To avoid financial disaster, several measurements are available for assessing a person’s personal financial stress:
- The Debt-to-Income Ratio is obtained by dividing your debts by pretax earnings. Generally this number should be less than 28 percent, without your mortgage, or 36 percent, including your mortgage payment.
- Discretionary Expenses involve spending for items other than fixed obligations and variable nondiscretionary items, such as food and utilities. Purely discretionary expenses may involve recreation and vacations. An analysis of these categories will allow you to delay, reduce, or eliminate various expenses to avoid financial difficulties.
- Emergency Savings should be able to cover three to nine months of living expenses. These funds should be readily available in savings or other easily liquidated accounts. Greater financial greater obligations will require a larger emergency fund.
- Additional Income involving wages or tips from a part-time job or selling personal possessions can provide a cushion in times of financial difficulty.
- Total Assets, both liquid and non-liquid, will reduce your vulnerability to financial turmoil.
For additional information on the personal finance stress test, click here.
Teaching Suggestions
- Have students calculate one or more of these measurements for their life situation.
- Have students prepare a short creative video with a summary of these measurements.
Discussion Questions
- Why is liquidity important for reduced financial stress?
- What actions would you recommend to for a person to reduce their personal financial stress?
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