The Test: Can You Handle a Troubled Economy?

Here's a piece on wealthy people (or at least relatively wealthy people) who are worried about the bad economy's negative impact on their finances. What caught my attention is the "test" the psychologist in the article gives her clients in order for them to see if they can have the confidence that they can handle a troubled economy. Her test:

She asks [clients] to calculate their monthly expenses — from Botox shots to country club fees — and their monthly income from work and investments. Then she has them cut 10 or 20 percent off the income figure. If they can still afford their lifestyle, she tells them that they have enough of a cushion to protect them from a troubled economy.

Ok, don't get me started on the Botox shots and the country club fees.

But her point seems to be a good one: if your income takes a decent hit, are you still able to manage your current expenses? If so, you should be fine -- especially since you could probably weather an even bigger financial hit because you could cut out some of your current expenses (like Botox shots and country club fees.)

Having a financial cushion is probably how these people got rich in the first place (it's step #1 in my three steps to becoming rich.) If you do the same, you'll get the same results they have -- you'll grow your net worth and have a surplus that will allow you to handle even a very difficult economy.

For more details on how to become wealthy, see Two Steps to Being a Millionaire and Retiring in Your 40's. If the whole "retire at 40" thing turns you off to the post's ideas, simply ignore the first part and concentrate on the tips to making more money and saving more money.

Comments

[Until Debt Do US Part]

The cushion or financial slack in your personal budget is crucial to riding the economic storm.

Not everyone has slack in their finances. In a lot of cases there is no slack and the people end up in the red at the end of the month.

To combat this people should use the accounting concept of 'Prudence'. This basically means that you over estimate your expenses and you under estimate your income. You then train yourself to survive on the new lower income.

The net result is that after a couple of months of living like this you will have created a cushion or slack in your budget. The reason why is because your expenses come in lower than you thought and your income is higher than you thought. The key here is to trick yourself into thinking that there is scarcity and then responding appropriately.