Things don’t usually go wrong one at a time. A paycheck shrinks, markets dip, and expenses hit—all at once. When that happens, even a solid plan can start to show cracks.
What is financial health?
Financial health is a measure of how well you can manage your financial needs today, prepare for the future, and handle the unexpected. It can include having enough income to cover your expenses, manageable debt, accessible savings, appropriate insurance, and investments that align with your goals and timeline.
But financial health isn’t just about hitting certain numbers. It’s also about resilience. A financially healthy plan has enough flexibility to withstand a setback, such as a sudden expense, a loss of income, or a drop in the market, without completely derailing your long-term goals.
That’s why it can help to look beyond your balances and put your finances through a few “what if” scenarios.
How to test your financial health
The only way to know where the weak spots lurk is to test your financial health. Here are 5 situations that can reveal where things might break and what you can do about it.
1. If the market drops fast
Scenario: Your investments lose 20%–30% in a short time.
How to test it:
1. Look at your current balance—and cut it by 25%
Take your total investment balance and do a quick “what if”:
- What would it be if it dropped by 25% today?
Ask what that means for you right now:
- Would I need to delay a big purchase?
- Would I need to sell anything soon?
Your answers will likely depend on your goals for that money. If you’re retiring in 20 years, a dip in the market has historically turned into a minor footnote with the passage of time. But a market rout could spell trouble if you're retiring soon or if your investments are earmarked for a down payment on a house in the coming year.
Quick example
If you have $100,000 invested entirely in stocks, a 25% drop in the market or benchmark index could bring it down to $75,000.
If you were planning to use that money for a down payment on a house in the next year, would you have to wait or change your plans?
What to look for
- Modeling a market downturn tests more than the resilience of your portfolio. It can also highlight a mismatch between your investments and your timeline.
- If a market decline would force you to postpone a major goal, such as buying a house or starting a business, you may be taking more investment risk than that timeline can support.
How to improve your financial health
- If seeing your balance fall 25% would make you want to sell your investments, your portfolio may be more aggressive than you're comfortable with. Read Viewpoints: How much investment risk can you handle?
- For money you’ll need within 3 years, consider relatively lower risk options like high-quality bonds, CDs, and money market funds. Read Viewpoints: Investing for short-term goals
2. If your paycheck shrinks—or stops
Scenario: You lose your job, change roles, or your income drops unexpectedly. Read Viewpoints: 5 steps to consider after a layoff
How to test it
1. Add up your essential monthly costs
Focus on the basics:
- housing
- food
- utilities
- insurance
- minimum debt payments
- health care
2. See how long your savings would last
Divide your total savings (not counting retirement accounts) by that number.
That tells you how many months you could cover without income.
Quick example
If your essential expenses are $3,500 a month and you have $10,500 in savings, you could cover about 3 months without a paycheck.
If the number you come up with sounds tight, this is exactly the kind of gap you’re looking for. Building more robust emergency savings could make sense.
What to look for
- Do you have enough cushion to cover 3–6 months of essentials?
- Would you need to tap long-term investments—or take on debt?
- Could you realistically cut spending further if needed?
How to improve your financial health
- Build or rebuild an emergency fund (start by aiming for $1,000 and then keep going until you reach 3 to 6 months’ worth of essential expenses). Read Viewpoints: How much to save for emergencies
- Identify flexible expenses you could cut quickly.
- Consider backup income options like a side hustle or building your network.
3. If a big expense hits out of nowhere
Scenario: You’re hit with a large, unplanned cost—like a medical bill, home repair, or helping a family member.
How to test it
1. Pick a realistic surprise expense amount
Use a range that feels uncomfortable but possible:
- $2,000 (minor emergency)
- $5,000–$10,000 (major repair or medical bill)
2. Decide how you would actually pay for it
If it happened today, what would you do?
- Cash savings?
- Credit cards?
- Selling investments?
- Borrowing?
