Insuring against loss of income

For young people in particular, their biggest asset is their income-earning ability 

Not all people have enough income protection insurance.

It's amazing that so many financial planners don't talk about it. 

About 35 per cent of people insure themselves for income protection - and the vast majority of those people are self-employed. 

Many people in full-time employment rely on an income protection through superannuation that they may not actually have. 

A lot of people think they have protection through super when they don't. 

Also, people don't understand the difference between total and permanent disability benefits and temporary disability benefits. 

Take a moment to check your policy: the answer may surprise you.

Attitudes to income protection can be baffling. 

If you don't have an income, then there are all the other things that are dependent on that - you can't pay the mortgage, you can't feed the family. 

A lot of people could only go a month or two without income.

Ask the population if they have home and contents insurance and 90 per cent would say yes.
But they don't think they have to insure themselves, and they're the ones generating the money to pay for all this.

Then there's redundancy. 

Many mortgage providers offer - and sometimes insist on  mortgage insurance.

It's estimated that ten per cent of people have taken income protection with their mortgages over the long term. 

But that's more historical than current; it used to be more like twenty per cent and now it's more like five. 

People feel a lot more confident.

This sort of insurance means that if you lose your job, or your ability to earn income for another reason, the policy will continue to pay your mortgage. 

Periods vary with policies but can be one to two years.

Some institutions require people to get mortgage insurance, particularly if they are gearing heavily in their mortgage. 

If the loan to value ratio is above 80 per cent, for example, many lenders will require mortgage insurance ... with good reason for doing so: at the 80 per cent level, about 1 per cent of mortgages default. At the 90 per cent level the default figure climbs to 2.5 per cent.

Then there's the loss of income from an untenanted rental property. 

Landlord insurance can cost as little as a couple of hundred dollars and covers, for example, defects in the building or damage caused by a tenant. 

But if you can't rent it just because it's unpopular, you can't protect against that - it's a case of looking closely at the quality of the product in the first place.

Life Insurance: How much is enough?

The Two Approaches to Setting Life Insurance Policy Amounts 
You can use one of two approaches to estimate how much life insurance you should buy: the needs approach or the replacement-income approach.

Using the needs approach, you calculate the amount of life insurance necessary to cover your family’s financial needs if you die.

Using the replacement-income approach, you calculate the amount of life insurance you need to equal the income your family will lose. Let’s look briefly at each approach.

You need how much? 

Using the needs approach, you add up the amounts that represent all the needs your family will have after your death, including funeral and burial costs, uninsured medical expenses, and estate taxes.

However, your family depends on you to pay for other needs, such as your child’s college tuition, business or personal debts, and food and housing expenses over time.

The needs approach is somewhat limiting.

The task of identifying and tallying family needs is difficult, and separating the true needs of your family from what you want for them is often impossible.

Replacing Income 

Using the replacement-income approach for estimating life insurance requirements, you calculate the life insurance proceeds that would replace your earnings over a specified number of years after your death.

Life insurance companies sometimes approximate your replacement income at four or five times your annual income.

A more precise estimation considers the actual amount your family members need annually, the number of years for which they will need this amount, and the interest rate your family will earn on the life insurance proceeds, as well as inflation over the years during which your family draws on the life insurance proceeds.

Note: Do remember as you quantify the income you want to replace that Social Security provides generous survivors benefits if you’ve qualified.

Calculating Replacement-Income Amounts with Excel

If you’ve got access to a computer running Microsoft Excel, the popular spreadsheet program, you can use your computer to calculate the amount of insurance you need to replace a specified number of years of income.

Suppose, for example, that you want to buy enough life insurance to replace the income from a $50,000-a-year job for 15 years.

If you figure your family will earn 5% on the life insurance proceeds should the worst case scenario occur, you enter the following formula into a cell in an Excel workbook to calculate the replacement income life insurance amount:

=-PV(5%,15,50000)

Excel returns the formula result 518,982.90 indicating that you would need roughly $520,000 of life insurance, invested at 5%, to payout $50,000 a year for 15 years.

Two Calculation Tips 

If you want to factor in inflation because you’re trying to replace income over a long period of time, you should use a real rate of return rather a regular, or nominal, rate of return.

