How One Man Lost $500,000 Trading CFDs

Why on earth would anyone want to trade financial products that could potentially wipe you out? This is why.

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I went out to the flicks the other night to see The King’s Speech. Great movie – horrible pre-show entertainment.

No sooner had I popped down my popcorn and settled into my seat than an ad touting the latest investment fad, Contracts for Difference (CFDs), came on.

The slick ad looked liked a movie: fast-moving shots of city skylines, goldmines, and wealthy dudes doing wealthy dude stuff. It even had its very own Hollywood-style voiceover man.

He seemed to be suggesting that, because everyday news events tend to impact financial markets, the choctop-chomping suburbanites sitting with me in the cinema could profit from these events by trading highly speculative derivative contracts.

Talk about a horror movie.

What are CFDs?

If you’re trying to piece together what the hell a CFD is, you’re perhaps one of the lucky ones. CFDs essentially allow you to make highly leveraged bets on which way a share price (or the price of gold, currencies, or two flies crawling up a wall) will move in the short term.

You only have to come up with an initial margin (think of it like a deposit) of 5 per cent of the value of the share, but the CFD gives you exposure to 100 per cent of the price movement. If the share price moves the wrong way, you can be potentially exposed to unlimited losses.

Huh?

One of the best descriptions of CFDs I’ve heard comes from none other than ASIC Commissioner Greg Medcraft, who said ‘they’re basically a way to borrow to gamble’.

Nice.

CFDs aren’t allowed in some countries because they’re too risky, and earlier this month the Financial Ombudsman Service called for investors to be banned from trading CFDs unless they can prove they understand these highly complex derivatives.

However, writing about CFD providers is fraught with peril. They’re the financial services’ equivalent of Scientologists: rich, powerful, and not afraid to throw around their influence.

‘How I Lost $500k’

One of the best descriptions of CFDs I’ve heard comes from none other than ASIC Commissioner Greg Medcraft, who said ‘they’re basically a way to borrow to gamble’.

So with that let me introduce you to John*, a 31-year-old bloke from Melbourne who thought he’d give trading a go. I spoke to him this week.

Why on earth would anyone want to trade financial products that could potentially wipe you out? Here was John’s thinking:

If he invested $10,000 of his savings into the share market and it went up 10 per cent he’d make $1,000. Big deal.

If he invested $10,000 of his savings into CFDs and it went up 10 per cent he’d make $10,000. Big deal!

John was completely out of his depth. He didn’t realise that trading is like a game of tennis – you need to know who your opponent is.

The people he was playing against were in many instances the big financial institutions, like Citibank, Goldman Sachs, Barclays, HSBC and CBA. These institutions’ employees aren’t so much traders as risk managers – people with advanced degrees in mathematics, years of training, sophisticated financial models, and collaborative trading offices all around the world.

“I was trading the price of gold, oil, the ASX 200 and currencies”, said John. “All the action happens overnight in America, while you’re asleep – or trying to sleep.”

“I did okay at the start, but I didn’t really know what I was doing. For me, all too often I’d get this kind of overriding, heart-racing moment where I thought things are going to turn around.”

“So I’d go deeper, and deeper … while the market kept going the wrong way. Too many times I woke up to find out I’d received an automated margin call email (to top up his trading account because of losses) from my CFD provider.”

Barefoot: “Wait, wait, wait … how many times did that happen?”

John: “Oh gosh, I reckon about 25 times … I think I lost about $250,000.”

It gets worse.

“My trading strategy didn’t involve stop-losses (a risk-strategy that automatically exits your position at a predetermined price, so you ‘stop the loss’). I didn’t see the point, because in many cases with a stop loss you’d get sold out at a loss, and then the market would move back and you would have ended up making money.”

But that didn’t happen one Friday night a few months ago.

“When I went to bed I didn’t realise that the market was having one of its ‘corrections’. I woke up in the morning and checked my account. I’d received multiple margin calls overnight that had gone unanswered, so my CFD provider sold my positions out.”

