A risk mitigation framework to design our family emergency funds

This is a continuation from my previous post. What is the purpose for an emergency fund? Emergency funds is to help our family weather through urgent and sudden financial needs. The biggest challenge is to estimate how much we need as it is difficult to anticipate what it needs to be used for. We should put in time to think through our emergency funds as it will reduce our investment war-chest to achieve better returns.

First is to really ask when and what do we urgently need the money for? We assessed that key family emergencies might include:

·    Sudden loss of job income which affects payment of monthly expenses such as utilities, phone bills, food, transportation costs

·       Emergency medical treatment among family members

·       Unexpected home repairs

·       Replacement of household items that broke down suddenly

·       Unexpected car repairs

Adopting a simple framework to assess our family’s risks and come up with risk mitigation measures:

Emergency	Impact to Family	Likelihood of Occurrence	Risks	Risk Mitigation Measures
Sudden loss of job income	High	Medium	Medium	Create secondary income stream to minimally support basic monthly household expenses. Set aside 6 months of household expenses.
Emergency medical treatment	High	Low	Medium	Set aside for immediate, urgent medical treatment in case insurance unavailable.
Unexpected home repairs	Low	Medium	Low	Set aside home repair budget that sufficient to replace 2 critical household items

Risk Mitigation Matrix

High-High-High, H-M-M, H-L-M

Medium-High-Medium, M-M-M, M-L-L

Low-High-Medium, L-M-L, L-L-L

The higher the risk, the higher the priority for emergency fund allocation. We decided to set aside around 12 months household income based on past household annual expenses and to address our risk mitigation measures above. For medical risks, we planned using MOH’s historical bill and report.

My wife and I had aimed for 1 of us to be capable of supporting our annual family expenses entirely. In this way, there will be less pressure if either one decides to take a long-term break from our career. With this aim, we kept watch of our family expenses instead of allowing it to rise in tandem with our salary increase. To us, most importantly is to achieve family happiness by spending quality time together. Recall our earlier post, the key for happy family financial relationship is really to listen more, understand better, involve each other.

Hope you enjoyed this post!

GoHuat

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