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.
|Basic living expenses|
|Base level with normal year on year additions.
Big ticket items (up to 50% annual every two years)
|Fluctuation taken as Gamma distributed||Fluctuation mean||10000|
|Fluctuation std. dev.||5000|
|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: