Rule #1: Set up an emergency fund in liquid savings with 6 months of living expenses. You will need money if you get laid off or fired until you find another job. Don’t think this won’t happen to you. I know many smart people who got laid off in the last recession. It takes longer to find a job in the recession too than normal so better to be prepared.
Medical emergencies can also happen. Going to the emergency room is very expensive. The last time I went for my child it was $800!
You car could also need serious repairs like a new transmission or engine.
Do this also to prepare for a downturn. See my post on preparing for and surviving the recession.
In a recession your emergency fund will give you security. While you may have other income coming in such as via work, severance, unemployment compensation and side jobs the fund gives you a backup. You don’t want to be the guy or gal with lots of debt, no savings and no job if the economy goes down.
Rule of thumb #2: Try to set aside 10-20% of what you make each month after tax. This is separate from 401K. If you have debt such as credit cards or student loans to pay focus on getting that paid off first.
Mr. Cash Hoarder 