03/03/2016 11:44 EST | Updated 03/04/2017 05:12 EST

Can Your Personal Finances Survive A Stress Test?

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Poor couple with financial problems not having money

Could your personal finances handle a major setback? A sudden or unexpected event such as a job loss, major expense or caring for a sick parent could make you vulnerable.

You may temporarily lose sight of the big picture and become reactive or act hastily when you really need to pause, reflect and take stock. Most of us can recover. It depends on the event, our age and personal circumstance.

As an example, John, a major executive in a mid-size firm in a big city lost his job. His area of expertise became redundant as the company embraced a new strategic direction. Once a big fish in a little pond, he became a little fish is a big pond mid-way through his career.

He was lucky. He landed on his feet because he received a generous severance package and was re-employed quickly. His ego took a bit of a bruising, but financially he was okay.

This is not always the case. Susan graduated from college and started an entry level job in her field. Sadly her health took a turn and she was forced to leave her job. She was not entitled to any health benefits or an extended leave of absence. In short, she had to move home for support.

Managing a big change in life can be daunting. That's why we need to have a clear understanding of our financial situation. It can't be fuzzy. Banks, for example, regularly conduct stress tests to identify areas of vulnerability. Testing allows for preventative planning to avoid systemic breakdowns or unrecoverable losses.

Stress testing your financial situation is a good habit to get into because it gives you a quick snapshot of your financial health.

Sudden changes in the market, such as the recent oil and gas sector weakness, Canadian dollar volatility, rising interest rates, and escalating cost of living -- they all impact our lives. Some of us may have changed our vacation plans, pushed back retirement dates or reconsidered a major purchase.

When things are uncertain, it's smart to know where you stand. Take the time to do a quick stress test on your personal finances:

1. Calculate your net worth.

Figure out how much you have and subtract how much you owe. Knowing how much you are worth is a good way to assess your current financial situation. Is it positive or negative? What needs changing or adjusting? How are your debt levels?

2. Check in with your advisor.

Has your risk tolerance changed? Do you have sufficient liquid assets that could easily be converted to cash if needed? If an advisor manages your investments, reach out to him/her for an update. Do they really understand you? If they haven't called you lately, now might be a good time to reassess the relationship.

3. Assess your cash flow.

This is a straight forward calculation. Figure out how much money comes in and subtract how much money goes out. If you find yourself close to a zero balance you may be vulnerable. Check in with your lifestyle choices. Many of us love our luxury items. Subtle lifestyle changes could easily add more to your bottom line.

4. Examine your credit score.

It's easy to miss paying a bill on time. It's also a big wake-up call when you have done all the right things and saved money for a down payment on a home only to find you can't get a mortgage because of a bad credit rating for bill payment lapses. Check in with your credit score today. Automate all bill payments.

5. Build an emergency cushion.

A sudden job loss or change in your income or employment may make you vulnerable. Maternity leave benefits may not cover your overhead. And, severance packages and UI benefits eventually run out. Make sure you have some emergency funds in place that are easy to access.

6. Confirm your insurance.

Long-term disability insurance is essential, especially if you are self-employed. These plans help to replace or offset lost income due to an illness. Review all of your insurance policies.

Don't be caught off guard. Take action today and make sure you are set up to weather any type of setback. It's that simple.

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