Recently I heard a radio news report about stress tests European banks are conducting. American financial institutions have performed the same kinds of tests. The idea is to project how well a bank will function if different negative scenarios play out. For example, say inflation doubles—what does that do to a financial institution's loan portfolio?
That got me thinking about different financial scenarios in our personal lives. Let's look at some serious "what if" situations:
Don't just speculate; calculate the real cost of these setbacks.
For $5 a gallon gas: Say you usually drive 13,500 miles a year, get about 20 miles to the gallon, and have been paying $3.50 a gallon for gas. Your costs will go from $2,363 a year to $3,375—a little more than $1,000 a year or $85 a month. Not pleasant, but likely manageable.
Month in and month out, we face one financial challenge after another. Usually they're not too extreme but they can take a toll, especially when they come in series as so often seems to happen. So try a range of stress tests:
Another wrinkle—say more than one of these challenges crops up at the same time. That's life.
There's an old admonition against borrowing trouble. I think performing a stress test actually does the opposite—it borrows peace of mind by helping you prepare in advance for a bad patch. You do that by keeping debt low and building your savings for short-term and long-term goals. Hope for the best—and prepare for the worst.
The neat thing is, conducting a stress test lets you refine your priorities without having to suffer the actual effects of these calamities.
The people at your credit union can help you create a better scenario. They bring you this website and other tools to help you make the most of your financial resources. The Financial Fitness Challenge continues to look at ways you can make better financial habits no matter what condition the economy is in.
Each month we randomly select five winners to receive $50 Visa gift cards; we choose each month's winners only from that month's entries, so enter often. Remember to register for the Financial Fitness Challenge.
Susan Tiffany, CCUFC