Conduct Your Own Stress Test
May 18, 2009 by Tisa Silver
Filed under Finance
If the nation’s banks needed a stress test, maybe you should have one, too.
I have written several posts about the government’s stress test. The publicity may have morphed the test into something totally different from what was originally intended, but the idea of forecasting a bank’s ability to handle poor economic conditions is a good one.
Photo by AMagill, courtesy of flickr
Just like banks, we all have assets and liabilities, as well as income and expenses.
Some of those items are more susceptible to losses in times of a deteriorating economy. It never hurts to prepare for the worst, even if the worst case scenario never happens.
Here are some personal stress test questions to consider:
If you own a home, how would a 5-10 percent drop in property value affect your financial condition?
If you have credit card debt, what would happen to your balance if the interest rate was raised by 10-15 percent? Could you afford the new payment?
If you are nearing retirement, would you be able to retire comfortably (or retire at all) if your portfolio lost another 15-20 percent of its value?
If you were laid off, how long could you cover your monthly expenses?
Obviously, this list is not all-inclusive. Its length and depth will depend on your personal circumstances. Aside from the “what ifs,” here are a few good financial things to know:
Your net worth – Develop your personal balance sheet and see how the assets stack up against the liabilities.
Your cash flow – Account for your income and expenses and determine if you are operating at a surplus or a deficit.
Your investments – Examine the different pieces of your investment portfolio (securities, real estate, etc.) and determine if each piece is in line with your goals and comfort level.
Some of the personal stress test questions may sound absurd, but stranger things have happened. After all, who knew the government would be funding, running and stress testing banks?
Get a handle on your finances so that a third party doesn’t have to come in and do it for you!
