Episode 80 – What stress tests can you do right now to build your confidence?
The best way to tackle a financial crisis …
Is to plan for it before it even happens.
That’s the not-so-secret strategy for creating a contingency plan you feel confident about.
But where do you start? In the latest podcast episode, I walk through 4 steps you can take right now to feel ready and prepared for any financial situation.
Tune in now.
Hey there. Welcome back. This week I wanna give you a few things you can do to build up your money confidence—especially during this high inflation and uncertain time. You need a realistic perspective to get you to your end goals. We have enough stress in life, and any little thing we can do to take some control and know where we stand will help us mentally and physically.
So I’m gonna share a few stress tests for your finances that you should be doing. First, First thing is to go over your monthly expenses and add 5 to 6% on all of it. For example, on utilities, add the extra 5% to your monthly budget. Then for groceries, add another 5%, or even six or seven, it seems to be a little higher. Property taxes, et cetera.
You get the idea. Do not forget mortgage payments with an additional increase as well, especially if you have renewal coming up. I do think variable rate, going forward, but that’s for a whole other podcast.
Back to the monthly budget. Now what you wanna look for: Is there leftover money at the end of your month with that additional 5% on all your expenses? This is a stress test. If not, you know that changes are going to be needed. This test shows you your wiggle room, and the most important thing is to get in front of it right now.
Just knowing this ahead of time will help you make some decisions going forward. You do not wanna be caught with your pants down after the fact in debt. So that could mean less travel and vacations for some of us that are lucky enough to have—I don’t wanna throw it there—that middle class income, that with increased expenses, we can absorb it. We cut back a little bit. You have a place to draw from. You have extra.
But I’m not naive. It could be harder than cutting back on some luxuries. If things are already tight, then decisions will need to be made a lot harder than just cutting out on eating out and traveling. Only you will know the severity of your circumstance, but the main thing is knowing it before a financial crisis happens, and then finding expert guidance to help find some solutions. It gives you some time to make some plans. So that’s the first one.
Next stress test is to make sure your emergency bucket, meaning that liquid cash, is full. It is for the scenarios of a job loss or those increased expenses that we just talked about, or car breakdown—whatever life crap that happens—do you have enough liquid cash to cover it? If not, that is a priority.
Next stress test is: What does your financial plan and retirement income strategy look like with reduced returns? I have seen financial plans estimate six, six and a half percent rate of returns in retirement. I personally feel that is way too high of an estimate. It will most likely happen depending on the asset allocation and if there’s some equities, like, that can happen.
But there is no way you should be chasing those returns in retirement. For your stress test, run a three, three and a half, or a 4% return. Now run a few scenarios with a little bit more retirement income than you thought. Check to see your threshold.
This last stress test is a bit of a downer though. So moving on. This last one is to ask yourself: If I were to die, what is the stress test on my surviving family members? For example, if you have a spouse, can your spouse afford everything? If you have children, are the kids taken care of? Are your wishes met? Is there enough life insurance or are there enough assets?
So that’s not a fun conversation, none of the stress tests are, but there is a purpose behind that. They’re essential. I suggest you do this exercise on your own and then contact your financial planner. Go to an expert and do it again with them.
The purpose is it brings you peace of mind. It builds some confidence starting out the year 2023, and it’s also going to give you time to plan. That’s it. Any questions, send me a note, [email protected] and you can find show notes on our website. Take care.