Time to Stress Test Your Finances

In the 2008-2009 financial crisis, the Treasury Department and then the Federal Reserve ran stress tests on banks. This was due to the worldwide panic as to whether the entire world financial system was about to melt down. The question asked in the stress test was what happens if unemployment hits 13%, the stock market declines by 50%, and housing prices drop by 21%. In a lot of situations around the world this exact scenario came to pass. A number of institutions failed and were merged out such as Bear Stearns and a big failure, Lehman Brothers, that almost sank the world.Now we are almost two decades later and our financial markets are Dancing the Bossa Nova, declaring its always sunny in Philadelphia and time to party on. Even though we have a thirty six trillion dollar national debt and our budget deficit is high enough that a show dog can’t jump over it, it’s like that old Mad Magazine cover from the sixties, “What me worry”. I would recommend that we as individuals consider stress testing ourselves to see what kind of financial shape we are in if put to the test.What happens if the financial markets decline by 50%. The response of a lot of people would be they don’t invest in the markets, but if they have a 401K or IRA, in all likelihood it is in the market. Think about retiring with only ½ of the value that is now presently set aside for that purpose. Consider a spouse losing their job and the family budget then doesn’t have room to keep up the mortgage payments. Also just like in 2008 consider housing values decline to where the value is less than you owe on it. Consider the dollar, which is down 9% this year, keeps declining causing inflation to increase.The capitalistic system is a wonderful machine that produces increases in the standard of living but it has periods when excesses lead to savage corrections. The families that have not stress tested can be susceptible to being put through the meat grinder.