Financial Fire Drills

There is a term in the financial world that I want to share with you - a stress test.

The purpose of conducting a stress test is to help you recognize situations that would cause you to fail. In the world of financial money management, that means thinking ahead about what situations would cause you to financially fail, so you can try to avoid them before they happen (or be prepared for them). 

In my life, here are the disaster questions I had to ask myself:
1.     How long can I live without income?
2.   If my income goes down, how will I address my debt?
3.   If the bank won't do a short sale on my condo, will I be able to afford to rent the place longer (with condo fees) or will I come out better financially if I go through a foreclosure?

      4.     What is my plan if the car breaks down completely?

      5.     What if I need to fly to Tennessee because someone is sick? 

      6.   Can I pay for a major medical problem?
      7. What if none of my previous brilliant ideas work? 

   

Answers

      1.     I can live for 7 weeks on all the savings I have (including what's in the car fund and baby emergency fund). If I cut expenses during that time (see #2) I can go 10 weeks.

      

      2.    I have to find another job right away or cut expenses. I can cut expenses by: switch my car insurance from full coverage to liability only, put car payments on hold, put long-term savings on hold, put student loans in deferment, ask Daddy to pay t-mobile phone one month, asked San to pitch in on gymnastics for one month

      

      3.     I can afford to rent the place with condo fees if the mortgage is $500 including principal, interest, and taxes. However, I may do better just being foreclosed upon and setting up a payment plan for the rest later on. That will defer taxes that I have to pay and allow me to keep renting rooms or living in my car and using current income to pay off debts.

      4.     If the car breaks down today (June 2014) the plan is to buy a used car with a down payment of $1200 and a small loan. 

    

      5.     We have $1000 in an emergency fund to cover emergency trips home. 

      6. I have disability insurance that will help pay for hospital stays and emergency room visits. I am lowering my deductible to just $1000, so I will have to setup payment plans for anything beyond that up to a certain limit (I think $10,000). 

      7. I still have 2 credit cards and a line of credit I can use to access cash, but I reeeeeaaaallllyyy don't want to go that route. 

         

Some blog articles that give more info on the topic:
http://finance.yahoo.com/news/stress-testing-personal-finances-223000511--finance.html