What would you do if you lost your job?

What is your contingency plan if the worst were to happen? In the present economy, everyone needs a backup plan.

CNN has a story on Patricia Guerrero, a single mother of two living in Altadena, California. Until Februry, when she was laid off, Guerrero made $70,000 per year. That is a pretty good salary, but not enough with two children and a $2,500 per month, interest-only mortgage. A few weeks after she was laid off, Guerrero had burned through her savings and resorted to a food shelf to feed her family.

“It brought tears to my eyes, and I sat there and I cried. I was like, ‘This is really where I’m at?’ ” she told CNN. “I go ‘no way;’ [but] this is true. This is reality. This is the stuff you see on TV. It was hard. It was very hard.”

What should your backup plan be?

Jobs in general are not disappearing yet, thankfully, but that can depend on what sector you work in. If the worst were to happen, how would you pay the bills?

Dealing with debt

Make sure you are paying down your credit cards steadily. Pay a little more than the minimum, but not a lot more. Say an extra $20-50, depending on your balance. You want to make progress, but you do not want to impoverish yourself.

You should also call your credit card company and ask them to lower your rate. If you have been a good customer, they probably will. If at first you don’t succeed, keep at it. I was able to lower my rate just by saying I wanted some time to work on paying down my balance.

While you are setting up an automatic monthly credit card payment, it would be a good idea to put those credit cards in your sock drawer. You may need them if the worst happens, but this is no time to be taking on more debt.

Which means that yes, you need to cut some spending. Be reasonable. If you try to live like a pauper, you won’t last long. But you can probably do without eating out every night. Or at least without the bottle of wine with dinner. Save where you can.

Savings are security

At the same time, start saving. Just like with your credit card, set up an automatic monthly transfer to a savings account. Basically, you are just making your debt payments and savings a part of your monthly expenses. Save what you can. Even $10 each month is a good start. Your savings will build when you are not looking. Your goal should be to have six months of expenses in the bank. For most people, that will be between $18,000 and $30,000. Don’t let that big number scare you, though. Take it slow!

Six months should be enough time for you to get back on your feet if you have a financial emergency. And by the time you have built up six months of savings, you may very well have paid off your credit cards, or at least made a serious dent. Once you have six months in the bank, you can attack those remaining credit card balances.

(Some will say not to save if you still have consumer debt. They have a point. You are probably paying more in interest on your credit cards than you can hope to earn from savings. But if you cannot pay off your cards, and you lose your job, you will still have a credit card payment, but you will have no money to pay it. Working on paying down debt while you build savings means you will have a cushion in case of emergency.)

Think about this: if you were saving all the money that you spend on servicing your debt, how fast would your bank account grow?

And once you have paid off your consumer debt, keep building savings! If you already have six months in the bank, keep going! See a financial advisor (David Benning at Ameriprise is mine.) to discuss long-term investment and retirement strategies, and keep building on your savings.