“I stared at my computer screen. I had just lost a further $250,000. In one day.”

“It wasn’t like I’d bought $250,000 worth of shares and they’d gone down to zero. I never had that money in the first place. And now I had a few days to come up with $250,000 to cover my side of the trade.”

Luckily John could afford to lose $500,000. He’s a successful financial advisor.

Tread Your Own Path!

*name changed

How to Start Investing in Shares

Mr Smith, my high school maths teacher, insisted that trigonometry was something every young man needed to know. Yet I was more interested in buying and selling shares.

But the only place I could do this – we’re talking the early 90s, before broadband, when mobile phones were the size of Bert Newton’s noggin – was the guidance counsellor’s office. I would sneak in and use his (free) phone to call my broker.

When I tell people this story, they instantly understand why I never went on a date in high school. They also begin asking me lots of questions about how they can start out in the share market.

So let’s answer some of them.

The Top Five Questions:

1. Why bother investing?

2. How much does it cost to get started?

3. Isn’t investing something I should get a professional to do for me?

4. How do I know which stocks to buy?

5. What if the stock market crashes?

Why bother investing?

Let me give you two reasons. Let’s start with the carrot – compounding.

Albert Einstein said “it’s the easiest way to get rich without having to don a necktie, sit in a cubicle, and make small talk all day with Sue from accounts”.

Or maybe he said compounding was one of the greatest wonders of the world. Either way he was a fan. Here’s why.

Let’s say you stash away $50 a week and invest it into the share market each time you get to $1,000. Assuming your shares earn 9 per cent a year, in 30 years you’ll have $442,000, but have invested only $78,000 of your own dough. That’s compounding.

So that’s the carrot, now let me hit you with the stick – inflation.

Practically everywhere I look these days I see prices rising – at the petrol pump, at the supermarket, and (over the last few years at least) at auctions. This means that the dollars in your pocket are losing value – they buy less stuff.

If today you have $100 to spend on groceries, in 30 years that amount will be only worth about $40. So if you have your dough stashed under your mattress (or for that matter, in a transaction account), you’ll soon be eating lots of mouldy bread.

The only way you can outrun inflation is by earning a higher rate on your money than is being eaten away. Historically, the best way to do that is by investing in the share market, which has been averaging around 10 per cent per year for the past 20 years.

How much does it cost to get started?

Provided you don’t have any credit card debt or any other consumer credit (pay those suckers off and nab a guaranteed 18 per cent return!), you can get started in the share market with as little as a thousand bucks.

Isn’t investing something I should get a professional to do for me?

 That’s exactly what the mass financial marketing machine wants you to think.

Most retail managed funds are about as good as the financial planners who flog them – they overcharge and under-deliver. Figures this week from Morningstar show the average fund manager underperformed the market in 2010. Worse, most still slugged investors with high fees for their failure.

How do I know which stocks to buy?

It’s easier than you think

Here’s you: “But I don’t know anything about the share market!”

Here’s me: “Relax, you don’t need a crystal ball. The best investors focus on becoming part-owners of good businesses.”

How do you do that?

You buy what’s called a low-cost index fund.

These are simple, boring funds that just track the market. Which means that you can pick up a slice of the top 200 or 300 businesses in Australia … with a single purchase!

Even better, this way you don’t need to decide what to buy: the index fund is ‘self-cleansing’, because it automatically buys big companies as they grow, and sells those that fall out of favour (like Kodak).

And remember, if you’re invested in shares in your super, you’re already an investor in hundreds of businesses — how easy’s that?

What if the stock market crashes?

It will. That’s one thing you can count on.

Share markets – like life – have their ups and downs. The world’s an uncertain place: there’s the risk of war, recessions, oil price hikes, Bieber-fever. But if history is a guide, the stock market will still be the best place to invest to for the long term.

Repeat after me: “I will not invest money that I’ll need in the next five years.” To soothe their nerves, smart Barefooters have a couple of grand stashed away in their Mojo account so they don’t have to sell when everyone else is.

