Can you pass a Financial Stress Test?

Banks and financial institutions across Europe and the US recently conducted, and passed, their financial stress tests, an annual assessment that gauges ability to cope with an economic crisis.  How would your personal finances hold up under the same simulation? Could you pass a financial stress test?

In our quickly changing world, unexpected events can quickly hit your bottom line.  How would you cope financially if you lost your job, or the interest rate on your mortgage increased dramatically?  Assess your finances against the following points to see if you have enough set aside to get you through a crisis:

1.  Liquidity

Most financial advisors recommend you keep a minimum of three months living expenses in easily accessible funds or accounts.  As an expatriate we recommend you aim to save equivalent to 6 months living expenses given the increased financial strains of living abroad and potentially expensive repatriation.  

2.  Financial diversification

Write down all of your assets, and calculate the percentage you have in each category.  How diversified is your portfolio?  Is a high percentage tied up in property?   While property can be a great long-term investment, an investment strategy based entirely in property can be difficult to sell quickly.  Likewise a stock portfolio heavily focused on one industry or stock can mean a small down turn in financial markets has a large impact on your net worth.

3. Debt to income levels

While there is no magic number to aim for, the goal is to assess the maximum amount of debt you could possibly service, and then back away from this number to a point that makes you, and your bank, comfortable.  Many older debt calculators may suggest a debt to income ratio of no higher than one third, but higher incomes now make this calculation a less reliable way to factor risk.  In general, the lower the number, the better your financial health.

4. Spending versus income

You're embracing the expat life. Travelling around the region, eating out at restaurants, drinking in bars, keeping your home cooled to pleasant 20 degrees year round.  You work hard.  You can afford it.  Then, slowly, the credit card statements and the bills start pile up and it becomes blindingly obvious that you are spending more than you earn.  Spending creep can happen to anyone.  The occasional splurge on life's little luxuries becoming an everyday occurrence.  The small lifestyle choices you make every day slowly pushing you into the red.  Take some time to assess spending versus income, needs versus wants.  Just one less trip to your local coffee shop during the day can add up to thousands in savings by the end of the year.

Sit our free financial health check to assess your current financial health.  For more ideas on how to set up a personalized financial plan contact me at:

http://www.expatfinancialplanning.com/financial-health-check-1