The Motley Fool: Could your job be the next to go? Be prepared

The unemployment rate in America was recently at 4.5 percent. It varies by state, though, with Michigan, for example, around 6.5 percent. Many jobs have been lost as companies have merged, outsourced labor or just downsized to save money.

Could your job be next? Layoffs can strike quickly, so be prepared. Your first line of defense is a cash cushion. Having a well-stocked emergency fund can provide a critical safety net.

The standard advice about emergency funds is to have three to six months’ worth of income stashed away in safe cash equivalents, such as savings accounts, money market accounts and certificates of deposit. (Some people, though, such as those who might not quickly find a new job, should consider stockpiling more cash than that.)

You often won’t earn a lot of interest on these types of accounts, and they’re no fun to talk about at parties. But the money will be there tomorrow if you need it. You can find some good rates at bankrate.com, which recently listed one-year CDs and money market accounts paying more than 5 percent.

An emergency fund isn’t just for potential job loss, either. Sudden, unexpected big-ticket expenses are a part of life. Car repairs can cost hundreds of dollars, house repairs often cost thousands, and body repairs … well, you just better hope you have good health insurance.

A credit card that charges 25 percent interest is a nightmare that’s likely to sink you deeper into trouble.

To learn more about how much you should have stuffed in your cash cushion and how to invest it, visit www.fool.com/savings. And read “The Motley Fool Personal Finance Workbook” by David and Tom Gardner (Fireside, $15) or “The Standard & Poor’s Guide to Personal Finance” by Tom Downey (McGraw-Hill, $15).

Ask the Fool

Q: How much does a company’s stock price matter to it? — T.W., Macon, Ga.

A: Companies get their money when they first sell their shares to the public (via an “initial public offering,” or IPO). Once the shares are “out there,” they trade between investors. When you buy shares of PepsiCo through your brokerage, you’ll be buying the shares from an investor who wants to sell them. (It’s like baseball cards: The companies that print them get their money when the cards are sold. After that, they’re traded between owners, with their value rising or falling.)

Still, share prices matter to companies. If PepsiCo’s stock price falls significantly, so will its total market value. A competitor might look into buying the company, whether PepsiCo likes that or not. Also, low prices limit a firm’s flexibility.

My dumbest investment

My dumbest investment was Independence Air. I had flown on the airline and liked it, as did my friends. I thought the company could make a go of it and that surely fuel prices couldn’t stay above $50 a barrel for long. Boy, was I wrong! To my credit, I never put much money in speculative investments, so my losses here were limited. I definitely learned a lesson, though. (Maybe I should have known something was up when I got on planes that were two-thirds empty!) — Jesse Hensley, Baltimore

The Fool Responds: As you now know, oil prices have topped $70 in recent years. In investing, it’s always good to imagine the unimaginable and to be prepared to sell.