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Stress Testing Your Financial Models

When was the last time you stress tested your models?

Let’s break it down into personal life, business/practice, and investment models.

 

 

We live in a time with a lot of volatility in our economic cycles. We’ve been in a long bull run cycle since around 2012,  after the 2008 recession hit its bottom around 2010-2011. I believe these cycles will become more frequent and deeper (especially on the low side) going forward. 

So we need to stress test.

To stress test your personal life, look at how much margin you have in your lifestyle overhead. Are you close to maxing it out with school loans, practice, or consumer debt?

What if you had a decrease in your after-tax lifestyle capital? What would you have left to run on after bills and expenses? Could you take a decrease of 10% of your current lifestyle burn rate and be okay? What about 15% or 20%? How far down the line can you go before you can’t squeeze any more out? It’s important to know where you stand.

How about your business or practice? When the marketplace has a downturn, it also affects your clients. What would it look like if your practice revenues were reduced by 10, 15, 20, or 25%? How would that change your profit margins, and more importantly, your cash flow?

These are all interrelated, and you need some predictions. Get with your CPA and look at those numbers to see how much of a decrease your business revenues could take before you would have serious problems.

What about your investments: Where are you in the market cycle? What kinds of investments do you have? Are they debt leveraged? If you’re looking at your investments as replacing your active income sooner rather than later, it’s very important that you stress test them as well. What kind of downside risk protection do you have? If your investments dropped in value or cash flow by 10-25%, could you weather the storm?

The key to getting through an economic downturn is having enough margin in these three areas of life – particularly the investment side if you are depending on that for cash flow to live on. What plans and provisions can you make in each category so that you can get through a downturn without having to sell your assets and investments at fire-sale prices for liquidity? 

Do you have enough margin in your models to get through the gap (which is typically about 18 months – possibly a bit longer)? Don’t wait – it’s critical to stress test your models now so you can see where you stand, and make any adjustments before a crisis hits.

To your freedom!

David

 

P.S. To get a quick look at where you stand on your retirement journey, be free to take our free Retirement Scorecard assessment: www.freedomfounders.com/scorecard

 

P.P.S. Whenever you’re ready, here are some other ways I can help fast track you to your Freedom goal (you’re closer than you think) :

1. Attend A Workshop:

If you’re committed to Freedom, but still building a practice, paying down school debt,  or growing investment capital, our hands-on Freedom Blueprint Workshops are your entrance ramp onto the fast track! Visit www.freedomfounders.com/workshop to claim your seat!

2. Apply To Visit The Mastermind:

If you’d like to join dozens of dentists, docs, and practice professionals on the fast track to Freedom (5-7 years max), visit www.freedomfounders.com/step-1 to apply for a seat.

3. Want to Work Directly with Me?

If you’d like to work directly with me and a small group of my closest investment colleagues, with direct access to the dealmakers and asset classes that I invest in, just send a message to my Executive Assistant (Lindsey@FreedomFounders.com), and put “Fast Access” in the subject line. Or, call (972) 203-6960 Ext 144 and leave a brief voicemail for Lindsey. Let her know you’re interested in the Fast Access program – we’ll set up a time with you to talk, find out about your goals, and see if there is a fit.

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