So if you’ve been putting off dipping your barefoot into the stock market, the time to begin is now. Like any skill, you get more comfortable the more you do it, and it’s one hobby that can definitely pay big dividends.

While I can’t remember much from high school maths, the lessons I learned from buying businesses have stayed with me till this day.

Tread Your Own Path!

REVEALED: How I Personally Manage My Money

I’ve met people who track their spending on a spreadsheet. They tend to have names like Ian and Cheryl, and they bring homemade hummus and day-old bread to your barbie. Or worse, their home brew (‘It works out to be only eight cents a glass! Yes, and it tastes like it too, Ian.)

This is no way to live your life. Your daily latte won’t send you broke. To this day I’ve never, ever been able to stick to a budget – but I’ve compensated by letting technology do the heavy lifting for me.

It’s called the 60-20-20 plan – 60 per cent safety, 20 per cent savings, and 20 per cent splurging – and it’s the easiest way I know to manage your money.

Safety – 60 per cent

Safety means allocating 60 per cent of your take home on food, shelter and dog biscuits. All the things you need to live safely in the suburbs.

If you’re like most people it will divide up something like this:

• Mortgage: 30 per cent (but not if you’ve bought in Point Cook)

• Food: 15 per cent (or a bit more if you watch The Biggest Loser)

• Mobile and broadband: 5 per cent (unless you’re Malcolm Turnbull)

• Car: 10 per cent (unless you’re Bob Brown, who rides a bike)

Let’s talk dollars. An average couple pulling in a combined $120,000 a year (without any crying tax deductions – yet) takes home about $1,850 a week. So they would have to sock away:

• Mortgage: $555

• Food: $277

• Mobile and broadband: $90

• Car: $185

Knowing how much it costs to run You Inc is scary, but powerful – so work out your percentages. In times of trouble, this is the minimum amount you need to bring in to keep the lights on and the cat warm.

Savings: 20 per cent

Allocate 20 per cent of your hard-earned to savings.

Hang on a minute. If you’ve got any credit card debt or personal loans you’ll need to do the following:

First, save $2,000 into a Mojo account – a high-interest online savings account. For our average couple this would take them a little over six weeks to save (20 per cent of $1,850 = 370 x 6 = $2,220).

Second, start paying off your minor debts by attacking the smallest one first (say a parking fine), knocking it over, and then moving on to the next biggest one – and keep going. I call this method ‘domino your debts’, because you knock them down one by one. (By the way, your major debts, like HECS-HELP and the mortgage will obviously take longer.)

Now you’re (mostly) debt free, you can begin paying yourself – every dollar you put into your savings account is like getting a payrise at work without doing anything – it’s like being a politician.

The best legal tax dodge going around is superannuation – especially if you earn under $62,000. Call your fund and ask about chipping more into your fund via the Government’s co-contributions scheme.

Then you have a choice: you can aggressively pay down your mortgage (or if you’re renting, you can aggressively save for your deposit via a First Home Saver Account), or you can begin building an investment portfolio of direct shares. I do a mixture of both.

Splurge: 20 per cent

You are hereby directed to go out and blow 10 per cent of your money on crap that makes you feel good (shoes, booze, and anything else you want).

The other 10 per cent of your splurge money should go to longer-term splurges: overseas holidays, weddings, divorces, anything that is going to cost more than a few weeks’ wages.

For our couple, this means dinners to the value of $185 a week, and sticking another $185 into the Greek Island Getaway fund.

The best place for keeping your splurge funds is uBank, which is currently paying the highest rate of interest on the market (as at Feb 18th 2011), and lets you create sub-accounts for your different goals.

The key is to make sure your splurges don’t drain your bank. Think about the big goals you have over the next 12 months, and chunk them down to weekly amounts.

OK COMPUTER

Here’s you: “This sounds like a lot of, like, work.”

