FOOL'S EYE VIEW

Eight Ways To Protect Your Wealth

By Cliff D'Arcy
March 14, 2006

Although I've been in paid work for close to two decades, I've been an employee for all but the last few months.

These days I'm self-employed. Although it's great to give up commuting in favour of flexible working from home, there are several things I've given up which I miss, because, without them, life feels much riskier. For example, leaving the Fool meant losing a regular wage, company pension contributions, life cover, medical insurance, sick pay, long-term sickness insurance and so on.

Alas, the extra benefits which made life feel more secure have vanished, so I have to find replacements -- or do without them and live life closer to the edge. This got me thinking about how to preserve and grow my wealth, regardless of what challenges life throws at me. Hence, here are eight things for you (and me) to think about:

1. Protect yourself against dying

Despite what you might believe, your most valuable asset isn't your home, car or other prized possession. In fact, it's you or, to be precise, it's your ability to earn money, which is referred to as your "human capital". For example, £500,000 earning 5% a year before tax would approximately replace an annual income of £25,000, so a rough rule of thumb is that your human capital is worth twenty times your income.

So, what happens to your family (or anyone else who is financially dependent on you) if you die? If you haven't adequately insured your life, you could leave your spouse/partner and children up the proverbial creek without a paddle. Hence, as basic protection against financial catastrophe, low-priced life insurance is a must, but read these five crucial tips before buying a policy!

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2. Protect your income

One thing I miss about being an employee is company sick pay, especially as I'm just getting over a flu-like bout at the moment. However, if I don't write articles, I don't get paid, so I've just been soldiering on. However, I do need to think about what happens if a more serious illness or accident strikes me down and leaves me unable to work for a lengthy period.

Although I could use my savings to replace my income for years, watching my capital dwindling away isn't an option that I'm entirely comfortable with. Therefore, I'm going to look into buying income protection insurance (long-term sickness cover), which will kick in and pay me a monthly tax-free sum if I'm unable to work for an extended period. To keep my premiums to a minimum, I'm going to opt for an excess period of, say, twelve months, which means that I won't get any benefits until I've been unable to work for more than a year. If needs be, I'll cover my first year's expenses myself, because I see this as catastrophe cover, on which I hope I'll never have to rely!

3. Protect your mortgage

"Your home is at risk if you are unable to keep up repayments on a mortgage or other loan secured on it."

Although most homeowners are familiar with this wealth warning, few homeowners who are in arrears actually see their homes seized ("repossessed") by their mortgage lenders. For the record, lenders grabbed 10,250 properties in 2005, but this was up 70% on 2004's figure of 6,030, and repossessions are expected to keep rising this year and next. Hence, it pays to be prudent by making sure that you can pay your mortgage for at least, say, six months if the worst comes to the worst.

You can do this by building up an emergency fund in a high-interest savings account, or by buying mortgage payment protection insurance (MPPI). However, buying MPPI from your mortgage lender is a complete no-no, as I explained in The £10 Billion Mortgage Protection Racket. Instead, save a fortune by shopping around for stand-alone cover, such as that offered by British Insurance, Burgesses, Helpupay and Paymentcare.

4. Protect yourself against rising debts

Having had a disastrous dance with debt in the Nineties, I don't do debt anymore. However, one thing that frustrated me was watching my debts creeping up thanks to sky-high interest and charges. In addition, I could only afford to pay my minimum monthly repayments (MMRs) most months, so I was hardly chipping away at my debts at all.

To protect yourself from rising debts, try this three-step process:

Stop spending more than you earn. Remember, it's a debt card, not a credit card, so only buy something with it if you can afford to pay for it at the end of the month.

Don't just pay your MMRs -- set up a standing order or Direct Debit for a fixed monthly amount and pay what you can on top. For example, on a balance of £2,000, I'd recommend a flat monthly payment of at least £80 (4%).

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5. Protect your home and its contents

According to the Association of British Insurers, in 2004, we spent a total of £8.5 billion on property insurance and received £7.7 billion in claims. In other words, we get back about 91p in the pound, leaving 9p in the pound to go towards insurers' profits. This is miles better than, say, rip-off payment protection insurance, where more than 80p in the pound is pocketed by greedy lenders!

Thanks to its high payout ratio, I'm quite a fan of buildings and contents insurance. However, as a tenant, I don't need buildings insurance, and I've never claimed on a contents policy in my life. That's why I minimise my annual premium by choosing a high voluntary excess -- if any minor accidents occur, I'll self-insure by paying for them from my rainy-day fund.

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6. Protect your car

Motor insurance is a legal requirement: you must have at least third-party cover in case you injure someone else or damage another's property. However, it pays to shop around for motor insurance, as premiums vary wildly. According to the AA, the typical motorist can save an average of £296 a year by shopping around for comprehensive insurance, and even more (£395) by choosing non-comprehensive cover wisely. Before you renew your car insurance, read these five money-saving tips, or you'll pay over the odds!

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7. Protect your savings by beating inflation

Currently, the government's preferred measure of inflation (rising prices) is running at about 2% a year. In other words, on average, something that cost £100 a year ago now costs £102. Therefore, inflation is said to "erode" the value of our savings, so it's important that your savings rate keeps pace with it.

If you're a basic-rate taxpayer (paying 20% savings tax), you need to earn 2.5% a year just to keep pace with inflation. Even worse, higher-rate taxpayers face a steeper hurdle: 3.3% a year. Sadly, although there are over four thousand different savings accounts to choose from, only a handful pay really decent rates, say, 5%+ a year before tax. If you'd like to sharpen up your saving skills, read Your Ultimate Guide To Saving and check out the Best Buys in our savings centre.

8. Protect your future by investing

The main reason why I'm not scared to be out on a limb working for myself without all those lovely company benefits is that I've built up a big nest egg over the years by saving and investing. Indeed, in my opinion, the best way to secure your financial future is to invest, which, to me, means putting money into the stock market to build capital over the long term. Although I do pick individual shares to buy, I also invest in the stock market via a cheap, simple, index-tracking fund. Over the long term, it's this route that I expect to generate most of my wealth!

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