To calculate a real rate of return, subtract the inflation rate from the interest rate in the formula.

For example, if you expect 2% inflation, you could replace the formula shown earlier with this formula:

=-PV(5%-2%,15,50000)

Here’s a final calculation tip:

You probably want to round up your number. For example, if the formula provided earlier returns the value 518982.90, you might want to round up this value to $600,000. Or $750,000.

Editor's Note: Financial Services Online provides a free online calculator that uses a combination of replacing income and needs approach in helping to determine the amount of life insurance cover you may need.

16 Simple, Everyday Ways to Save Money

Here are 16 of the simple, everyday changes that have worked for us.

1. Use a coupon, absolutely whenever possible. I was really surprised by how many money-saving opportunities are out there when I knew where to look.

For local purchases, get an “Entertainment Book” each year and you will save on those inevitable everyday expenses ranging from dining out to accommodation and admission to movies, theme parks, etc.

For online purchases, stick to the reputable retailers. You certainly will not save any money if you are the victim of fraud or if you are simply unable to return an item. And before you start shopping, always look for a coupon code that will allow you to save on your purchase. In the past, many online retailers sent out promotional codes as a series of letters or numbers that could be entered at checkout. Now, many retailers use a button or text link that automatically activates your coupon when you click through, so it is often a good idea to find the coupon first, before you start to shop.

2. Shop around. The internet is an amazing tool for researching products and retailers, as well as for comparison shopping. We make nearly all of our large purchases online. It is also important to know where to shop. For holiday gifts, plan ahead and check out the big online discount stores. Many offer significantly reduced prices on trusted brands. And you can get great delivery rates too, even on large gifts. I once had an enormous game table shipped to me for $2.50.


3. Keep a running list of gift ideas for your loved ones. I have found that when I am confident that a gift is perfect for the recipient, I am much less likely to overspend. But that kind of inspiration rarely hits me during the pre-Christmas rush, so I need to keep a list going the whole year through.

4. Budget. Of course, it is important to know what you are really spending. For years, the budget I had in mind was really more of a “wishful thinking” budget. But this quickly led to debt. It pays to get realistic. Whether you use a computer program or a simple ledger book, make sure you know where your money is really going.

5. Save for the future. Take 10 percent of your income and put it in savings, right off the bat. Now you know what you need to cut back on (or how much more you need to earn) to shore up the deficit.

6. Plan ahead. You will want to make sure you have money in the bank for emergencies. Experts say you should have three to six months of living expenses set aside, for those just-in-case times. It sounds like a lot, but start socking away money each month, and it will add up fast.

7. Get organised. When your home is organised, you will be less likely to spend money on items that are already hiding in the nether reaches of your closet and drawers. The same goes for your refrigerator and kitchen cupboards. Purge and organize before you shop.

8. Simplify. There is a certain romance to the “simplify your life” movement. And having too much stuff really does weigh us down. Take a look at everything in your home. If it does not add joy, beauty, meaning, or usefulness to your life, give it away. And when you are tempted to buy something new, it must pass the same test.

On a quarterly basis, go through your house and ask yourself these same things again. Go through your closet, attic, garage, and basement and purge those items that do not add genuine joy, beauty, meaning or usefulness to your everyday life.

9. Reduce, reuse and recycle. A simple lifestyle, for me, is about reducing my urge to over-consume. It is about being kind to the environment. It is about spending less money on material things, so that I have more time and money to spend on memories with my family. Make changes that will help the environment and your purse at the same time. Install water saving kits on your toilet. Write on the back sides of paper. Use reusable containers in your lunches. All these little things really do add up, and it is important to show our children how we can all be part of the solution.

10. Shop without your kids. I know that if I get a shopping cart at Coles and I do not have a list, I will spend $150. If the kids are with me, I will spend even more. This is another reason it makes sense to do your shopping online. You are less likely to purchase the incidentals.

11. Make sure that your credit card is paying you back via an incentive program. I found a credit card that allows me to earn points on my daily purchases toward our annual vacation trip, including airline miles and hotel accommodations. Since most of my expenses each month are incurred at the grocery store, I found a card that rewards specifically for these types of purchases. Of course, you will need to make sure that you are paying off your balance each and every month. Paying a high interest rate on your credit card will quickly negate any savings you accrue on your incentive plan.

