As the Scout motto goes: "be prepared", and your finances are no exception. No matter your financial position, these tests can help you feel more financially confident, or help you find the flaws. (Make it to the end of the month, before you run out of money. To learn more, check out The Beauty Of Budgeting.)

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Simulate a Job Loss
It might sound silly to pretend like you're jobless when you're going to the office every day, but simulating that dreaded financial event can help you feel more confident and prepared for it if the day ever comes (knock on wood!).

Imagine you have a $0 income. Now work out an emergency budget from there with a list of temporary cuts to get you through the interim.

If you have some emergency savings for this test, don't take them into account because life rarely goes as planned and you may not have an emergency fund for whatever the reason if the time that you actually need them comes. (For more tips, check out Planning For Job Loss.)

Some actions on your list might include:

  • Cancel your cable TV package down to basic cable, or get rid of it completely
  • Go on a lower-cost cell phone plan
  • List low-cost but nutritious recipes on hand (oatmeal, beans and cutting out meat can be big budget savers)
  • Gather up items to sell (but don't regret your de-cluttering!)
  • Drive less, switch to public transportation or walk
  • List out all the free activities you can do, such as go to the park, bike, go for walks

Once you have the plan in place, try out as many items as possible such as taking public transportation for a month or cooking those low-cost but nutritious recipes.

These are all decisions you have to consider and at the end of it, you should feel like you have a solid list of tried and true cutbacks to call upon in times of need, but if you don't test what you've put down on paper, you'll never know if it's doable.

For example, what if you lose your job and then suddenly realize that taking public transportation will add four hours of commuting each day? Would you rather do that, or cancel your cable TV subscription to pay for gas?

These are all great questions to ask, so you can rank each of the cutbacks and be aware of what the change will be. (Already unemployed? Don't miss 4 Steps To Surviving A Job Loss.)

Live On One Income
If you earn two incomes but only live on one and save the other, it can be a fast way to build a substantial emergency fund.

If your net incomes are in the same ballpark, then add up the two net incomes and split it in half. If one partner is earning far more than the other, then take the lower income for this test, because it could end up being all you have to work with. (Find out the financial advantages and disadvantages of dual incomes in Marriage: For Richer Or Poorer?)

List out last month's budget expenses (or keep track of two to three months and use an average) so you have an idea of what you are currently spending. Now scrutinize each category; cut back until the budget balances to $0, or as close to $0 as possible. If you balance to $0, you're done. If you have a deficit, make a list of jobs and things you can do to make up for the amount.

At the end of the exercise, you may end up pleasantly surprised, because you may end up realizing that it could be a part of your permanent financial plan! You should have a budget that is either balanced or in the red. Now you can go into this budget and know exactly how much you need to pick up the slack if anything happens.

As a side note, the job you take in the interim may not even cover your expenses, but every little bit helps and you don't have to put it on your resume.

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Test your Emergency Fund Periodically
As a litmus test for financial reality, you can try living on your emergency fund's budget once in a while. It's easy: live on the budget you've laid out as your emergency fund. This is different from your job loss budget because it's now testing the budget amounts and seeing if they are realistic and if you've saved for as many months as you've imagined.

When I first started budgeting, I thought what I had saved was enough to cover all of my basic expenses, but when I gave my Emergency Fund Budget a shot, it ended up being totally unrealistic, so I revised it. (Learn more in Why You Absolutely Need An Emergency Fund.)

The Bottom Line
No one likes to think anything bad could happen but things we cannot control happen every day, and all you can do is be prepared.

For the latest financial news, see Water Cooler Finance: Poverty Rates Increase - And So Do Millionaires.

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