Do you have a job-loss safety net?

"What are the chances that I'll lose my job?"

Unless you're a retiree, a tenured university professor, or own your own business, it's a good bet that question has flitted through your mind at least a few times over the past few years. The pace of unemployment growth in the UK continued to increase in the second quarter, official figures showed yesterday, and, at 7.8% on the ILO measure, it's higher than it has been since 1996.

Even if you're feeling sanguine about the safety of your current position, it never hurts to put in place a good safety net. I've outlined some of the key steps below.

Build up your emergency fund
Although I've spent most of my career analysing and writing about investments, individuals make even more significant decisions before they ever write a cheque to a fund company or brokerage firm. Have they saved enough? Have they stayed out of debt? One of the key steps to ensure that you do both is to make sure you have an emergency fund--enough cash socked away to tide you through financial emergencies both big and small: job loss, unexpected medical expenses, or big-ticket auto and home repairs.

Conventional financial-planning wisdom has long held that you should keep three to six months' worth of living expenses in highly liquid accounts, but the current financial crisis illustrates that figure is probably too low. (Wouldn't you like to have more than three months to find a new job if you lost yours?)

However, it's always a balancing act. Given currently minuscule yields on ultrasafe investments--as well as the long-term threat that inflation could gobble up every bit of any interest you're able to earn--you don't want to keep too much money on the sidelines.

One strategy to help you build a safety net without going overboard is to keep three to six months' worth of living expenses in real cash: your current and savings accounts, CDs, money market account, or money market fund. (When tallying up your emergency fund, don't count positions that register as “Cash” in Morningstar’s Portfolio Manager because they're residual holdings in stock or bond funds that you own.) Then you can park another three to six months' worth of living expenses in a conservatively positioned short-term bond fund. If you did lose your job, you could shift those funds into a more liquid vehicle.

Prioritise a tax-efficient wrapper for retirement savings
You can't put your life--and your long-term financial goals--on hold just because you're worried about job loss. But you can be strategic about what you sink your money into, and that means focusing on those investments with the fewest strings attached in case you need to make a withdrawal. Rather than saving within the confines of your company retirement plan, where you'll pay penalties if you need to withdraw your assets prematurely, consider deploying fresh retirement pounds into an ISA instead. (This is a no-brainer if your company isn't matching you on your contributions.) If you save within a tax-efficient wrapper, you can withdraw your contributions tax-free at any time. And because you're contributing aftertax pounds, you won't have to pay taxes on your earnings from year to year or upon withdrawal during retirement. That makes the ISA far preferable to saving for retirement within your taxable account. (The one snag is that income limits apply.) Check Morningstar's ISA Learning Centre for more information.

Secure back-up financing
Of course, tapping your own assets is preferable to borrowing money when you're in a financial pinch. But it also makes sense to line up credit just in case you need it, and it's far better to negotiate from a position of strength--while you're employed--rather than scramble for financing if you've lost your job. That's particularly critical right now, with lending standards tighter than they've been in more than a decade. If you have equity in your home, consider obtaining a home equity loan with the understanding that you'll use it only in case of a real emergency and after you've exhausted other sources of funding. Rates on home equity loans are still extremely low relative to historical norms, and your interest will--on the first £100,000--be tax-deductible.

On a related note, if you haven't refinanced your primary mortgage to take advantage of currently low rates, it's time to get on the stick. As with any type of financing, it's better to shop for a mortgage while you're employed than when you're not.

Pay down costly forms of debt
I know, I just got through telling you to secure a home equity loan if you're eligible. But if you already have expensive types of debt such as credit cards and are concerned about job security, job one is to reduce that onus as soon as you possibly can. Credit card companies are the last people you want to mess around with if you find yourself in a financial bind, as they're able to raise your rates if you're late on a payment.

Be a commitment-phobe
Here's another balancing act: While service providers--particularly purveyors of cable TV, Internet, and telephone service--will offer you a lower rate if you sign a contract of a year or more, be sure to weigh those lower rates against the risk that you'll lose your job. If you're concerned about job security, read the fine print on any contracts to see what it would cost you to get out of the agreement in a pinch.

Take advantage of the perks you have
Have you had a medical lately? Do you need new glasses or contacts? Are you overdue for a visit to the dentist? If so, it's time to get on the blower and make some appointments. If your employer offers private medical care, the chances are you're paying decent-sized premiums for that privilege, so it pays to take advantage of all your perks while you have them.