Bank bailouts, bankruptcies, and the falling DOW index are hogging the news headlines. Without going into the droll details of how a bank fails, here it is in simple terms. Banks fail when the money they take in from customer accounts do not cover their liabilities of money they loaned out, and borrowers default on those loans. Ordinary bank customers have nothing to fear if their bank balances are less than $100,000, as those amounts are federally insured should your bank fail.

All of the government intervention is putting one question on the popular financial websites: “How will this affect the average American family?” This assumes the average American family at this point has little choice but to let this economic downturn hurt the family finances. Let's flip the question and be proactive. “What can your family do right now to help prevent the current economy meltdown from adversely affecting you family finances?” The answer is an emergency cash reserve fund in the form of savings.

Why is this economic crisis going to affect individual families?

Here is what is going to happen over the next couple of months, perhaps even longer. Investment firms, banks, and companies will fail from their unbalanced and highly optimistic investment portfolios. Many relied on the real estate boom of the last few years to enjoy record profits then, and are reaping record losses now as the bottom fell out.

Companies will continue downsizing as they struggle to remain afloat in the tough economy. Falling stock prices equates to a loss of capital for companies that employ perhaps your family's breadwinner, and to stay in business executives will start looking to cut costs. Credit card companies, which are backed by these struggling banks, are no longer interested in making emergency loans to families with maxed out credit lines and high risk credit factors in their credit reports.

Don't wait for a pink slip, or emergency home or auto repairs to push your family over the edge. Get your family together and put together your plan of action today. Even if you think your budget is tight enough as it is, there is always room to cut. Make sure all cut backs Do Not Pass GO, and go directly to money jail: the savings account.

How do you make a plan and what are ways to cut back?

Gather the whole family together and explain the situation. Children of all ages can understand due to poor decisions by business and government leaders, Mommy and Daddy are going to be on the safe side and start saving for a rainy day. Get them involved in the cost saving measures which will affect them, and let them see the growing balance in the family emergency fund. Don't think you are depriving them as you make the cut backs. You are teaching your children a valuable lesson in smart money management.

* Use only one vehicle. Countless families finagle the family's schedule around one vehicle. It cuts down on gas consumption because it forces prioritizing trips. Unless you are going to garage the other vehicle completely, do not remove insurance on it. However, you can contact insurance company and reduce the driving percentage of the vehicle with worse gas mileage to reduce your insurance rates. In dual income families, one parent may have to slightly adjust working hours to accommodate the pick up and drop off.  The savings come from the reduced commuting distance. Instead of two full round trips to work, it will be one round trip to the farthest work location, plus the distance between the two workplaces. This is a huge savings over an entire month of commuting. As an added bonus, it gives spouses a chance for some alone time to reconnect and refresh marital communication, sans kids.

* Cut extracurricular activities for the kids not covered by school bus transportation. Seriously, kids do not need evening dance classes, karate lessons, or gymnastics training. Your family will save on the tuition, the inevitable eating out frequently associated with cramming these activities into the schedule, and gas money. Instead, turn this time into family time to play at a local free park, or run around the backyard. A short half hour of quality time with no TV and everyone participating is just as important for a child's development.

* Television is turned off/unplugged except for specific television shows family members place on a TV schedule. Random channel surfing leads to additional television watching when ordinarily the viewer would be doing something else. This in turn leads to a much higher electric bill. Kids can still have their favorite shows,
but once Spongebob is over, TV goes off even if coming on next is the Fairly Oddparents. If it's not on the approved watching schedule, they can't watch it. To keep things fair, show the kids the electric bill as it goes down from the savings and let them know they added that to the emergency fund.

* In addition to the electric bill savings, let the kids in on ways to save on all the utility bills. Take an inventory of the actual channels your family watches and talk to the cable company about the lowest package you can go down to with all of the family favorites included. Some companies are even offering a la carte offerings so you simply choose your favorite stations and remove the clutter. Try a Netflix or Blockbuster DVDs by mail membership to substitute for movie channel loss, save on gas, and late fees. Plans start for as little as $10 a month for about 1 movie out at a time, and that can easily become family movie time once a week. If you have cell phones, kill the home phone line. Get kids taking showers over baths, and using one cup throughout the day to cut down on dishes.

* Run drills to turn off lights, games, computers, and any other appliances not in use at least twice nightly. Kids and adults alike are forgetful, and easily leave rooms and spaces with electronics still on. Replacing light bulbs with more efficient models as they burn out is another great cost saving measure. Don't forget about turning off the water while brushing teeth, and using rechargeable batteries for small electronics.

