Personal Finance Stress Test

Personal Finance Stress Test

Thanks to The Blunt Bean Counter for pushing me a little bit to get this blogpost done, since he hit on something I’ve been thinking about for some time now, stress testing your personal finances.

What does stress testing imply?

In general terms, stress testing is about demonstrating the stability of a given process or system when that process or system is pushed beyond its normal operating means.  Ok, that was overly technical.  How about something more simplified…

I think stress testing means the conditions that push you into crash mode and how you cope or recover from that.

Ideally, passing the stress test should demonstrate some level of stability under exaggerated conditions.

In the world of personal finance and investing, I suspect we all have our “what if’s” in life; how we would recover from a crash that impacts us financially.  For today’s post, please consider answering what you’d do in any of these situations to keep your life somewhat stable in very unstable circumstances.

I’ll give you my answers in italics below.

Are you spending more than you earn today?

No.  Any “leftover” money today after paying ourselves first, paying the base amount on mortgage and for living expenses goes towards our fat mortgage in the form of lump-sum payments every 2 weeks and into our investments every month.

If your income dropped by 50% for 6 months what would you do?

We would immediately stop our lump-sum mortgage payments.  We would pay the base required on our mortgage.  We would immediately stop all discretionary spending; no more dining out, trips/vacations or purchases for the home.  We would immediately suspend all investment contributions.  We would curb grocery spending to the essentials and revisit our current expenditures on electricity, gas and cable.

If you needed more income what would you do?

I would try and find another job as soon as I could.  I would also stop any reinvestment activities for any securities I own and use the income paid as dividends and distributions for living expenses instead.

Do you have enough insurance to pay off debts in the case of a death?

Yes.

Do you have a Will?  Do both spouses know where to find it?  Is it up to date?

Yes and Yes and Yes.

Do you have a list of assets (investments, real estate, other) you own?  Do both spouses know where to find it?  Is it up to date?

Yes and Yes and No.  I’ve got work to do on keeping things more current.

Do you know you have access to money if you needed it in an emergency (line of credit, savings account)?  Do you know what accounts you’d withdrawn from first to avoid more debt?  Is the money readily accessible within one day?

Yes and Yes and Yes.

Do you know you have a list of emergency contact information for professionals in an emergency situation (doctor, lawyer, and accountant)?

Yes.

I’m sure there are many more questions to stress test your personal finances but I suspect these questions are a decent start in the right direction.  Some financial preparedness can go a long ways in the event an accident or a catastrophe.  Let’s hope we never need to worry about putting more stress to the test for a very long time.

Mark

My name is Mark Seed - the founder, editor and owner of My Own Advisor. As my own DIY financial advisor, I'm looking to start semi-retirement soon, sooner than most. Find out how, what I did, and what you can learn to tailor your own financial independence path. Join the newsletter read by thousands each day, always FREE.