The $0 emergency fund

A big pile of cash still might not be enough.

Consider that the average length of unemployment in 2006 was 16.8 weeks, or more than four months. While there's no way to predict how long you might be out of work should you lose your job, you should prepare for the possibility that it might be longer than you think.

You also want to get ready in case you're hit with more than one crisis at a time.

Hundreds of thousands of people discovered that reality after Hurricane Katrina. It took more than a month just to drain the city, and the reconstruction effort will take years. Many lost their homes and their jobs, with no idea when they'd see their next paycheck or how much it would cost to rebuild their lives.

Having some cash can help you enormously in the first days or weeks of your crisis. But having access to credit can tide you over the rest of the way.

Those who eschew debt in any form may recoil from this advice, but the truth is that credit can be an incredibly helpful tool. Like any tool, it can be misused. But properly deployed, it can be a lifesaver.

Borrowing for emergencies

For most families, the best borrowing for emergencies comes in two forms: credit cards and home equity lines of credit (HELOC). That's because these two kinds of credit are:

• Readily accessible. Credit cards are useable virtually everywhere; even in disaster zones, merchants will start accepting plastic as soon as the power and phone lines are restored. If you've already got your HELOC in place, you can start writing checks against it immediately.

• Unlikely to disappear overnight. Stocks or bonds can quickly lose value, but you'll typically lose access to your credit only if you misuse it.

• Relatively inexpensive to have and to use. HELOCs typically cost nothing to set up, and most have relatively low annual fees ($50 to $100 is typical). The interest rate is low, and you don't have to pay any principal during the first 10 years or so you have the line. So if your interest rate is 7%, you can take about $70 of every $1,000 you borrow and use it to make your payments until the crunch passes.

Credit cards typically come with higher interest rates, but their minimum payments are likewise pretty low, usually 2% to 4% of the balance monthly. And credit cards have a feature that home equity lines lack: If you wind up filing for bankruptcy, balances on unsecured debts like credit cards may be erased, while secured debts like mortgages and HELOCs can't be discharged.

Of course, you'll want to be extremely judicious about how you use your credit. In a crisis, you'll need to cut your expenses to the bone before you do anything else. You don't want to drain away your precious equity, pile up massive credit card debt or wind up filing for bankruptcy simply because you refused to adjust your lifestyle.

You also need to realize that this advice isn't for everybody. If you're a chronic overspender who can't be trusted with credit, you're better off going the all-cash route. All the lines of credit in the world won't help you if you've maxed them out before the crisis comes.

But most people should at least think about the alternatives to tide them over as they're building their traditional emergency funds. Let's hope you never need them, but if you do, you may be very happy you have them.

Liz Pulliam Weston's new book, "Easy Money: How to Simplify Your Finances and Get What You Want Out of Life," is now available. Columns by Weston, the Web's most-read personal-finance writer and winner of the 2007 Clarion Award for online journalism, appear every Monday and Thursday, exclusively on MSN Money. She also answers reader questions on the Your Money message board.

Updated Jan. 18, 2008

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