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Planning Ahead for a Possible Pink Slip

How do you plan your finances, in an era of job insecurity? On the one hand, you should put a high priority on safety, just in case your company shows you to the door. On the other hand, most people don't lose their jobs. So you don't want to be so safety-conscious that you give up business or investment opportunities.

You're walking a fine line: Plan for the best but have an exit strategy in case the worst occurs.

That means two things. First, secure your base -- your home, your life insurance, your savings -- so an unexpected loss of income won't wipe you out. Second, be prepared for emergencies. That means having good credit lines, to provide you with extra cash. A planning primer:

Your home. If you missed the recent refinancing boom, when 30-year mortgage rates fell to an average of 7.2 percent, keep a closer eye on the news. Everything's easier when your mortgage payments drop and your chance may come again. As a rule of thumb, it pays to refinance if you can lower your interest rate by 1 percentage point. If the lender charges zero upfront for making the new loan, it pays to refinance to save as little as 0.5 percent in interest.

You'll save even more by choosing a 15-year loan. It carries a lower interest rate that you're charged for fewer years. But because of its shorter term, you pay more each month than you would for a 30-year loan -- so it's not a smart buy if your job is at risk.

Instead, consider a 30-year loan with no prepayment penalty, advises planner Daniel Roe of Budros & Ruhlin in Columbus, Ohio. That gives you flexibility. As long as you're working, you can make larger payments each month to retire the loan as fast as you can. And you can drop back to lower payments if you're fired.

Your life insurance. Your company might give you as much as $50,000 in term insurance free and let you buy more with payroll deductions. But you can't keep that policy if you're fired -- bad news if you develop an illness that makes you hard or impossible to insure. To maintain coverage, you'd then have to convert the company insurance into an individual policy. Typically, you'd pay through the nose.

A smarter move is to buy life insurance outside the company while you're still healthy, says planner Michael Martin of Financial Advantage in Columbia. At the age of 40, a $200,000 annually renewable policy from First Colony Life Insurance Co. costs $180 a year for a female nonsmoker and $196 for a man.

Your consumer and home equity debt. Cut out new spending and pay off debt as fast as you can, especially if you feel a pink slip blowing your way. You'll save a lot of interest expense. If you're fired and need cash to live on, you can always borrow against these credit lines again.

Your ready savings. For emergency cash, take a new view of the traditional rule of thumb.

You're supposed to have an emergency fund that covers at least three months worth of expenses (six months or more if your job might vaporize). But your "fund" doesn't have to be money in the bank. In fact, bank savings are better used to pay off debt.

For emergencies, arrange for six to 12 months of instant borrowing power. That means credit lines tied to your checking account and your credit cards; also, a home equity line of credit if you own where you live. And keep those credit lines as clear as you can. They'll be no help if you lose your job and you've already borrowed to the max.

Your retirement savings. Keep paying into your company retirement plan, even if you're pretty sure that you'll lose your job. Your contributions save you taxes and may trigger a matching company contribution. If you're fired, this money goes with you.

Your college kids. If your income drops, call the student aid office (or send your kids). Colleges rarely reduce tuition but may offer loans to help you cover the rest of the year. After that, you should reassess, says planner Burt Whitehead of Cambridge Advisors in Franklin, Mich. Don't wreck your retirement fund to keep your kids in an expensive school.