Everyone is subject to sudden financial emergencies – unexpected repair bills, job loss, price jumps, and/or illness. The past few years have shown how quickly personal and economic conditions can change. This Financial Stress Test was developed by Consumer Credit Counseling Services of Greater Dallas and modified by Faye Doria. It will show you how to prepare for a financial downturn or emergency. Ways to improve are included in each session. Start with researching your finances for these seven numbers:
A _________ Annual Gross Income (before-tax wages, pensions, interest, etc.)
B__________ Monthly Take-Home Income (after all deductions, FICA, etc.)
C__________ Monthly Expenses (remember annual and irregular payments)
D__________ Total Debts (balance due on car loans, credit cards, etc. – but not mortgages)
E__________ Total Emergency Savings (ready cash available within 3 months)
F__________ Home Equity (market value minus all mortgage balances)
G__________ Retirement Savings (in 401Ks, IRAs, Roths, or other savings)
1. Divide D ______ Total Debts by A ______ Annual Gross Income to get ______ % Debt-to-Income Ratio. If the answer is less than 10% you are in an enviable situation. Up to 20% is good, up to 35% if fair, and over 50% means you are in real trouble. To improve your ratio, you need to lower overall debt, and increase your income, if possible. Younger workers are likely to have higher ratios due to student loans and low incomes.
2. Take B ______ Monthly Take-Home Income minus C ______ Monthly expenses = ______ Disposable Income. Divide this number by B ______ Monthly Take-Home Income = ______ % Disposable Income Ratio. If the Disposable Income Ratio is above 25%, you are in excellent shape to weather a short drop in income or a jump in inflation. A Ratio above 20% is good, above 10% is okay, and less than 10% means there is lots of room for improvement. The higher the percentage, the better you can deal with unemployment, unexpected bills, short-term disability, or a reduction in paid hours. To improve your score, eliminate debt and reduce spending, particularly on things that don’t add to your quality of life.
3. Divide E ______ Emergency Savings by C ______ Monthly Expenses to get ______ # of months of Spending-in-Emergency Fund. Above six months is excellent, above 3 is good, and less than two is a serious red flag. If you want to increase the number of months you could pay bills without dipping into your investments, either cut overall expenses or start adding at least $25 a week to your Emergency Savings.
4. Add E ______ Emergency Savings plus F ______ Home Equity plus G ______ Retirement Savings = ______ Total Assets. Divide that total by C _____ Monthly Expenses to get ______ # of months to Welfare. This tells you how long you could survive with no appreciation or income before you are flat broke. Above 60 months is excellent, above 48 is good, above 24 is okay, and less than 24 means it’s time to step up your savings, and reduce your expenses. Remember, this is a worst case scenario (no job, no social security, no investment returns). If you’re not comfortable with your answers on this stress test, it’s time to put your worry to work by increasing your savings, paying down your debt, and reducing your expenses. Seek help. if you need it. To help you get started, look at the Money Matters Workbook.