Could You Pass A Personal Finance Stress Test?

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A personal finance stress test helps you see how you can handle the worst. Here’s 5 categories that test your financial stability.

I love to look at things from a high-level view. The details are important, of course, but I enjoy glancing at the big picture every so often to make sure I’m on target. This is the idea of a personal finance stress test. A personal finance stress test takes a holistic view of your finances to make sure you’re not only financially stable but able to handle almost anything thrown your way.

Financial stress tests were born largely out of the Great Recession. The Federal Reserve now requires banks with over $50 billion in assets to annually test themselves to ensure they have the ability to handle significant headwinds. They’re also required to test themselves internally twice per year to verify things are on the up and up.

Politics aside, this is a good practice and one I think we can benefit from on a personal basis. With that in mind here’s a more stripped down version with five areas where you can personally perform a financial stress test.

Debt-to-Income Ratio


Debt-to-Income (DTI) Ratio compares one thing – your debt against how much income you make. Think of it this way; your DTI reveals how much of your pay is obligated to someone else. For example, if you make $5,000 per month and all your debt (mortgage, student loans, car payments and other debts) equal $2,500 then your DTI is 50 percent.

As you can imagine, the higher the DTI the worse off you are and the less likely to manage things appropriately when everything hits the fan. Most experts say a healthy DTI is no higher than 36 percent, or 28 percent when you don’t include mortgage costs. It also uses your gross pay, not net.

I like to think of DTI as how much pain I can stomach. You feel your debt every time you make a payment thus only you know what you’re comfortable with. This comfort level will vary from person to person so beyond the 36 percent number there is no magic number to hit.

Personally, I hate debt, so our comfort level is considerably lower. Our DTI is sub 10 percent, so I feel we’re doing good on this measure.

How Liquid Are You?


You never know when a true emergency is going to strike. I’m not talking replacing brakes on your car as you should plan for that. I’m talking needing to replace or fix something that will cost you thousands of dollars. This requires having an emergency fund you can access at a moment’s notice.

We use Synchrony Bank for our emergency fund as we can get cash right away and it is one of the highest paying online savings accounts at 1.85%. If you’re unable to start saving in big chunks to build an emergency fund, you can use a service like Digit to start saving in small amounts and get you comfortable with the act of saving.

As you make more money or get older, you’ll find that a lot of your excess cash is invested – as it should be. However, how quickly can you access the equity in your house? Or, if your excess cash is locked up in investments, do you really want to sell them off to manage an emergency?

It may be unavoidable in truly pressing times, but having readily available cash will serve you better in most situations.

Like the DTI number, the amount you should have set aside in an emergency fund is personal. Experts recommend anywhere from 3-6 months of living expenses; you may be comfortable with less.

Since we run our own business, I like to have a sizable emergency fund to handle something unexpected. We have 12 months of mortgage payments and six months of living expenses saved in our emergency fund. The importance is knowing what helps you sleep at night.

Can You Take A 50% Loss in Income?


Losing a job is never a fun experience. I lost a job early in my days of paying off debt and while I found a new job relatively quickly, it still took me several months to recover from the income I lost during that time.

When it comes to a personal finance stress test you need to look at what would happen if you lost half your income or more – or chose to live on one income? For many, it would be incredibly stressful and goes back to the need for an emergency fund.

When looking at this particular measure, I believe it reveals several opportunities and actions to take. Those are:

Creating multiple streams of income. Whether it is a side hustle, a part-time job or something else, multiple streams of income will help you weather the storm of losing half your income.

Earning passive income. Passive income, like dividend income, is something that comes in without any action on your part. It comes in every month, quarter, etc. and goes right into your bank account.

Categorize your expenses. You want to breakdown your expenses into three categories – what you have to pay every month (mortgage, car, etc.), variable non-discretionary (groceries, gas, etc.) and discretionary. Determine what you can live without; find ways to save money every month and plug that back into your bank account if you need to take action.

If you don’t feel can handle a slash in pay, you can start building a foundation now. I feel like we’re doing pretty good on this front and would be able to live if we lost half our income through our income and cost-cutting efforts.

Are You Covered?


Insurance plays a huge role in finances. It’s something you pay for and hope you never have to use, but when you do, you’re thankful you have it. Your need for insurance varies based on your personal circumstances but will include the following for many:

  • Auto insurance
  • Health insurance
  • Homeowner’s/Renter’s insurance
  • Disability insurance
  • Liability insurance
  • Life insurance

The first two really shouldn’t be debatable in most circumstances, as is the homeowners or renters insurance. Disability insurance is available through many larger employers for relatively cheap and becomes important as you have increasing obligations or dependents.

Liability is usually only a concern for those who run their own business. Life insurance will depend on your situation, though I believe it’s important for most to have.

As with the other categories, insurance is largely personal. You need to think through what you could handle if something were to happen and you had to pay out of pocket to cover something you did not insure.

Thankfully there are many resources to get affordable insurance from, which include: eHealthInsurance for health insurance to USAA for renters or homeowners insurance and PolicyGenius for life insurance.

