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Stress Test Your Financial Fortress

Posted By Jim On 06/01/2011 @ 7:30 am In Personal Finance | 6 Comments

Have you ever stress tested your finances? Playing hypothetical games in which you figure out what would happen if you lost your job? Or had an unexpected repair? What if you had to weather an unexpected $500 bill? How about a $2,000 one?

It turns out that nearly half of Americans are “financially fragile.” If they needed to get $2,000 in the next month, 22.2% said they probably wouldn’t be able to do it and 27.9% said they certainly wouldn’t be able to. Only 24.9% said they would certainly be able and 25.1% said they would probably be able. That’s in a paper published [3] by the National Bureau of Economic Research, , Annamaria Lusardi of the George Washington School of Business, Daniel J. Schneider of Princeton University and Peter Tufano of Harvard Business School after they used data from a 2009 TNS Global Economic Crisis survey.

That’s scary.

A few years ago I came up with this analogy on how to view your finances from the perspective of emergencies – you live in a financial fortress [4]. Just as how castles had invaders, your finances also has invaders. In this case, it’s a $2,000 hypothetical invader that is “stress testing” your defenses. How far that $2,000 gets will depend on a variety of factors, such as the depth of your emergency fund.

That survey essentially said that 24.9% of Americans, the ones that said certainly able, have an emergency fund. If you have a fully funded emergency fund, you could immediately draw $2,000 out of that fund in order to pay for the emergency. If a $2,000 bill came screaming over the horizon, you wouldn’t necessarily have to scramble, freak out, or make any tough decisions on how to satisfy that need. You absorb that blow and then start building that fund back up again.

Here are a few scenarios that are worth looking at:

  • Losing your job.
  • A $500 bill due in 30 days.
  • A $2,000 bill due in 30 days.
  • A $5,000 bill due in 30 days.
  • A stock market drop of 10%.
  • A stock market drop of 20%.
  • An increase in credit card interest rate of 5%.
  • Loss of work for 1 week.
  • Loss of work for 30 days.

You can start with that list but think up a few more scenarios of potential financial disasters (from the mundane, like a $50 bill, to the less likely, like your house being destroyed) you could face and consider how you and your finances will react.


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[2] Email: mailto:?subject=http://www.bargaineering.com/articles/stress-test-financial-fortress.html

[3] paper published: http://blogs.wsj.com/economics/2011/05/23/nearly-half-of-americans-are-financially-fragile/

[4] financial fortress: http://www.bargaineering.com/articles/understanding-your-financial-fortress.html

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