It’s Time to Stress Test Your Personal Finances


It’s Time to Stress Test Your Personal Finances 

The devastating pandemic that is still a raging malady has had a ripple effect on the global economy and continues to be a huge impediment on normal operations. The outcry has been heard from both corporations and stretch to even personal finances.  Situations such as increase in school fees, loss of employment and tough business losses have taken a huge toll on finances. It is therefore prudent to have a strategy that can pull you into recovery despite the catastrophic conditions.

Stress testing refers to a simulation whereby institutions or finances are subjected to drastic economic scenarios to gauge their resilience ability. As such, one is able to know how well they can manage their funds during a financial crisis.  Stress testing is also performed to ensure proper measures are considered for managing risk levels and capital.  Without a doubt, these daunting moments call for a stress test to your personal finances.

 How to Stress Test Your Personal Finances

  1. In depth Analysis of Your Financial Position

To be able to steer ahead of the trying moments, it is essential to have a comprehensive look at the details of your financial position. Examine your expenses such as school fees, rent, utilities, household expense and trip expenses in great detail.  Look at your liabilities that dig into your personal finances such as insurance and personal loans.

Your assets and income are also relevant at this stage. This should include your disposable income, real estate income and profit gains.

  1. Come up with simulation questions

Having come up with the status of your financial position, the next step lies in deducing simulation questions that have an impact on the financial items.  Such questions include:

  1. What contribution do the sources of income have to the overall income portfolio?
  2. What contribution do the expenses have to the total expenditure?
  3. What is the impact felt on your personal finances when any of the sources of income stop?
  4. How are your personal finances affected with a rise in expenses?
  5. How will your personal finances be affected by stock market fluctuations?
  6. How liquid are your finances in case of an emergency?
  7. Obtaining answers for the simulation questions

The above questions will give a thorough check on your personal finances. Once the questions have been established, you are then tasked in finding the best solutions. This provide a buffer in case of extreme conditions and the engagement of a financial planner is essential.

You should be able to look at adequate liquidity levels on your finances to meet urgent cash needs, recurring sources of income to manage expenses, obtaining a goal-based investment, proper asset allocation for your portfolios and insurance covers in case of severe emergencies or cases such as accidents.

  1. Examining the worst-case scenario

Determining the worst-case scenario after obtaining solutions for your simulation questions will provide a framework from which you can base your decisions. Look at this case with the worst possible situations. This will constitute inflated monthly expenditure and a reduction in the sources of income.

Your sources of income may become deflated as the turmoil persists and your savings should help you face the tides.  You should know the duration this can last by doing a bit of math with the above assumptions. Having done this, you are able to gauge with increased certainty on how long you can survive decently.


Merits of Stress Testing Your Personal finances

Conducting a stress test on your personal finances is does not only provide confidence to face turbulent storms but also has ample benefits. For one, you are able to organize your finances well, anticipate for contingent situations, obtain insurance cover and plan for emergency funds, have a budget and diverse your assets in a bid to weather the storm.

 Getting Back to the Drawing Board

 The financial health of your personal finances is clearly shown by the results of the stress test. If you are not comfortable of dealing with a financial crisis with the status of the projections, this is where you get back to the drawing board.

You can gain control over financial setbacks by:

  • Obtaining an emergency fund account that is interest bearing.
  • Reducing expenditures such as personal loans
  • Automating savings to avoid over spending
  • Diversifying investments to assets with negative correlations
  • Budgeting and financial management on a consistent basis.


Getting a hold of your finances and performing a stress test on your personal finances should be done at regular intervals. You should obtain clarity on whether you will pass a stress test with sudden trying situations. There has never been a better time to perform this test for the soundness of your personal finances. If you do not feel confident after conducting the stress test be sure to take proactive tests toward managing your finances to avoid falling into a financial pitfall.

Previous article3 Common Debt Payoff Strategies
Next articlePortfolio Diversification for Beginner Investors


Please enter your comment!
Please enter your name here