12. Lower your interest rates. If you are carrying a balance on a credit card, give the credit card company a call to see if they will give you a lower rate. Sometimes, it is just that easy.

13. Shop around for insurance. The money you pay for car, home, life and health insurance can vary greatly. Do some research to find out if you are getting the best rate.

14. Be wary of the influence of TV commercials and print ads, especially on your children. We hear fewer cries of “I want that!” when we keep our kids programming to those channels rely less on advertising dollars, such as the ABC and some pay TV channels.

15. Play “Time Warp.” This is a technique I first learned from “My Monastery is a Minivan,” by Denise Roy, and I use it quite a lot. It goes like this: When you are tempted to make a purchase, mentally fast-forward through the life of the item. For example, in her book, Roy thinks she needs new candleholders. She imagines spending time at the mall to find them, soon having to clean them, and then, years down the road, packing them in the giveaway box. She shirks the purchase and soon rediscovers the heirloom candleholders that are packed away right in her own home.

I like to play this "fast forward" technique in reverse, too, asking: What new clothes did I buy last season? (Sometimes, I can not remember). Where are those "I have to have it" items now?

16. Keep your mind on abundance. When you are thinking about money, it is really important to get out of the poverty mindset. Too often, when we are focused on saving money, we are living from a perspective that focuses on lack and scarcity, which tends to bring about more of the same. It has been really helpful for me to make a conscious effort to see the world as infinitely abundant and to rest in the notion that my needs will be taken care of. This is generally a simple matter of thinking more about what I *do* have than what I do not have.

All my days of penny-pinching have certainly proven to me that it truly does not take money to make us happy. Many of my fondest memories have occurred in the smallest homes. My child’s favourite playthings tend to be the inexpensive items that were never designed to be toys at all.

And it is the simple, everyday pleasures that are the sweetest, when enjoyed together.

Teaching Kids About Budgeting

If you have kids, you've probably already figured out that teaching them how to handle money is one of the most important skills you'll ever teach them.

As a parent, there are two critical areas for you to take action to help your kids the most when it comes to money and budgeting.

1. Manage your money in a responsible way. 
Create a simple budget that works for you. Practice good budgeting habits - know how much you have to spend before you spend it.

By spending within your self-made budgeting guidelines, you will demonstrate a confidence and security about money that your kids will notice and hopefully emulate later in life.

Make a habit of saving. If you don't follow a budget, don't save money and you frequently overspend, you will have a great deal of stress about money which your kids will easily pick up on.

Which lesson do you want to teach your kids about money? Money is stressful? Or, money is to be respected and commanded in a responsible manner, bringing a sense of confidence and calm?

2. Directly teach them about budgeting and saving money early (before they become teenagers.)

Some experts disagree about the effectiveness of allowances and money for chores, etc. - but don't get distracted by this.

How your kids 'get' money is quite a different thing from what they do with it once they have it.

Help your kids to know the pros and cons of the different things they can do with their money.

Kids aren't generally known for having a long attention span, especially when the topic is boring, so keep your message simple.

Encourage them to save a portion of any money they get; a great idea for reinforcing this is to match each dollar they save.

Also, gradually help them to understand the different places money flows to in the adult world.

For example, explain the sales tax on the receipt for the shirt they just bought - that it is used to pay for roads, schools, etc.

Or, if you want something a little more fun for them, playing a board-game like Pay Day or the computer game The Sims can help a lot by giving them a frame of reference for understanding some of the basics of where money goes.

However, actively helping your kids to build a habit of saving money whenever they receive it, in the real world, is probably one of the best things you can do to help them build good money skills.

Explaining the pitfalls of using credit is valuable too (as well as minimizing your own use of it!), but emphasizing savings is probably more effective at a young age since it's something they can do now.

Teach them that by having a lifelong habit of saving money, they won't need to borrow as much, allowing compound interest to work for them and not against them.

When your kids get their first part-time job, continue to extend your reinforcement for saving, but now add in a proper budget.

After showing them the basics of listing their expected income along with their desired expenses and savings goals, reward them for creating their first budget.

