A stress test is not a new concept. People have been going to doctors for hundreds of years to see what can be done about their stress levels. What is a relatively new concept however is the stress test, which the authorities use to check up on the health of our banks. Both in Europe and here in Australia banks have had to test their businesses and subsidiaries to see how they would stand up to another Global Financial Crisis.
Fortunately in Australia most of them passed with flying colours. These tests were great as it meant that the banks had to assume falls in property prices, increased bad debts and big cash withdrawals if people decided to put their money under the bed. They were scenarios that will hopefully never happen, but the positive is it demonstrated they were in good shape and where they needed to improve.
Credit where credit is due…
This is a clear example of the banks not simply sticking their heads in the sand which we all know does happen from time to time. So if this works for them why not apply this to our own financial situation. That’s right, your very own money stress test!
All the good things in life are simple so let’s try to keep this idea straightforward. Let’s first look at the short-term problems that could arise and this unfortunately is the time to think on the scary side of things! The two most common situations that cause money stress for working families are:
- Emergency Access To Cash…if you needed to, within 30 minutes could you access three-months pay?
- Have a separate savings account without card access and put aside one day’s pay each fortnight.
- If you own a home, set up a separate equity access line of credit for this purpose.
- Have a credit card for this purpose. Once it is set up, don’t keep it in your pocketbook, put it in a drawer out of sight!
- Interest rates rise on your home loan…if interest rates increased by 3% could you still afford your mortgage?
- Review your mortgage rate. If you can refinance at a lower rate, then do so but keep your repayments the same.
- Get ahead of your mortgage schedule so if rates rise, you have some flexibility. A good way to do this is to take the bank’s monthly repayment, divide it by 2 and then make this every fortnight. Each year you get a month ahead!
- Put your next pay-rise, tax return or windfall straight into your mortgage to build your buffer.
There are a number of ways to stress test your financial stability but of course the most important thing to remember is don’t just sit on your hands and think everything will be OK. ‘Expect the best and plan for the worst’ definitely rings true in all money issues!
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