Risk Management in Daily Life (2)

In our last article, we discussed two daily life scenario where you can apply some techniques in risk management. This time we continue with two more life situations.

Scenario 3: Finding a new job

You have worked in your company for 5 years. You are an above average performer and the average rate of salary increase over the past 3 years is 10%. Last year’s salary increase is only 8%.

A company has just offered you a new job and a salary increase of 30%.

Would you take the job offer? Analyze the risks and impacts and justify your decision.

It's tempting to take the new job. After all there would be nothing to lose with a 30% salary increase, right? Wrong. A more proper analysis is to perform a decision tree analysis using EMV, and extend the time horizon to at least three years.

On one side of the tree you should consider the total salary income for the next three years if you stay in your current company. Your past performance and credential should be taken into consideration.

On the other side, the total salary income for the new job over the next three years should be calculated. Remember to consider the scenario, no matter how unlikely it looks, when you would be let go in 6 to 12 months (risk of new job or sudden economic downturn). Note also that there may not be significant salary increase in the next one or two years due to the fact that you are new to the company, and you have not built up too much credentials yet.

Try to compare the total earnings and career prospect in the next three years.

In my opinion the fastest move in one's career is usually within the same company. If you consider yourself a top performer in a company, it's exactly the place where you want to be to propel up the career ladder. That is if your company is in good shape and growing.

Scenario 4: Buying a new apartment

Your family (you, your spouse, and two kids) is now living in a rented apartment. The rental amounts to 20% of your total monthly family income.

You are considering buying a new apartment of similar size in a nearby building. You figure that you have to use all your savings as down payment, and 30% of your total monthly family income will go to mortgage payment assuming a 20-year mortgage is secured.

Would you buy or not buy the new apartment? Justify your decision by analyzing the risks and impacts.

There are several things to consider:

• Rental may go up. This should be compared with the probability of interest rate going up. Both affect your future monthly payment depending on whether you rent or buy.

• Housing market may go up, remain steady, or go down. This affects your ability to get out in case you need to sell. If price goes up or remains steady, the sum amount received is higher than the remaining mortgage, and you have no trouble. In late 90's and early 2000's, many people in Hong Kong were trapped in 'negative equity' as price had dropped significantly. When they sold their apartment they need to pay the difference between the outstanding mortgage and selling price.

• What is your family's future income stream going to be like? What if one of the bread winners lose job? Or any accident that impairs your earning power? Can you still afford the mortgage payment? Do you have sufficient cash for sustaining your current level of living standard for at least 6 months should anyone in your family lose job?

Our conclusion is there is risk in everything. If there are risks in everyday life events there are definitely risks in a corporate environment where projects are performed. As the famous Charles Tremper once said: "The first step in the risk management process is to acknowledge the reality of risk."


Next we will examine risk management in a corporate environment.


To be continued...

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