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I figured an appropriate blog post for this momentous occasion would be one where I took a look at some of the reader emails I have received. For me, the interaction with the readers is definitely one of the best parts and and a very cool side effect of this blog. You guys keep me on my toes, point me to very interesting content, and give great insights. So thanks to all of you!
The emails below have been paraphrased/edited for easier reading. Below each email you will find snippets of my response to the original question/comment and of course some extra waffling thrown in for good measure.
First up, a question on necessary and unnecessary insurance.
Hi,
I have been trimming my insurances but now I have reached a point where I want to eliminate a few! Perhaps another article idea for the future?
Medical aid verse insuring a phone?
Life assurance verse car insurance?
Let me know your thoughts?
The insurance industry can be defined as an industry where a little Maths makes a lot of money. A quick glance at the profits of the insurance companies listed on the JSE will confirm this.
The reason for this is simple - the average person with an average insurance will lose out, on average. With all those averages it means that the average insurance company makes more than an average amount of money! The premiums of the many are expertly priced to more than cover the losses of the few. So insurance is a losing game for the client, and some easy money to be made for the insurer.
Insurance is designed to lose the average client money. So the question is - do we need it?
And the answer is yes - because we are not average (we are special :)).
But what we should be doing is aiming to only insure what is necessary. A better question is - which insurances do we need, and which can we do without?
For me this is quite simple. If you imagine the event you are insuring against were to happen, and your response to that would be along the lines of "nou is daar groot kak" then you probably need that insurance. In other words only get insurance to cover the events which would seriously set your financial plans back or that you would not be able to recover from.
For example, I do not have cellphone insurance. If I lose my phone, or it gets stolen, no biggie - I got like 2 spares at home, and if I didn't have any spares, I could easily go out and buy a cheapie to tie me over until the next contract or whatever. No trainsmash. We also recently got rid of the all risk insurance for my wife's wedding and engagement rings. Sure it would suck if these were to get stolen - but in truth no ring of any value could replace them anyways.
We do have car insurance though. If our car were to get stolen or written off, this would seriously set my financial freedom plan back. Or if I were to crash into the back of a Ferrari, and it was my fault, (sho imagine that!) I would be ruined for life!
Medical Aid - unfortunately at no point in my life will I be able to pay cash for a triple heart bypass, whilst getting a kidney transplant (after driving into the back of the Ferrari from the paragraph above.) Medical expenses are kind of limitless to the upside, so I think this one is a must.
Life insurance - at the moment my wife and son would be left high and dry with a lot of debt and reduced income if I were to kick the bucket. However, after reaching financial freedom I will no longer require this insurance because, if I were to die, my wife and son would actually be better off (since there are now only two to support). But please don't tell her this - would hate for her to have any sort of additional motive... :-P
The reason for this is simple - the average person with an average insurance will lose out, on average. With all those averages it means that the average insurance company makes more than an average amount of money! The premiums of the many are expertly priced to more than cover the losses of the few. So insurance is a losing game for the client, and some easy money to be made for the insurer.
Insurance is designed to lose the average client money. So the question is - do we need it?
And the answer is yes - because we are not average (we are special :)).
But what we should be doing is aiming to only insure what is necessary. A better question is - which insurances do we need, and which can we do without?
For me this is quite simple. If you imagine the event you are insuring against were to happen, and your response to that would be along the lines of "nou is daar groot kak" then you probably need that insurance. In other words only get insurance to cover the events which would seriously set your financial plans back or that you would not be able to recover from.
For example, I do not have cellphone insurance. If I lose my phone, or it gets stolen, no biggie - I got like 2 spares at home, and if I didn't have any spares, I could easily go out and buy a cheapie to tie me over until the next contract or whatever. No trainsmash. We also recently got rid of the all risk insurance for my wife's wedding and engagement rings. Sure it would suck if these were to get stolen - but in truth no ring of any value could replace them anyways.
