Passing The Financial Stress Test – Are You Sure Whether You’re Economically Stressed?

You might think that your household and family finances are looking pretty fine and in the right place. But what would happen if you suddenly face some unforeseen medical expenses or a sudden reduction in your paid working hours? Will you still be able to see your personal finances running fine or your fiscal state will suddenly go haywire? How about suffering from a sudden job loss or an unanticipated tax assessment? This is why you should sometimes test yourself so that you get to know whether or not you’re financially stressed.

Have a look at the 5 stress tests that you may conduct to check your own situation

  1. Your DTI ratio: Make a list of what you spend each month, including mortgage, student loan, car loan payments, and credit card payments and then add them up. What you have to do next is to divide this figure by your monthly income (your pre-tax dollars). The result is the debt-to-income ratio. The founder of the Garrett Planning Network, Sheryl Garrett, is of the opinion that the debt-to-income ratio should be less than 36% and in case you exclude the mortgage payments, you should aim for less than 28%. When you have a high debt-to-income ratio, this is a warning that you have too much debt in accordance with your income and this means that you either have to lower the debt or increase your income. You might have to do both at times.
  2. Your discretionary expenditures: It is also vital to keep a track on your discretionary spending so that you may know how quickly you can cut back on them during times of stress and urgent financial needs. Start by categorizing all expenses into 3 categories, fixed, variable and purely discretionary expenses like vacations and gym memberships. As per a consumer advocate, discretionary expenses should always make up a greater part of expenses so that you have enough room to cut back and defer during emergencies.
  3. Your emergency savings: Financial planners usually tell clients to reserve enough money in saving or some other liquidated account so that it covers 3-9 months of expenses, with 3 months being with the bare minimum expenses. This should be the very first place where you should turn for help as this is the account that is readily available. The greater obligations you have, the more should be your emergency cash so that you don’t require borrowing money from other lenders.
  4. Your additional income: You should consider all other options for generating additional income during times of stress. There are various jobs that you can do part time so as to generate some more cash. Hence, if you wish to float through, you have to make sure you have enough money stacked in your safe.

So, if you wish to stay financially sound, take the stress tests twice in a year or more often so that you may know where you stand at the end of the day. Get the latest financial tips here.

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