Here’s me: “Nope – the 60-20-20 plan puts your money on autopilot.”

That’s the beauty of this plan: once you’ve crunched some numbers and set up your accounts, the system runs itself. Best of all it’ll take you only ten minutes a month to monitor.

Here’s how to get started quick:

1. Over the first week keep tallying up your expenses (either with an old school pen and paper, or an iPhone app that tracks your spending), so you know where the dough is going. Relax, this isn’t a tut-tut judgmental stuff, just keeping a track on where you spend your money.

2. When you calculate your percentages for safety, savings and splurging, make a few calls to see if you can screw down your suppliers.

3. Keep a float of $500 in your savings account so you don’t accidentally overdraw and get hit with (unfair, perhaps illegal) fees.

4. For your 10 per cent ‘blow money’, physically take out cash each week. Get it in $10s and $20s. Then put it in an envelope and store it in your sock draw. It’s a psychological thing.

   Casinos use chips so you don’t freak out when you gamble away your (mother’s) rent, credit cards work the same way.

   (Case in point: the other week I bought something at Harvey Norman, and the pimply teenager at the checkout was like “Woah, dude, you’ve got, like, real money”.) Cold, hard cash is a lot harder to spend.

5. Once you have this plan in place you won’t have to worry about money again. That frees you up to focus on using the miracle of compound interest to turbocharge your wealth plans – which we’ll tackle next week.

Tread Your Own Path!

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Shopping List:

1 X fee-free transaction account
1 X high-interest online savings account
1 X low-cost industry superannuation fund
1 X discount online sharebroker
1 X sock draw

Automate Your Money:

The 60-20-20 plan

• 60% Safety (all living expenses)

• 20% Savings (thinking ahead)

• 20% Splurge (things that make you smile)

20 Tips to Set Yourself Up in Your 20s

You don’t have to be running the world by the end of your 20s, but you can certainly set yourself up for success. A funny thing happens when you have a birthday with a zero at the end. You freak out.

After all, it’s God’s way of reminding you that you’re getting closer to pushing through the pearly gates – that and the fact that you look a bit like Sam Newman (or Naomi Robson) when you look in the bathroom mirror in the morning.

Over the festive break I had dinner with three mates who were adjusting to having a life with not just a zero at the end, but a three in front. After more than a few reds, we came up with a list of the top 20 things we wished we’d known in our 20s.

1. The Joneses were broke

The Joneses you were trying to keep up with probably had a cool car and nice clothes, and took fashionable holidays to countries that Jetstar doesn’t (yet) fly to. But chances are they were broke – or will be by the time they hit 40 – because they were wasting money on worthless junk trying to keep up with the Jameses.

2. Buy the right stuff

We all regret not taking the opportunity in 2000 to buy a house (or two) and then riding the debt boom. The key to long-term wealth creation is buying the right stuff: assets that compound in value over time.

3. Watching 100 re-runs of Sex and the City will give you a zero per cent return

Instead of sitting around playing make-believe, get out and become your own Carrie Bradshaw (or Mr Big).

4. Bad credit will come back to bite you

I know of a guy whose credit file is dirtier than Pamela Anderson. He now finds it hard to be taken seriously by banks and other lenders. Get your money in order with my 10-minute plan.

5. Chains of habit are too light to be felt until they are too heavy to be broken

Warren Buffett said this, probably in relation to investing, but it applies equally to all the silly habits young people experiment with – smoking, drinking, debt-bingeing, and the Young Liberals.

6. Listen to old people

I’ve learned a lot from listening to older people who’ve endured similar struggles. It’s easier to learn from someone’s mistakes than to make them yourself.

7. Don’t listen to (some) old people

We’ve all known a number of old geezers at work who set out the rules of “how things are done round here” – which usually equated to not showing them up or offending their fragile egos. All workplaces have losers. The older they get, the sadder they become.

8. Move out of home

It’s not natural to live with your parents in your 20s. Any money you save is offset by a lack of independence, missing the chance to grow as a person, and your father making small talk with your random pick-up from the night before.

