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Home And Contents Insurance

This post is brought to you by Understand Insurance

Insurance is a funny product. It seems like a big fat waste of money until you need it. But when you need it, it then becomes invaluable. We bought our home six years ago. Like many people, our family home is by far our largest asset. However, our mortgage is by far our largest debt.

No-one wants to think about it, but what if something were to happen to our house? Without home and contents insurance we would be left with a small (and I mean teeny tiny) block of land in Sydney’s inner west and we would still be left to pay our mortgage. Yes, no couch to sit on, no TV to watch, no clothes to wear, no house to live in but our debt would still exist and the bank would still want its monthly repayment! For us it would be nothing short of financial devastation, throwing away everything that we have worked so hard for. Not to mention the stress and strain on our family would be unimaginable. That is why we have home and contents insurance.

However, recently when our home and contents insurance bill came in, I wondered if we had enough? You see, even if you have home and contents insurance, you cannot just set and forget, insuring for the same amount year in year out. Things change and the last thing you want is to get yourself in a situation where you need your insurance, but find out you do not have enough.

So how do you figure out how much home and contents insurance is enough? This is how I went about it …

Firstly, I split my home insurance and contents insurance into two separate decisions. Even though they are often bundled together, they are two separate things. Home insurance, covers loss or damage to the building you own. Contents insurance covers costs associated with loss or damage to your possessions.

How much home insurance do I need?

If we ever needed to rebuild our house there is more to it than just getting a pile of bricks and tiles and shoving them together. There are lots of costs involved, some of which you might not think about. Things such as the cost of clearing the land, alternative accommodation, architects fees (if needed) and fees for lodging plans to council. The costs really add up fast!

We used an online calculator to see whether our current level of insurance was roughly appropriate. It was pretty easy, they just ask you a few questions about your house and it gives you an estimate of how much it might cost to rebuild. (Click here to use the building calculator from Understand Insurance.)

The good news was the amount we are currently insured for was about right according to the Understand Insurance calculator 🙂 Happy days! (Note: if you live in a high risk area such as a bushfire prone region, you might want to talk to the council and see if you are affected by new building codes should you need to rebuild.  This might increase your costs.)

How much contents insurance do I need?

Like most families we have a lot of contents!! Lots of it we probably don’t need. Anyway, for this component we went from room to room and wrote down what we would have to replace if something happened. Beds, couches, the TV, computers (yep, in a bloggy/gamer household we have more than one, it prevents fights!), clothes, the fridge, washing machine, dryer – the list was a bit endless!!! Then we simply estimated how much it would cost to replace all our major items on the list. It is surprising how much it adds up!!! To make the process even easier, you could use a household inventory check list such as the one from Understand Insurance.  Click here to see their inventory check list. This is the way I will be doing it from now on :-).

Another way to check how much your contents should be insured for is to use a contents calculator. Click here to see the one from Understand Insurance. We checked what the contents calculator told us, against our estimate and they were pretty similar. Happy days!

After using the above methods and having a good logical think about it all, I am pretty comfortable that we are adequately insured, should the worst case scenario happen. Now the key is not to just ‘set and forget’ our home and contents insurance. But to regularly review it and make sure we are correctly insured. As one day, we might just need it.

 

This sponsored post is brought to you by Understand Insurance – a financial literacy initiative of the Insurance Council of Australia, the representative body of the general insurance industry. To find out more about insurance and to use their calculators, visit their website here.

If you liked this post you might also like:

How to save on your health insurance

5 websites that will make or save you money

How to pay off your mortgage faster

3 easy ways to find your lost superannuation

Disclaimer:

The information contained in this post is general in nature and does not constitute financial advice.  Please see your financial advisor for advice specific to your individual circumstances.

 

03/09/2014 38 comments
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There is a trade off between risk and return.  Anyone who tells you any different is lying.  If I had a dollar, for every time a client told me about a no risk investment returning a guaranteed 20%, I would be on a beach somewhere, right now.  My advice is always the same, it is highly likely you are being scammed, run!

Remember risk is the chance that an investment won’t give you the return you expect.  It is the chance of losing some or even all of your investment.  Higher risk investments are generally associated with higher potential returns.  Low risk investments are generally associated with lower potential returns.  This is the risk/return trade off.  No one in their right mind would take on a high risk investment for a low potential return.    It makes no sense, the return you get at the end of the day does not compensate you for the high probability that you will lose your money.  A low risk investment doesn’t need to offer a big return because it is unlikely you will lose you money.  Markets all day, everyday are pricing risk.

So, why do so many people get scammed?  It is human nature to focus on the outcome, the big return rather than the risk involved.  People want to believe that high return investments, exist without risk, but I guarantee (after 16 years in the industry) they do not.  If someone tells you they do, then they are either lying to you or they do not fully understand the risks involved in the investment.  Too much of a focus on return and not enough on risk, was the downfall of many an investor during the global financial crisis (GFC).

