Conduct a personal financial stress test
The results of a stress test on the nation’s 19 biggest banks were released last week. The assessment was designed to determine how well the institutions would fare if the economy deteriorated further.
Because it pays to be prepared, I think it is a good idea for consumers to conduct their own financial stress test. Here are a few things you might want to consider when assessing your personal financial strength.
Is your current budget manageable? Seek help if you are only making minimum payments or are borrowing money to pay for items you used to buy with cash. After all, you can’t successfully prepare for the future until you get control of the present.
Do you expect the unexpected? Be prepared for periodic expenses such as auto repair bills and holiday expenses. While you may be able to “absorb” periodic expenses during good economic times, they could result in financial disaster in times of trouble.
How much do you have in your emergency saving account? Experts recommend keeping three to six months’ worth of living expenses in an accessible account. Do not assume that you can fall back on credit cards if an emergency strikes—many creditors are closing accounts or lowering limits.
Is your insurance adequate? Some financial emergencies are not caused by the economy, but rather by major life events, such as a car accident or medical condition. While the results of such events can be devastating, maintaining adequate insurance is one good way to protect yourself from financial ruin.
How organized are your finances? Consider taking steps to streamline your financial situation. For example, think about how many creditors would you have to contact if you fell behind on payments. While it can help your credit score to have a good credit mix, having an unmanageable number of active accounts is stressful and confusing.
How adaptable are you? If you were to face your worst-case financial scenario, what would/could you do to survive? Could you sell your car? Would you be willing to take on additional temporary work if necessary?
In addition to helping you survive in the short-term, having a financial contingency plan could keep you from jeopardizing your future. Borrowing money from your retirement plan is not a good idea. It exposes you to potential penalties and jeopardizes the rate of growth.