Your Own Personal Money Stress Test

Here's an article that suggests we should each put ourselves (and our money) through a stress test similar to those many American banks just went through. The piece lists four factors that you should score yourself against to see how fit your finances are. The four factors are:

• Factor One: Disposable income ratio. This factor shows your ability to absorb a drop in income or an increase in expenses. To calculate: Subtract monthly expenses from monthly income to determine disposable income or shortfall. Then divide your disposable income by monthly net income to determine your disposable income ratio.

• Factor Two: Surviving on savings. This factor shows the amount of time you can survive on emergency savings without a job. To calculate: Divide your total emergency savings by monthly expenses to determine how many months you can get by without income.

• Factor Three: Total spend-down. This factor shows how many months you could live before becoming completely broke. To calculate: Add your emergency savings to the amount of home equity and your total retirement savings to determine your total assets, then divide by your monthly expenses.

• Factor Four: Debt-to-income ratio. This factor shows the ratio between your level of debt and your level of income. To calculate: Divide your total unsecured debt by yearly gross income.

I scored 100 which they rate as "Excellent health – You are well prepared to handle adversity." Actually, I was well above 100 since I was way over every top measure they offered, but who's counting? :-)

Seriously, a good score here is simply a result of what we talk about here on a day-in, day-out basis -- keep spending low, maximize income, save for emergencies, invest for the long-term, avoid debt, etc. If you do these things, and do them for a long time, you'll score well on this test and be prepared for most financial downturns. In addition, taking these few, simple steps will eventually make you rich.

So, how did you do on the test?

Comments

[Rzrshrp]

This is a good reminder that my wife and I still have a long way to go with emergency and retirement savings. We got 50 points for the two income ratio questions and that's it. Not enough emergency savings or total spend down money to even get five points. We feel too comfortable now that we've beaten our credit card debt but we still have a ways to go with emergency spending. I'd like to make it to that magic 6 month mark and maybe increase it to a year after that. I'm not beating myself up too much about the total spend down part though, we don't have much in our 401ks yet but we're contributing and we just bought our house so not much equity there either.

[finco86]

From what I see, I too get 100 points but that is after I do some adjustments. My emergency fund should last 19 months if I take into effect the other income that continues to come in if I loose my job. The calculation doesn't really take this into consideration. Also, I end up with 12% total debt to income with only the mortgage so I don't know if that means 25 points or 20 points in that category. I assumed 25 points as this is not unsecured debt. Otherwise, an interesting exercise.

[Meg]

The way they calculate "debt-to-income ratio" is wrong. They define it as the total unsecured debt divided by annual gross income. I'm a banker and I've never seen any version of this used. "Debt-to-income ratio" is supposed to be the ratio between debt payments required on ALL debt (secured and unsecured) divided by gross income.

[Rzrshrp]

I noticed that too Meg. It's also possible though that they meant the calculation that they used. If that's the case, they probably shouldn't call it "debt to income ratio" because that term is pretty much reserved for the calculation that you're talking about.

[Param]

I scored 100 too, but I'm still stressed about money...

[Observer]

My ratios are 0, 0, 0, and (student loans) 65%.

Can I get a bailout?