After a layoff, carefully pick what to cash out first

— -- Unless you got fired for driving your boss's car into a lake, there's nothing funny about losing your job. And unfortunately, 3.6 million people — more than the population of Chicago — have lost their jobs since the recession began in December 2007.

If you're suddenly unemployed, you have a number of unpleasant choices to make. Can you keep your car? Your house? If so, for how long?

Probably the most unpleasant choice: Which assets do you sell first to make ends meet? And how do you go about liquidating the savings you'd hoped to spend on something else?

Financial planners generally say you should have three to six months' expenses in an easily accessible account in case of an emergency. And getting laid off is a financial emergency if there ever was one, particularly if you only have one income.

This is a rule of thumb that's probably more often said than done, however. Let's say that you make $80,000 a year and that your expenses are about 60% of your gross pay. We're just talking about the money you need to pay the bills, here. You won't be contributing to your 401(k) plan, and, since you don't have income, you can pass on tax withholding, too.

Nevertheless, we're talking about salting away $12,000 to $24,000 in a low-interest savings account, and for many families, that's a tough amount to save.

After you've exhausted your emergency fund, your next candidate should be any taxable investments you have: stocks, bonds and mutual funds. If you're at this point, you should also consider selling some of your stock funds, says Gary Schatsky, a New York financial planner.

"Your risk tolerance is obviously different now," Schatsky says. After all, this money is no longer being saved for a far-off goal: It's being used now, which means you should be careful with it.

True, stock funds have gotten clobbered recently, and you can argue that stocks are cheap. On the other hand, by looking at it that way, you're making a market-timing decision, not a cash-flow decision, Schatsky says. By moving to less risky investments, you'll give up some potential gains, but you'll also sidestep some potential losses. And you'll have a better idea of how much cash you have to use in the coming months.

You can also use your taxable losses to offset any amount of taxable gains this year. Stop laughing. It could happen. You can also deduct $3,000 of losses from your taxable income — a fact that's less interesting if you have no income.

If you have run out of taxable investments, you'll have to start tapping funds in retirement accounts. Your first stop should be a Roth IRA, if you have one, says Ray Ferrara, a financial planner based in Clearwater, Fla. "You can take your contributions from a Roth IRA at any time with no tax implications," Ferrara says.

Finally, there's your 401(k). If you're laid off, you can request to have the company write you a check for your 401(k) balances. Your company will do that, but it will withhold 20% of your 401(k) for taxes, because your entire withdrawal is taxable. You may also owe 10% of the entire amount for the early-withdrawal tax penalty. You can dodge the 10% penalty if you have lost your job and you're 55 or older. (Normally, you have to wait until you're 59½.) You still have to pay taxes on the distribution, however, says Deborah Walker, partner at Deloitte Tax.

If you want to be philosophical, you'll at least be pulling money out of your retirement account when you're in a very low tax bracket. "When the economy gives you lemons, make lemonade," Schatsky says. For what it's worth, you probably made your contributions when you were in a higher tax bracket.

If you're still working, then the recent drumbeat of layoff announcements should spur you to start an emergency fund.

Consider investing in some of the high-yielding money market funds and bank CDs in our Savers' Scoreboard, on this page. You can find others at www.bankrate.com.

If you want something that's more of an investment, consider one of the high-grade corporate bond funds in the chart. These funds invest in long-term IOUs issued by top-rated companies, and current yields are extremely tempting.

Finally, remember that sooner or later, the economy will turn around, companies will start hiring, and you'll find another job — quite possibly, one that's far better than the one you left. Living well, after all, is far better revenge than driving your boss's BMW into the lake.

John Waggoner is a personal finance columnist for USA TODAY. His Investing column appears Fridays. new book,Bailout: What the Rescue of Bear Stearns and the Credit Crisis Mean for Your Investments, is available through John Wiley & Sons. Click here for an index of Investing columns. His e-mail is jwaggoner@usatoday.com.