Financial Stress Test
The banks are taking it, and individual consumers might want to consider it too.
I am referring to the "stress test" the government is giving major financial institutions
to see if they can withstand possible worst-case scenarios in a troubled economy.
Some critics argue that it is too late for this measure to be effective; others say it is better
late than never. Now is a good time to conduct a "super audit" of your own financial
situation to see if you have what it takes to make it through the toughest economic times.
The process is not actually that complicated, and won't take up too much of your time.
There are three major components of personal finance: Income, savings, and credit.
Reviewing each, you should look at where you are now and project your current situation
into different financial scenarios. If you pass each test, you will know that you are well
prepared to make it through difficult situations. Should you fall short, you still have
time to plan what do to get you where you need to be.
There is no grade scale, and no right or wrong answers. The point of this exercise is to learn how prepared you are, and what you need to do in order to be ready to face a financial emergency.
Income/Job:
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Is your job at risk? The answer to this question will help you determine how soon you
may face a financial emergency.
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Have your work hours been reduced? Cuts in your work schedule may be an indicator of
how secure your job is. Reduction or elimination of bonuses and commissions also factors
into this question. These are signals to re-examine your budget for possible efficiencies
(like that daily splurge on a coffee you could make at home instead).
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Does your company offer severance pay for those who are laid-off? Ask this question
of your company's benefits administrator or human resources office. You will want to
know details of your company's policy and how they will handle benefits and income
when employees are downsized.
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Do you have a backup plan for generating income? You may have a hobby or interest that
could help you generate income in a time of financial stress. Know what needs to be
done to get that income stream started and how long the process would take. You may
also want to see what items you have lying around the house that could be sold for
quick cash. Make a list of the items and their sale value and keep it handy. This
could help get you through some difficult days.
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Do you know how and when to apply for jobless benefits? You may be gainfully employed
with no signs of trouble in the foreseeable future, but that is when you should be
thinking of how to respond to a layoff. If you don't have enough savings to cover
your basic expenses, start putting money aside. You should also know how to apply
for unemployment benefits. The more familiar you are with the process, the easier
it will be for you when the time comes to take action. Check on the rules for your
state by selecting a link below:
Savings/Budget:
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Are you tracking your income and expenses on a regular basis? By regular, I mean at
least once a week. If you are not reviewing your budget this often, you need to start
now. The key to reaching your financial goals and staying afloat is knowing as much as
you can about your current financial situation. How much is coming in and how much
is going out? Where are you spending your money? Try answering these questions without
looking at your notes. All are questions you should be able to answer accurately at
any moment. If there are others in your household with a stake in your financial well
being, include them in the discussions about the budget. For children and adults,
this can be a great opportunity to share and learn at the same time.
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Do you have at least six months of net income set aside for an emergency? You may think
this is excessive, but you would be surprised at how quickly resources can evaporate
in a financial crisis. If you don't have the money saved, now is the time to start.
Take a few moments to figure out what percentage of your monthly income you can
dedicate to this effort. Calculate how long it will take you to get there, and stick
to your plan. Reaching a financial goal is something to celebrate, so be sure to
acknowledge the progress you are making by periodically rewarding yourself for
your hard work. The real reward will come when you have an emergency and the money
is there for you!
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Are you regularly adding to your savings and retirement fund? Having the savings is
one thing, but growing it is another. Build on your savings regularly by following
the "pay yourself first" rule. Make saving for emergencies and retirement your number
one priority. As a rule, you should be allocating about 10% of each paycheck (net)
to your savings.
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Do you participate in a retirement savings plan like a 401k or 403b? Let's face it,
the Social Security income that you are counting on when you retire may not be what
you expect. Even if it is there for you at all, it is not likely that it will meet
anything more than your most basic expenses. This is why you should be participating
in a retirement savings plan that will be enough to supplement your federal benefits
or even stand alone as a sole source of income. If you don't have anything saved, it
is never too late. Don't use that as an excuse not to start saving.
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Are you taking advantage of your employer's matching contribution to your retirement
fund? As far as your retirement is concerned, you should always take advantage of your
company's matching contribution if one is available. In choppy economic waters, it
is a great way to offset losses caused by a down market. Think of it as free money!
Credit:
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Have you been spending more than 20% of your monthly income on credit payments?
Keeping your monthly creditor payments under this limit is referred to as the "20% Rule".
If you are allocating 20% or more of your net monthly income to creditor payments, you
are already overextended in debt and need to stop spending and get serious about paying
down balances.
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Are your credit balances at or below 50% of your available credit? A low balance is
not just a good way to achieve or maintain a healthy credit score; it's also good
for your wallet since you are that much closer to being debt free. If you are over
that threshold, start attacking those balances with extra payments. You will see
why this helps in the next item.
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Do you have any credit cards with interest rates at or above 14%? High interest rates
are a killer when it comes to being able to quickly pay down your debt. Don't let these
rates keep you chained to your debt for what may seem like an eternity. Just by
adding $10 or $20 to a minimum payment can put your debt payoff in the fast lane.
When developing a strategy for paying off your credit balances, target the higher
interest accounts first. You will be glad you did when you calculate all of the money
you save in the long term.
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Do you carry a balance on your credit card accounts for more than two billing cycles?
A billing cycle is typically 28 days, or one month. Carrying a balance for more than
one billing cycle allows most creditors to start applying interest charges on your
purchases. The longer you carry a balance, the more likely it is that you are in
danger of being dependant on credit. Break that dependency and let your money start
to work for you instead of the creditors.
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Do you have more than two credit card accounts? One account is ideal for an individual,
and two may be okay if you have a small business or small family. Any more than that
is simply not necessary. Avoid using your credit accounts for things like small
convenience purchases, groceries, or utilities. Here's another question to ask yourself
along these lines: How many of your credit cards are retail accounts? One of the biggest
pitfalls for consumers is high-interest retail accounts. There is an easy solution for
that. Most every major retailer accepts one or more of the major bank-issued credit
cards, and they all accept cash. Using the store card has been a way for some consumers
to take advantage of additional "sales", but that 10% discount the store offers when
you use their card may just find you paying more than the full price after you factor
in the 21% interest on your balance. Use cash and you pay no interest, have no
contracts to sign or payments to mail each month.
As mentioned earlier, there is no grade scale in this stress test. The most important part
of this process is that you are honest with yourself, and that you use the results to
take whatever steps are necessary to achieve your financial success. Reaching a financial
goal is seldom done quickly, and may require you to overcome some obstacles or setbacks.
Once you reach your goals, your greatest reward may not be measured in dollars and cents.
We all know that a good night's sleep is priceless.