We do have car insurance though. If our car were to get stolen or written off, this would seriously set my financial freedom plan back. Or if I were to crash into the back of a Ferrari, and it was my fault, (sho imagine that!) I would be ruined for life!
Medical Aid - unfortunately at no point in my life will I be able to pay cash for a triple heart bypass, whilst getting a kidney transplant (after driving into the back of the Ferrari from the paragraph above.) Medical expenses are kind of limitless to the upside, so I think this one is a must.
Life insurance - at the moment my wife and son would be left high and dry with a lot of debt and reduced income if I were to kick the bucket. However, after reaching financial freedom I will no longer require this insurance because, if I were to die, my wife and son would actually be better off (since there are now only two to support). But please don't tell her this - would hate for her to have any sort of additional motive... :-P
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This next email was an interesting one. I really didn't know this sort of thing was legal!
I would love to see an article on your blog about this:
http://www.moneyweb.co.za/archive/pensions-can-be-used-to-get-home-loans/
Short and sweet that one!
The article is from 2011 - so it is quite old, and may not be relevant anymore. Either way I was quite surprised that using your pension fund as security for a home loan would be legal! But apparently I am wrong? Anyone have more info on this?
But let's assume it was allowed.....
I think it would be a disastrous idea to use your pension as backing for any kind of loan! If you took this option, and you end up defaulting (maybe even due to something beyond your control - like losing your job) you stand to lose not only your house but your pension fund too! The normal case would be a slightly less disastrous repossession of your house, but at least your pension would be safe.
Also something to think about - if the bank feels the need to back a house loan with your pension - it means they either do not believe the house is worth the money being paid for it, and/or they don't have a lot of faith in your ability to pay back the loan. Either way this should be a big red flag.
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This next one relates to a previous post I did on trading in an expensive car for a cheaper one. Turns out the reader who sent in the original query ended up taking the plunge:
I decided to trade in the expensive car for a much cheaper one. My new ride costs me less than R2000/month, compared to my old car which was costing me around R8500/month. I am also now car loan free.
I will be using some of the extra money I have freed up to increase my pension contributions.
It's funny, getting a "worse" car is actually quite a relief! I now get more thrill from a growing bank account then I did in a 4 second 0-100km/h.
This feedback is great! Not only has this person significantly reduced his monthly expenses, but he is now also car loan free. And then for bonus points, he is investing some of the additional money he has freed up. Winner all round!
I think driving a reasonable car is one of the best financial decisions anyone can make!
The article is from 2011 - so it is quite old, and may not be relevant anymore. Either way I was quite surprised that using your pension fund as security for a home loan would be legal! But apparently I am wrong? Anyone have more info on this?
But let's assume it was allowed.....
I think it would be a disastrous idea to use your pension as backing for any kind of loan! If you took this option, and you end up defaulting (maybe even due to something beyond your control - like losing your job) you stand to lose not only your house but your pension fund too! The normal case would be a slightly less disastrous repossession of your house, but at least your pension would be safe.
Also something to think about - if the bank feels the need to back a house loan with your pension - it means they either do not believe the house is worth the money being paid for it, and/or they don't have a lot of faith in your ability to pay back the loan. Either way this should be a big red flag.
-------------------------------------------------
This next one relates to a previous post I did on trading in an expensive car for a cheaper one. Turns out the reader who sent in the original query ended up taking the plunge:
I decided to trade in the expensive car for a much cheaper one. My new ride costs me less than R2000/month, compared to my old car which was costing me around R8500/month. I am also now car loan free.
I will be using some of the extra money I have freed up to increase my pension contributions.
It's funny, getting a "worse" car is actually quite a relief! I now get more thrill from a growing bank account then I did in a 4 second 0-100km/h.
This feedback is great! Not only has this person significantly reduced his monthly expenses, but he is now also car loan free. And then for bonus points, he is investing some of the additional money he has freed up. Winner all round!
I think driving a reasonable car is one of the best financial decisions anyone can make!
