Stress Test Your Money Before Trouble Hits
Financial expert Terry Savage says the best time to check if your money is safe is when everything seems just fine.
A stress test is a way of checking for hidden problems before they become serious. Banks do them every year, and doctors use them to look for heart trouble in patients. Financial writer Terry Savage says your personal finances deserve the same kind of check-up — especially when times are good.
The economy looks strong right now. The stock market is near record highs, unemployment is low, and many retirees have bigger savings than ever before. But Savage warns that good times can make people stop paying attention to risks that are still hiding in the background.
Think about what you learned in science class. Objects in motion tend to stay in motion — but that rule does not always apply to money. Assuming your finances will keep doing well just because they have been doing well can put you in real danger.
Start your stress test with your retirement savings. The S&P 500 stock index gained around 26% in 2023 and 25% in 2024, which is excellent growth. But it lost 18% in 2022, and over the past 60 years there have been four crashes where prices fell by nearly 50%. Could you stay calm and keep paying your bills if that happened while you were retired?
Your home also needs a check-up. Home values have been rising, but many people have not updated their home insurance to match the new value. Savage suggests making a video record of everything inside your house and asking your insurance company whether your current policy is enough to cover rebuilding costs.
Debt is a third area to examine closely. About 9 million Americans with student loans are already behind on their payments. Credit card debt has hit a record $1.25 trillion, and billions more are owed through buy-now-pay-later apps. If the economy slows down, all of that debt could cause serious stress very fast.
The best part about a stress test is that doing it early gives you options. You can trim spending, save a little more, or adjust how much risk you are taking with your investments. Taking small steps now, while things are calm, is much easier than scrambling to fix problems during a crisis.
Anticipating stress and acting in advance by cutting expenses and taking additional work is easier when the economy is doing relatively well.
Comprehension quiz preview
1. What does Terry Savage suggest everyone should do with their personal finances?
2. How much did the S&P 500 lose in 2022?
3. Approximately how many student loan borrowers are behind on their payments or in default?