Quick example
If you had to cover a $7,500 expense this month, would you pay it from savings—or put it on a credit card and pay it off over time?
What to look for
- How quickly could you access the money?
- Would covering the expense require borrowing or liquidating investments?
- Are there risks that might be better managed through insurance? Medical bills, liability claims, property damage, and even veterinary costs can be insured against.
How to improve your financial health
- Build a dedicated emergency cushion separate from long-term investing.
- Consider keeping some savings in accounts that are easy to access.
- If you’re eligible, a health savings account (HSA) may help you prepare for future medical expenses with potential tax advantages.
- Review insurance coverage for risks that would be difficult to absorb out of pocket. Read Viewpoints: Are you underinsured?
4. If your costs keep rising
Scenario: Everyday expenses like rent, groceries, and health care climb faster than expected. The hidden danger of inflation isn’t just higher prices. Money that could have been saved for your future may now be needed just to maintain your current lifestyle.
How to test it
1. Inflate your current monthly spending
Take what you typically spend in a month and increase it by 10%–15%.
2. Check the impact on your plan
- Would you still be able to save as much?
- Would you start dipping into savings?
- Would this change your timeline for big goals?
Quick example
If you typically spend $3,000 a month, a 10% increase brings it to $3,300.
Would that extra $300 come out of savings—or force you to cut back elsewhere?
What to look for
- Does higher spending reduce your ability to save and invest for future goals?
- Are rising costs forcing tradeoffs between competing priorities, such as paying down debt, building savings, and investing?
- Are increases in essential expenses creating pressure on your monthly budget, or are they mostly affecting discretionary spending?
How to improve your financial health
Revisit spending categories that have changed the most over the last year instead of making across-the-board cuts. Try Fidelity’s free digital tools to track spending, net worth, and debt.
- Identify which goals are non-negotiable, such as emergency savings and retirement contributions, and try to protect those first. And remember that saving something is always better than nothing.
- Look for opportunities to increase saving when costs stabilize, even if only by small amounts.
- Think about maintaining some exposure to investments with long-term growth potential, which may help offset inflation over time.
5. If you retire earlier or live longer than planned
Scenario: You stop working 5 years earlier than expected because of a layoff, burnout, health issues, or caregiving responsibility—or you simply live longer than anticipated.
How to test it
1. Add more years to your timeline
Whatever you’re planning for now, extend it. You can model your retirement plan with Fidelity’s free digital tools, which use a default planning age of 94.
- If you’re planning for a 25-year retirement, see if it works as a 35-year retirement.
2. Check how that affects your withdrawals
- Would your spending plan still work over a longer timeline?
- Would you need to lower withdrawals to make your money last?
Quick example
If you planned for 25 years of retirement and extend it to 30, your savings now need to last 5 extra years.
Would your current withdrawal rate still feel sustainable over that longer stretch? Read Viewpoints: How much will you spend in retirement?
What to look for
- Is the annual income your savings might provide sustainable over a longer time frame?
- Would keeping the same spending increase the risk of running out of money?
- Are you relying too heavily on market performance to make up the difference?
How to improve your financial health
Consider starting with a sustainable withdrawal rate, often around 4%–5% in the first year, then adjusted over time.
- Be open to tailoring spending as conditions change, especially over a longer retirement.
- Delay retirement if needed and if possible, or reduce withdrawals early on to give savings more time for growth potential.
- Consider ways to cover core, must-have expenses with more predictable income sources using Social Security, pensions, or annuities.
- Consider maintaining a portion of your portfolio invested for long-term growth potential, which may help support a longer timeline.
The bottom line on testing your financial health
You can’t predict what life—or the markets—will do next. But you can get a better sense of how your finances might hold up when things don’t go as planned.
After all, if your plan only works when everything goes perfectly, it’s not really a plan.
Running a few simple tests can help you find weak spots early—whether that’s not enough cash on hand, too much dependence on market performance, or spending that may be hard to adjust.
Making small changes now can make it easier to stay on track, even when things don’t go your way.