Be creative in offering various incentives for them to stick to their budget.

By building on the savings habit you taught them earlier on, and introducing them to the concept and value of budgeting, you will have done a great deal to help your children grow into one day being responsible adults.

5 Simple Tips For Reducing Your Debt!

Are you one of the many Americans with too much credit card debt?  Don’t feel bad.  You’re definitely not alone!

There are worse things in life than debt.  But when you’re dealing with the stress of financial problems, and losing sleep, it is important to find a way to reduce the burden as quickly as possible.

Even if you’re struggling with financial problems, you need to keep it in perspective.  Because YOU have the power – no matter how bad things seem right now – to take control of your finances, and start knocking off your debt one dollar at a time!

But how can you do it when money is really tight?  And the bill collectors are calling (or will be very soon)!

No matter how much or how little debt you have, there are ways to get yourself back on track financially.  Getting out of debt is not a race.  And there are no secrets.  It’s a process.  And if it’s taken you several years to accumulate your debt, you won’t get out of debt overnight.  But you can take action today and start making changes right away – changes that will get you on the right path, and make your future a lot brighter financially!

Each change you make – even if it only saves you a few dollars at the start – will start yielding bigger results over time (and give you peace of mind every night when you go to bed!)

That’s the power of compounding.  Unfortunately, when you have too much debt that compounding works against you, and works in the banks favor.  Now it’s time to reverse that trend.

So if you’re losing sleep over credit card debt, start following these 5 simple tips right away!

1) Write a list of all your credit cards, with the amounts you owe, interest rates, and monthly payments for each of them.  You can’t develop a plan to get out of debt until you know exactly where you stand – even if it is a little painful.  Pretending your financial problems are not that bad is a mistake.  Knowing exactly how bad they really are is crucial!

2) Remove all but one credit card from your wallet or purse.  When you have credit cards with you when you’re driving around or walking through the mall, it’s easy to use them, and spend money you just don’t have.  So, pick one that you can use for emergencies.  And remove all the rest - stick them in an envelope, then seal the envelope and put it in your dresser in a place you won’t see all the time.  The less you see the cards, the less likely you are to use them!

3) Next, grab your most recent credit card statements and call all the creditors.  Ask to speak with someone who can help you lower your interest rates or lower your monthly payments.  Often, this one simple step can lower your interest rates 5-10% - and help you get out debt faster by paying off your balance quicker.  If the first person you speak with says they can’t help you, POLITELY ask for a supervisor.  And ask them for help.  If they can’t help, thank them and wait a few weeks and call again.

4) Take your list from the first step and make a goal to pay off the card with the smallest balance first.  Take as much extra money you can afford each month and add it to the minimum payment amount – even if it’s only $5 or $10 bucks!  Some financial “experts” will tell you to pay off the one with the highest interest rate first.  But you’ll see quicker results starting with the smallest balance, and get the motivation to keep going!  Then once that first card is paid off, take the money you used from paying it off, add it to the second card, and pay of that one.  Keep going until all the cards are paid off completely!

5) Once all your credit card bills are paid off, take the money you were using and open a savings or money market account, and put ALL the money you were using into the account each month.  Then you can use this account instead of your credit cards to pay for the things you need to buy!

And don’t forget - when it’s time for bed, think of something fun or positive you did that day (force yourself to think of something other than debt, money, and work) and before long you’ll be sound asleep!

You won’t get out of debt overnight.  But you can take small steps that you will pay off BIG over time.  You’ll be surprised how quickly you start making progress paying off your debts, and start sleeping better!

5 Hot Property Investing Tips

1)    Using property experts
Just because you have bought and sold a couple of houses with profit, does not mean you are an investment expert. Don’t listen to friends and family blindly – usually they have an opinion about investing, often despite that fact they are not doing it themselves. Property investing is too important an expenditure to take chances with – talk to property experts, investment advisors, finance brokers and study property reports before you make a decision.

2)    Waiting for the price to come down...
Property generally always goes up in value. It may plateau or slip back a few %, but across the board – prices are steadily claiming. So, if you wait until the prices from 10 years ago return, you will wait a long time. You are in most cases better off buying now rather then in 6 months,  as often you will pay more down the track – effectively reducing your capital growth. Having said this, the best time to invest is when you are ready to do so. Sooner than later is usually best.