* Start buying generic brands of your favorite products and the cereal in bags over boxes. To keep it fun for kids, let them design product sleeves for their products. Generic soap can be covered in simple colored paper and tape with the new name of  “Katie's Kleaner.” Budget cuts don't have to be boring.

* Take family trips to the local library, not the book store. First, there isn't a coffee kiosk to add $15-$20 to the bill. Even rural libraries use book swap programs to keep the latest best sellers in rotation without overspending their small book buying budgets. Don't be surprised if your kids are shocked you can take the books home without having to pay for them.

* Use a large family calendar and plan a family special day once a month. With something firmly set for the whole family to look forward to, it will cut down on the feeling that you need to be “doing something for fun.” The activity doesn't have to be expensive, it can be one trip to the matinée on Sunday, an afternoon picnic in the park or beach, or trip to a local museum.

* Save on holidays by resisting the urge to outdo the holiday memories of your childhood. No one ever eats all six desert offerings before they go bad, and super large turkeys for intentional leftovers doesn't always work out. Talk with extended family and friends and try to break up the holiday dinner so the person hosting doesn't have too much of the expense. Budget for gift lists in advance and do not shop without it. Only buy gifts within this price range, and anything outside of it is off limits.

* Consolidate the credit cards, close the others, and use only one card plus a check card from the checking account. This prevents the nasty habit of paying one card down or completely off, just to run it up again the next time a shopping urge or “emergency” pops up. You won't have cash to put towards the emergency fund if it keeps going to pay off revolving credit card debt.

* Use a computer software program, preferably a free one like GnuCash, to track spending. Most programs look similar to a check ledger, where you put in the payee, the amount, and categorize it. The savings comes from analyzing your spending habits in real time to easily identify sneaky saps on the family finances, like eating out habits, and money spent on clothing, alcohol, or cigarettes.

* Whenever possible, shop as a family. It may seem tedious at first, but young children will eventually accept behavior expectations. With all of the family “shareholders” there, the likelihood of no one speaking up about the costs of a want is slim. While husbands and wives may grumble about the other crimping personal shopping styles, both of you need each other to stay grounded. He can balk at $100 sheet sets, and she can put a stop to $60 in electronic purchases.

* Swap high dollar vacation trips for low fuss camping or exploring nearby destinations. Simply changing a destination to a nearby city within driving distance will slash travel costs, and don't underestimate the appeal of bed and breakfasts over large hotels. Many bed and breakfasts are run by sole proprietors, so if it is off season, you should negotiate a cheaper rate for renting multiple rooms as a family.

* Talk with neighbors about toy and clothing swaps. Children love new things, but clothes and toys slightly used by another are still new in principle to the receiving child. Goodwill shops and second-hand clothing stores are easy ways to remind ourselves everything we need doesn't have to be brand new. Now, your family is not only saving money for the emergency fund, but also recycling too.

* Turn cooking into a chore for all family members. Even under supervision, children can significantly contribute to dinner preparation, including table setting, pulling ingredients from the refrigerator, and some food prep like washing or peeling with a peeler. For dual income parents, swap off who has kitchen duty, to reduce the chances of picking up take out or loading up the kids to hit the nearest restaurant.

* Make eating out a planned event at least 3 days in advance. Also, try to only take the family if there are coupons or specials. Family eateries  advertise fixed price menus several times a year where an appetizer, main course, and desert runs $9.99 - $15.99. Combined with the Kids Eat Free night (usually Tuesday for some reason), and you have a very inexpensive outing. Take out places regularly send coupons via mail. Practicing this restores eating out to its proper place as a special treat.

The Lasting Impact of the Cost Savings

Most of these changes will not put a serious strain on daily life. In fact, many low income families have had no choice but to implement these practices for years just to stay afloat. All of the additional focus on family time, planning ahead, and reduced weekly schedules might make you and the kids want to always worry about that “emergency fund.” For added security, put your savings in a separate bank with a higher yielding interest rate than your current bank. This will help add to your return, and make it more difficult to withdraw the money unless it is a true emergency.

Even if you are still paying down debt, a cash reserve is just as important. Start shooting for a low goal of covering one month's of basic expenses (mortgage, insurance, bills, food, and gas). Eventually you really want at least three months' of savings, even if you are up to your eyeballs in debt. Remember, cash is accepted everywhere no matter what your credit rating is. Plus, in the tragic scenario one or both of you lose your jobs, on top of unemployment, this cash reserve may be the only thing that saves the roof over your family's head and puts food on the table.

Financial experts and government leaders are trying their best to assure us all the economy will bounce back. Meanwhile, take a lesson from these companies and banks failing left and right. Don't give up your cash reserve because it will be what protects the family's finances from liabilities (debt and bills) overtaking monthly income. No matter what anyone tries to say about the economy, cash will always be king.