A stress test is designed to assess whether something can withstand some catastrophe or extreme condition. Stress tests can be found in the medical field, engineering, and finance.
Simulated stresses are used instead of an actual catastrophe. For instance when an engineer designs a bridge they will generally apply different adverse loads on a computer model of the structure to test it’s strength.
We can use stress tests on our personal finances to assess our resilience by asking a few simple questions, for instance:
- How long can you survive if you lost your job?
- What happens if you fail to pay the mortgage on your home?
- What if your business venture fails?
- What if the interest rates on your loans increases?
- What if demand for your services and products drastically reduces?
- What if a certain investment collapses?
- What if you have an expensive medical emergency in the family?
- What happens if you suddenly dropped dead? Will your kids finish school?
- What happens if your company is bought and your job is made redundant?
- What happens if we are caught up in a national economic crisis?
- Are you prepared for retirement?
The main outcome of a stress test is to determine how resilient you are and to course correct when there are short comings. The current COVID19 crisis has been a perfect stress test for me. At least I now know where the cracks are. I am now focussing on removing these cracks from my finances.