In general, cash is considered the lowest risk investment.  The cash rate set by the Reserve Bank is  called by the industry the “risk free” rate.   So if something has a return close to the cash rate, which is currently 3%, it “should” be relatively low risk, although you still need to understand the exact nature of the investment to be sure.  On the other end of the scale, I consider a 15% return from the share market to be a very good return.  According to the ASX,  the Australian share market has averaged 9.3% over the last twenty years to 31 December 2012.  Shares are considered one of the higher risk investment types (more on this next week).  Anyone guaranteeing investment returns anywhere in the double digit range are to be viewed with great caution.  I’m not saying you can’t make double digit returns – it is just that is it is highly unlikely to be guaranteed (ie. low risk), especially in the current low interest rate environment.

The key is to always focus on the risk involved in any investment and to make sure that the potential return makes sense given the risk.  The only way to truly understand how much risk you are taking in an investment is to understand exactly where and how your money is being invested.  This should be done for each and every investment that you make.

Gearing or borrowing to invest always increases risk, as well as potential return.  I am quite a conservative investor so my golden rule is to never put your family home at risk when investing.  For me it is a risk not worth taking.  Many people have lost their family homes in investments gone bad, when they never really understood the level of risk they were taking, or were scammed by the offer of generous returns.

Next week we are going to start going through the different investment types or asset classes as they are known in the industry.  We are going to look at their key characteristics and where they sit when it comes to risk and return.

If you liked this post check out the rest of the series by clicking on the links below:

Investing: How Do I Get Started?

What Is My Risk Tolerance?

What Are My Investment Choices?

Fixed Interest Investments

Property Investments

Happy investing!

Money Mummy

* Please note this is for your general information only and does not constitute financial advice.

02/05/2013 4 comments
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Investing involves risk.  Each of us is unique, and understanding how much risk you can tolerate is fundamental to shaping your own investment strategy.  During the Global Financial Crisis, so many people forgot about or did not understand their own unique risk tolerance to their peril.  This is how we ended up with the travesty of Storm Financial convincing retirees, with no income, to borrow against their homes and invest into high risk investments on the stock market.  Different investments have different risk characteristics.  Understanding your risk tolerance, will help to decide which investments have the right fit for you.

So what is risk?  I define risk, in the investment sense, as the likelihood of losing money.  Be warned, strangely enough, many in my industry do not see it that way.  Fund Managers, people who invest your money in a range of investments on your behalf, often see risk as the risk of underperforming the market.  This means if they lose you 10% of your money but the market loses 20% they think that they have done a good job! Oh, thank you so much Mr Fund Manager for losing my money so well and charging me fees for it too! (I will write more on how they get away with this later).  In my opinion, losing money is losing money, doing it better than anyone else is not the aim of investing.

So how do you figure out your risk tolerance? Given your ability to handle risk is entirely unique to you, there are a range of factors you should think about in deciding how much risk you can handle including:

  1. Your Age – generally speaking the younger you are the more risk you can afford to take as you have more time to ride out any fluctuations in markets and make up for any mistakes.
  2. Your Goals – what are you investing for?  If you are investing for your retirement, depending on your age, the long term nature of the goal means that you could afford to take more risk than if you were planning for a holiday in a year’s time (short term goal).  When my husband and I were saving for our house we were invested in markets for the first few years but then as we started to get serious about purchasing we put the majority of our deposit into cash.  Yes, we missed out on some returns (we brought our house pre GFC), but for us given that we thought a purchase was imminent, it became more about preserving our deposit than making extra money.
  3. Your Circumstances – this includes things like are you thinking of having a baby?  How stable is your job?  How good is your health? How secure are your current financial circumstances?
  4. Your Personality – how risk averse are you in your daily life?

Another clue to your risk tolerance is to think about how you would feel if the value of an investment dropped by 20% overnight.  As all parents know, you should avoid losing sleep at all costs!  If such a scenario would cause you to lose sleep then it is likely that high risk investments are not for you.

Like everything risk tolerance is a spectrum and it is crucial to remember that your risk profile changes over time.  The risks I could take in my twenties when I was single, are different to what I can take now that I am married with a child and this will be different again as I approach retirement, which thankfully is still a fair distance away!

Understanding your own risk tolerance is key to making sure each investment you make is right for you.

Next on our investing journey we are going to look at the fundamental relationship between risk and return.  Many investors get scammed as they fail to understand this essential rule of investing, then we will look at the risk characteristics of broad investment groups so you can see how they relate to your risk tolerance.

If you liked this post check out the rest of the series by clicking on the links below:

Investing: How Do I Get Started?

Risk and Return

What Are My Investment Choices?

Fixed Interest Investments

Property Investments

24/04/2013 2 comments
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