Thursday, February 21, 2013

Stress-Testing your Personal Finances

At the prodding of The Blunt Bean Counter, My Own Advisor recently answered a series of questions designed to test how well his personal finances would stand up to different types of stress. I liked the list and decided to give it a shot myself.

I like to think that I’m very well-prepared financially, but let’s put it to a test. Here are the questions and my answers.

Are you spending more than you earn today?
No. My family spends only about half my take-home pay.

If your income dropped by 50% for 6 months what would you do?
Not much. I would probably delay RRSP contributions until after the 6 months were up.

If you needed more income what would you do?
I would take one of the job offers I get to do work I don’t really want to do, but pays more than I make now. However, I’d rather just live modestly than spend all my time working.

Do you have enough insurance to pay off debts in the case of a death?
I have no debts.

Do you have a Will? Do both spouses know where to find it? Is it up to date?
Yes, yes, and not really. My current will has provisions for what will happen to my children in the event that both my wife and I die, but my children are adults now.

Do you have a list of assets (investments, real estate, other) you own? Do both spouses know where to find it? Is it up to date?
It’s not exactly a list, but it’s all in a spreadsheet.

Do you know you have access to money if you needed it in an emergency (line of credit, savings account)? Do you know what accounts you’d withdrawn from first to avoid more debt? Is the money readily accessible within one day?
Yes to all questions.

Do you know you have a list of emergency contact information for professionals in an emergency situation (doctor, lawyer, and accountant)?
Yes for the doctor and lawyer, but not the accountant. I’ve always spent the time to understand my tax situation, so I haven’t used an accountant. I might do well to have an accountant in mind in case of tax troubles.

My results are reasonably good but not perfect. How did you fare with these questions?


  1. Michael,

    Two things.

    1. I said this to My Own Advisor also. I don't like the do you have enough insurance to pay off your debt question. That is the minimum your insurance should be used for. Luckily or skillfully not an issue for you. But that question is not comprehensive enough. If someone dies with young children, they need substantial additional insurance to cover their children's upbringing and future education. How about the day to day living expenses of the surviving spouse? Do you have sufficient liquid assets, for most people the answer is a resounding no. So I would suggest having just enough insurance to pay off your debts is only part 1 of that question.

    Question for you? U have a spreadsheet, that is fine, have you walked through with your wife where to find it if you were hit by a truck tomorrow? Having it and actually ensuring your spouse knows are two separate things. Does the spreadsheet have account names, contacts, contact info. Idea is to make the list idiot proof if god forbid someone needs to access the list in a time of sorrow.

    1. @Mark: You make some excellent points. Coincidentally, I was throwing out some old papers recently and came across my notes around the time my first son was born. I was working out how much life insurance I needed to cover my future financial contributions to the family. The numbers look quite small to me now.

      I'm lucky that my wife is quite engaged with the family finances. Big numbers make her nervous, but she knows where all the accounts are and where to find the list of access information I maintain. My main concern is that she would quickly lose her nerve during the next bear market and would sell everything at low prices and turn it all into GICs.

  2. My answers are quite similar to yours. Living on 50% of take home pay makes for a life free of financial worry, doesn't it?

    It is hard to imagine ever needing more income, perhaps if I wracked up gambling debts and had gangsters after me? Assets and insurance cover everything that is plausible and beyond my control.

    1. @Greg: I have to concoct similar unlikely scenarios to come up with a possible need for more income. Maybe the most likely is a major health problem not covered by our medical system. But that still seems quite unlikely.

  3. I was able to answer positively for all the questions. I guess I am in good shape. :-)

    1. @Tara: Good stuff. You might want to read the Blunt Bean Counter's comment on this post. He makes a good case for improving these questions.

  4. I found the questions are not really related to a financial situation as such, but they are emergency related.

    You could easily expand them by answering : what if electricity goes out, emergency for the pets, boiler stops working in a middle of a winter, etc...

    They to exclude a lot of other questions - such us information security - passwords are stolen or credit cards, etc...

    It does not alter the fact that these are provocative and very interesting questions. However I am focusing mainly on a longer term financial goals. I probably would not pass the test.

    1. @FI: You're right that these questions are emergency-related. However, I'd argue that preparedness for financial stress is an important part of your financial situation. I knew a guy during the tech boom who was leveraged at the same time as his stocks cratered and he lost his job. His finances will forever be defined by his lack of preparedness for stressors at a critical time.