Stress Testing For Life! ????

Risk Management is applicable in more ways than just saving your business. It has direct applicability to your life.

Let’s take buying a house as an example ??;

(Disclaimer - this is not financial advice this is scenario based risk management to illustrate the uses of stress testing in a domestic environment).

You see a home you love, you’ve saved up your deposit and you’re going with your partner to apply for a mortgage through a bank. Exciting times! Hooray! ??

A good risk management principle, before you apply for the loan, or indeed make a final decision on the house, is to conduct a good old fashioned - Stress Test.

So it looks something like this:

My partners monthly take home pay (excluding essentials and liabilities) + mine. The dream house costs X (Minus the 5/10% deposit required by most lenders). The bank will (hopefully ??) lend you the remaining amount minus the deposit. With the addition of an interest rate - lets call it Y (the charge for lending you both the money).

Ergo.

Combined Monthly Take Home = Monthly repayments to the bank including Y.

We’re good, right?

In theory, but in reality, it depends more on Y than you’d think.

We live in a turbulent world, pandemics, environmental disasters, hiking prices, governmental failures, to name a few. They all carry - RISK.

With that in mind, assuming reasonable rate on Y is affordable (per month) what if (like in recent times) Y goes up… way up. ??

Like.. it goes so high you need a hot air balloon to reach the dizzying heights of interest.

Well, you can stress test your affordability.

Here’s how ??

Work out your monthly payments on Y at the current market interest rate. (Incorporate your realistic additional spending - this is important and to be honest with yourselves).

If Y, on-top of the monthly repayment (given all the other circumstances) is good… then let’s stress test.

Do the same calculation as above but with Y as double.

That is to say if a ￡1000 on a 3% interest rate is affordable.

Is the payment affordable on a 6% interest rate?

If the answer is yes - again you’ve done some decent stress testing and you’re in a good spot. If the answer is anything other than a resounding YES! It might be time to go back to the drawing board, and run the risk and affordability analysis again.

Now if you’re like me and you’re a geek and love risk modelling you might want to run this with multiple scenarios - the sky is the limit ??. You can build this with a variable rate mortgage or a fixed rate, triple rate hike or even a drop in interest rates to see how little your mortgage could cost per month, moving and exit fees, the list is truly endless.

Risk Management often shows us the things we’d rather not acknowledge. It shows us our blind spots and forces us to think uncomfortably - that’s where the value really lies. It’s easy looking at everything through rose tinted glasses, take them off and smell the roses once in a while. Don’t see things as a sugar coated topping - adopt your risk management practices in all areas of life!

Stoic Affirmation

"The Happiness of your Life, depends upon the quality of your thoughts." - Marcus Aurelius

This quote personifies Stoicism - our interpretation of events, external and internal will determine the trajectory of our lives. In success and disaster we can choose our reaction.

A ritual for me:

Pause.

"Is the thought going to take me somewhere productive? Or will it take me to a place I'd rather avoid?"

The Ascend Management Level Up ????

Deep Dives! ?

Carve out time to get into the weeds of your processes - work closely with your SME's.

One of the most powerful tools at our disposal as Risk Managers is being pro-active.

Conduct Process reviews to head off potential issues - get in early with changes within a process.

"How does this effect your controls? Are there new risks?"

Creator Highlight - Martin Weitzel . ??

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