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

Related Post

1.      Is there a definition of success by Millennial Family?

2.     3 Tips to build a Happy Family Finance Relationship

A Definition of Success by a Millennial Family

I came across several posts that discussed how millennial define success including today's report on Business Times: https://www.businesstimes.com.sg/brunch/young-and-not-so-upwardly-mobile

This inspired me to think through my family's definition of success, and that is to achieve family financial freedom. 

Money is required for basic daily needs such as paying for our meals, as well as electrical, water, gas bills. To support these needs, we have to work very hard to earn our paycheck. Gradually work becomes a priority and later on, we regretted  not spending enough time with our family.

Financial freedom offers a choice to escape this rat race and allow us to focus on things that we believe should be our priorities. Many people might think that financial freedom requires a lot of money.

But... is it true that financial freedom equate to being wealthy? Need not be!

It simply means having constant cash inflow that can comfortably cover our expenditure. Hence if your monthly family expenditure is low, you would require lesser cash inflow to achieve financial freedom.

So how does our family plan to achieve this? Through 3 steps:

1^st is to follow good family financial habits. Will elaborate more in our subsequent blog post.

2^nd is to maintain family lifestyle spending even as salaries grew each year. This can also help mitigate some family financial risks. Again, will share more soon.

3^rd is to generate more passive cash inflow through investment e.g stocks, fixed deposit, etc. There are many choices and considerations e.g. market outlook, inflation etc. So we should adopt an approach that best fit our investment needs, profile and goals. It is important to do the math and assess the length of time needed to realistically achieve your goals, level of investment risks versus its reward and your risk mitigation measures. 

Hope you enjoyed this post. Would be keen to find out what is your family's definition of success. Feel free to share!

GoHuat

Related Post

1.      How have our financial perspective changed over the years?

Enjoying our Gains with a Heart

Amidst the fast pace of living and demand for cash, our family saw the importance of taking time off to count our blessings. 

There are many things that we can be grateful about. This can be as plain as having a roof to stay in, having 3 full meals to eat, clothes to wear, harmonious family relationship with our families and siblings. These are some areas that we tend to take them for granted and only realise it on hind-sight.

My wife and I believed in giving back to society including quarterly blood donation, monthly cash donations, etc. We had considered volunteering but have yet to find a suitable cause and will keep looking for one. 

We had achieved some gains in our investments and work performance bonus . Hence decided to contribute some token to charity. We then spent some time to screen through the charity organisations before making our choice. Though our token is not that significant, we hoped that it could still benefit those who really needs it. May those who receive it be well and happy! 

Enjoying our gains with a heart 😊

GoHuat

Is now a good time to buy RMB Yuan for your portfolio?

Our family’s cash are broadly categorised into:

(1)   Near-term and daily needs in high deposit bank accounts

(2)  Emergency funds in short-term fixed deposits

(3)  Stocks

(4) Investment Warchest in Singapore Savings Bonds and high deposit bank accounts.

(5)  Currency – NEW!

In our previous post, we shared our decision to buy RMB Yuan. We considered several investment possibilities such as options, currency, bonds, gold to diversify our portfolio before finally deciding to go for RMB Yuan first. 

Our key assessments include (1) RMB Yuan is now part of IMF’s reserve currency bucket. This means that more international contracts could transact using Yuan which would spur currency demand. (2) Yuan will likely be well-supported by China and global forces to eventually become an option to challenge USD as the global currency. (3) At ground-level, ICBC Singapore offered a good fixed deposit ranging 2.75-4.5%. This is better than Singapore Savings bond or fixed deposits.

We have been steadily building up our position in RMB Yuan. The currency is facing some near-term volatility against SGD. 

In our view, this presents a good buying opportunity. I remained optimistic that Yuan should strengthen in the near or medium-term given my assessments above. I also expect the Singapore dollar to gradually pause strengthening or weaken in order to help our exports become more competitive during this trade war climate. 

Will our investment in RMB Yuan turn out well? I certainly hope so!

GoHuat

Related Posts

1. Signs of market downturn coming? 

Signs of market downturn coming?

Global banks are often the front-runners for a market downturn (e.g. bad debts, poor loan repayment, staff retrenchment, etc). Over the past 2 days, three news caught my eye:

• Deutsche Bank staff sent home as 18,000 job cuts begin (The Guardian, CNBC, 8 & 9 Jul 2019)
• Yield on the benchmark 30-year US Treasury bond briefly dipped below 2.5%, yielding less than the Federal Reserve’s short-term federal fund rate (CNN, 8 Jul 2019)
• Temasek Holdings one-year return for shareholders came in at 1.49%, down from 12.19% in the previous financial year (Straits Times, 9 Jul 2019)

The warning signs of a global market downturn have grown even stronger. For the past 2 years, our Singapore leaders have been warning the people to be more conservative through policies such as property cooling measures and public speeches. 

Even if a market downturn is more likely now, it is still impossible to time when it would actually take place. My best guess is to be around the U.S. Presidential mid-term election period (Oct-Nov 2020 time-frame). But surely many people out there would also share similar thoughts. So how accurate would this guess be? 

Instead of timing the market, my wife and I decided to diversify our investment portfolio from stocks. We considered buying currency, gold, bonds or simply build up our investment war-chest. For gold, we were doubtful if the returns were worthwhile as the US$ would likely weaken when global economy tanks. For corporate bonds, most bond returns seems unattractive with its risks. In the end, we chose to buy currency - RMB Yuan. We will elaborate more on our decision in our next post.

Do you think that a market downturn is coming soon? Feel free to share your thoughts!

GoHuat

Can investment help us to stay discipline and keep emotions in check? Yes it can!

My biggest lesson in investment is to learn how to constantly keep my emotions in check. Whenever emotions take over, we tend to easily lose discipline from our original gameplan. 

Sounds familiar? 

I made many “emotional” mistakes at the start of my investment journey. In 2011, I bought SGX when its share price rose suddenly. But after my purchase, the price dropped. Ok, my luck. Thankfully, the dividends were not too bad and the price recovered 3 years later. Twice I bought SIA and both ended in similar fate. I sold them within months at a loss when news on sharp reduction in global oil supply circulated. Then, I justified to myself that it was just a “cut-loss”. Was this part of my plan? Honestly, no. And I did not have a better answer why I did so. Thinking back, it was simply reacting based on emotions.

So how did I keep my emotions in check now? As a fundamental investor, I simply focus on numbers only i.e. to buy when price is at least 10% below its intrinsic value, and sell when the price is above its intrinsic value (usually from 20%). Using numbers has certainly helped me in making many rationale investment decisions and maintain my discipline. Sharing a quote from Mr Warren Buffett...

There might be some “feel-good” sentiments in the market including temporary easing of trade war, extension of oil supply cuts by OPEC & Russia, potential interest rate cuts by FED, etc. It might be easy to get really optimistic and buy into the market. Before deciding to go aggressive, it could be useful to first take a step back. Consider carefully whether this is part of your investment plan, or whether your remaining finances are sufficient for daily livelihood without  having to sell your stocks, even if the market crashes tomorrow. 

Returning to my investment principles, most importantly to first set aside the money for our family’s immediate needs and only invest with spare cash that I could afford to hold/lose.

Looking forward to hear from you too! 

GoHuat