3)    Emotional vs commercial decision
When selecting and deciding on an investment property – do yourself the favour of approaching this simply as a commercial decision based on figures, returns, vacancy rates etc, not what colour the walls are, whether you would want to live in it or that it is in easy reach so you can mow the lawns on a weekend. The more emotionally detached you are, the better it is. Investing is done from the head, a home is bought from the heart.

4)    Old vs New
Unless you are a tradesman or have loads of time to spare to perform renovations, repairs and maintenance, you probably are better off buying a newer investment property. Apart from the work and expense, your depreciation schedule is more substantial on a new property than an older one. After all, it is all about letting your money do the work – work smarter - not harder.

5)    Managing the Property Yourself
Unless you are rather experienced in this area and have access to the industry tools to ensure you do end up with the best tenants possible – don’t do it yourself. Firstly, if you do select a ‘lemon’ for a tenant, this can easily turn into a lengthy process in front of the tenancy tribunal, with loss of rent, loss of access to the property, presentation costs etc.  Once again, you want to work smarter not harder. So, get a good property manager to look after your investment. The percentage you pay them should outweigh any losses through your own tenant mismanagement and peace of mind is worth a lot!

Eight Ways to Raise Money For Investing

When you are new to investing you may have little or no funds with which to invest with. Let's take a look at several ways to get access to money so you can begin your investment career sooner rather than later.

1. Savings - The old fashioned way like you were told to do as a kid. Remember, all great investors are great savers. If you are not saving money now then you are never going to become wealthy until you start saving. Make sure you pay yourself before you pay anybody else. Simple but powerful words.

2. Sell something - In this modern society we live in where we just have to own the latest of everything. Well the good news about that is that you are bound to have plenty to sell. Put an add in the newspaper or the easiest way, E-Bay. Now the harsh reality, stop spending money on things you don't need. Wait until you have real wealth then pay cash for them.

3. Tax - Minimize your tax as quickly as possible. The wealthy don't become so by paying lots of tax. Get yourself a great accountant and get good advice on how to lower your taxable income. There are plenty of ways to do this. Starting a side business is a great idea. Pay your expenses and spend, then pay tax from what is left over. It is much better than being taxed and then spending what is left. This will send you broke, quickly.

4. Income - Tomorrow you are going to see your boss and get that pay rise. However, first you need to get your reasons down on paper why you should get a rise. Write down some good solid reasons why you should get one. If you don't deserve one then take a long hard look in the mirror. If you can't do your best working for someone else how are you going to give yourself the best? Be the best that you can regardless of what activity you do and the rewards will come. Ask for 10% extra. If you don't get it but you know you are worth it, then get another job. Only you will know if you are worth it.

5. OPM (Other peoples money) - The most successful business people in the world today always use OPM, always. Do you think Donald Trump puts up his own money to finance that new tower? No way, he never puts up his own money. Use the banks, or do vendor finance deals. Borrow, beg or (actually, you better not steal) borrow some more. As long as the investment pays more than the interest things will work out. You must do due diligence here. Good debt is the key here and I will do another article on good debt shortly.

6. Using equity - So you own a house or part of a house. Excellent, then you have valuable equity which the banks love and in Australia you can release about 80% of that equity. Should you spend that equity on a holiday like the rest of the herd? No. Put that money to work in property or shares and allow yourself to have the income that it produces.

7. Parents equity - Times are getting tough, that is for sure. Talk to your parents if you can and explain that it a new world for young and smart investors. Go over everything and show the folks exactly how your chosen strategy works and how you both can benefit. Profit share with them if you like. Better yet, teach your parents and give them a better retirement. It is your duty.

8. Superannuation - Are you satisfied with the institutions taking care of your life savings with various financial planners and fund managers getting massive trailing commissions? Then start to manage your own SMSF (Self Managed Super Fund) and put it to work harder and smarter. There are some awesome opportunities out there right now and you can find one that resonates with you. Pay for good advice here. I repeat, pay for good advice.

So there you have it. Eight ways in which to get a leg up in your new investment journey. You might not be able to do all eight ways, but I'm sure you can access at least four of them.