Just about everyone knows someone who has lost a job in this recession, and many wonder if they are next.

It’s a helpless feeling. But you can prepare for the worst. Putting your finances into a defensive position ahead of time can help you weather a period of unemployment, so you won’t feel forced to take a job that doesn’t suit you.

Most important is to create a sizeable cash reserve, big enough to cover living expenses for six to 12 months. Then you need a fallback, in case you don’t land a new job before the cash runs out.

One way is to get a home equity line of credit, or HELOC. It allows you to borrow against the equity in your home -- the difference between the home’s value and what you owe on the mortgage.  Just remember, it’s essential to get the HELOC approved before you lose a job, as you probably won’t qualify afterward.

With a HELOC, you draw money only as you need it – and as much as you would with a credit card, but with a much lower interest rate. For most borrowers, interest paid on home equity loans is deductible on the federal income tax return.

The other type of home equity loan, the installment loan, is less useful in this situation because the money comes in a lump sum.  Similar to a mortgage, you have to start paying interest on the whole sum immediately, even if you don’t need it right away.
Some lenders are offering HELOCs at starting rates as low as 3 or 4 percent, according to the BankingMyWay.com survey. But remember, HELOCs carry variable rates that can change month to month, so be sure to look at how future rates will be figured. Use our search tool to find the best deal.

Using credit cards during a period of unemployment should only be a last resort, as interest rates generally run in the double digits. But you can limit the damage by switching to cards with the lowest rates. Again though, switch while you still have a job, as you probably won’t qualify after the fact.

BankingMyWay.com lists cards with the lowest rates, such as the Citibank Platinum Select card from Citibank (Stock Quote: C), charging as little as 8.74 percent, and a Discover Card (Stock Quote: DFS) starting as low as 10.99 percent.

Obviously, it makes sense to enter a no-income period as debt-free as possible, so try to trim your debts while you still have a paycheck. Start with those charging the highest rates.  Use the BankingMyWay.com calculator to develop a credit card-payoff strategy.

Improving your household budget is another step in minimizing expenses and building a cash reserve. To find potential savings, keep a list of all expenses, including incidentals like snacks and movie rentals. Many can be painlessly replaced. Most libraries, for example, now offer DVDs for free, and it’s a lot cheaper to carry your lunch and coffee to work than to buy them in the cafeteria.
Also, review your phone service, cable TV plan, car and homeowner’s insurance. Most people only look at these occasionally, which leads to the potential to miss better deals.

Finally, examine your investment accounts for opportunities to convert stocks, bonds or mutual funds into cash. Switching 10 or 20 percent of your stock holdings to cash won’t hurt your performance very much, even if the market rebounds. And, given the market decline in the past year or so, you might be able to unload some less-promising holdings and realize a loss that can reduce your taxes.

Where should you put your cash reserve? It needs to be safe and accessible, in a savings account or money market.  You can also earn a bit more using certificates of deposit, but don’t tie your money up for too long, or you’ll face an early withdrawal penalty if you have to cash out in an emergency.

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