This is the one category that we personally have an opportunity for growth in as we don’t have disability insurance and could stand to have more life insurance.

You Have Positive Net Worth


I read an article on Yahoo Finance recently that spoke about the growing number of people with negative wealth. Negative wealth is when your debt, when added up, is more than your assets. In other words, you’re financially underwater. They pointed out two main culprits for this number, student loans and growing car payments.

The reason for the negative wealth really isn’t the point but in the case of a stress test you’d be in significant trouble regardless of the type of debt. Ultimately, it comes down to not buying crap you don’t need and finding ways to make extra money. The combination will help you grow your net worth.

Additionally, it comes down to tracking your spending and keeping an overall eye on your finances. I use Personal Capital for this as it helps us get a snapshot of how we are doing anytime I want, and it’s free to use.

How Often Should You Do A Personal Finance Stress Test?


There is no real true answer as to how often you should do a personal finance stress test. It’s going to depend on your situation and comfort level. You may feel fine doing it annually. You may want to keep a closer eye on your finances and do it monthly.

I’m of the opinion that if you’re already keeping a close eye on your finances, you can do it once or twice per year. This is another reason why I’m such a big proponent of a tool like Personal Capital. If you use a tool like that, you can get a good sense of where you stand financially without adding much to it.

Regardless of what you do and how you do it, the point is to know where you stand in the event that something unforeseen takes place so you know how you’d be able to manage the situation. Really, assuming something doesn’t happen you get the joy of watching your finances improve and seeing your net worth increase – something we should all want.


What else would you include on a personal finance stress test? What’s one area you need to grow the most in? I scored a 4 – 4.5 out of 5, how do you score?

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John is the founder of Frugal Rules, a dad, husband and veteran of the financial services industry whose writing has been featured in Forbes, CNBC, Yahoo Finance and more.

Passionate about helping people learn from his mistakes, John shares financial tools and tips to help you enjoy the freedom that comes from living frugally. One of his favorite tools is Personal Capital , which he used to plan for retirement and keep track of his finances in less than 15 minutes each month.

Another one of John's passions is helping people save $80 per month by axing their expensive cable subscriptions and replacing them with more affordable ones, like Hulu with Live TV.


  • Amanda @ centsiblyrich says:

    Love this! It’s so important to take stock of the overall picture of your finances now and then.

    We’re about a 4 out of 5. We probably need to work on the liquidity at bit. We have a decent emergency fund, but it’s less than it has been in the past (though we do have a HELOC we can access, if needed, but that’s still borrowing, in my opinion). But we’ve come a long way from having a negative net worth 16 years ago!

    • John Schmoll says:

      Thanks Amanda and completely agreed.

      Sounds like you’re on solid ground and can relate – glad to be in the black now. 🙂

  • Fehmeen says:

    I would definitely fail this financial stress test with ‘flying colors’. Sure, we don’t have any debt to deal with but financial independence is so much more than that. I think this stress test is something you ought to be exposed to first when you are 18 and ready to leave home for college, because it’ll help consumers work in the right financial direction. Debt is a reality and most of us are just a wrong turn away from it…

    • John Schmoll says:

      “I think this stress test is something you ought to be exposed to first when you are 18 and ready to leave home for college, because it’ll help consumers work in the right financial direction.” I completely agree Fehmeen! I view a lot of this as basic/intermediate financial literacy topics and would be of great help if taught in schools.

  • Bridget Todd says:

    Great post! I think our Financial Gym clients could really benefit from making this a regular part of their financial fitness routine! We always stress the importance of having 6 months of expenses in cash just in case, calculating out that number is a great way of putting into perspective just how much you are spending each month. A lot of people realize that they can or should cut back on certain areas!

  • DC @ Young Adult Money says:

    I wouldn’t be surprised at all if a large percentage of millennials couldn’t handle a 50% loss of income. First of all, most millennials are making the least they will in their life. Second, there typically isn’t much room to play with variable expenses. Looking at the Twin Cities market, housing costs can only go so low (even if you are looking at studio apartments). Idk, it’s a tough thing to think about for most millennials imo.

    • John Schmoll says:

      I don’t think millennials are the only ones that would run into that situation with regards to loss of income. But, that said, if you’re younger and single, I’d argue it’s simpler to cut down on expenses vs. someone that may have a family. Ultimately, it’s subjective to the person and their particular situation in my opinion.

  • Syed says:

    Great stuff John. I like the one about if you can live on 50% of your income. I feel couples should especially focus on this because there is a good chance that one of you won’t be working for some period of time. This could be form many reasons like taking care of a child, health problems or job loss.

    If a couple can live like they only need one income, and apply the other partners income towards savings or investments, that net worth will build up fast.

    • John Schmoll says:

      Thanks Syed. Agreed, I think it’s something that’s commonly overlooked for a variety of reasons but it can be a powerful tool. We do it ourselves, if not less, and it has been a great aid to ramping up our net worth.

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