Risk modelling your life – living expenses

Graeme Keith and I went on a quest to model our lives by applying state of the art risk management techniques. In the previous article we covered income and the associated risks, now we will talk about basic living expenses. Since we are building a long term model we made a decision to aggregate important items as much as possible, so expenses are represented as an annual expense distribution. We have also modelled unexpected risks that every 5 years some unknown event happens that requires significant cash outflow.

Read the first part here

Basic living expenses
Base level with normal year on year additions.
Big ticket items (up to 50% annual every two years)
Base level 50000
Fluctuation taken as Gamma distributed Fluctuation mean 10000
Fluctuation std. dev. 5000
Risks
Unexpected large expenses up to 50% of annual Frequency period (years) 5
Uses exponential distribution for impact of simple then
analytical result to aggregate multiple impacts P90 simple imact 30 000

Below is a diagram showing one of the scenarios:

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