9. In your 20s you learn, in your 30s you earn

If I had a dollar for every young whippersnapper who busted out of university and expected to run the company within a few years I’d be, well – come to think of it – I’d be me. Really though, learning in your 20s sets you up to make serious dough when you’ve curbed your enthusiasm for 5am finishes.

10. The letters after your name don’t really matter (unless you’re a surgeon or a stripper)

EQ beats IQ hands down. Passion and enthusiasm beat them both.

11. No, you can’t have it all

The management gurus are wrong: there’s no such thing as a four-hour work week. It’s a daily trade-off between spending time with your family and friends, your career, and watching Sex and the City re-runs.

12. Networking is slimy

I’ve met wonderful people who’ve opened doors for me. But not because I offered them a cheesy smile, a sweaty palm and a magnetic business card. It was because I gave before I got. Actively looking to help people is the most powerful career advice I know.

13. Turn your passion into profit

Here’s how it works. You finish university wanting to be a writer – but it’s a tough job market, so you take a job in accounts until something better comes up. Ten years later, you’re still there. Comfort is the enemy of progress. Work hard at turning your part-time pleasure into profits – then go full time.

14. Tattoos are trouble

Your mother is right, and your future children will agree with their grandmother.

15. Buy the cheapest car your ego can afford

Two of my mates bought cars to impress girls. Now 10 years on, both adamantly attest there are easier ways to impress ladies than dropping $42,000 ($30,000 plus $12,000 on repayments) on a car – like a deposit on a pad. Girls like cars. Women like homes.

16. It’s easier to save money when you’re broke

Most people fool themselves into thinking they’ll save more if they earn more. It almost never happens. Saving is a character trait – not a function of how much money you earn.

17. That mate who borrows money from you isn’t going to give it back

I once lent a mate a grand to cover his rent. At the time he swore he’d pay me back. But he couldn’t – for the same reason he had to borrow it in the first place. As time went on he avoided me more and more, to the point that now we never speak – all for a lousy thousand bucks.

18. Relationships are more important than a career or car

Sadly, one of my mates didn’t make it through his 20s. His final memories were filled with moments he spent with family and friends. He never mentioned his possessions or his profession. Not once.

19. Most things don’t matter

I spent a good part of my 20s worrying about things that never happened.

20. 30 is the new 20

You know you’re in cougar territory when you start spouting lines like this. But there’s a point to it: even if (like me and my mates) you didn’t nail all the things on this list in your 20s, the rules are the same whether you’re hitting the nightclub or the bowling club this weekend.

Tread your own path!

All You Need To Know When Buying Your Next Car

When I was growing up I’d pray that it was my mother, not my father, who would pick me up from social and sporting events. She had the nice car.

Dad, on the other hand, drove a Toyota Hilux, but not one of those gleaming monsters you see CUBs (cashed-up bogans) driving around today. Rather it was a clapped out one-tonner he’d had for as long as I could remember. It was so old it had a factory-fitted wooden tray on the back.

I’d die a slow death when I’d see the clunker coming up the road. The only thing worse was when we’d offer someone a lift home – which, in the stinking summer sun, meant we’d all rub legs as we sat along its bench seat.

Thankfully my mother was not a fan either. Towards the end of the Hilux’s life she would put pot plants in the back and use it as a sort of moveable garden ornament.

Yet my father’s taste (or lack of) in cars has had untold influence on me.

To this day I’ve never bought a new car, and for most of the cars I’ve owned the thought of theft is more of a running gag than a reality.

Yet maybe it’s the kilometres I’ve been racking up, or perhaps it’s that my labrador retriever, Buffett, has slobbered over every inch of my sedan, but I’ve finally decided that it’s time to trade up.

Trading up

Yet I’m no car person, so I enlisted the help of my good mate Sam, who makes his living selling used cars (which is much nicer than calling him a used car salesman).

Barefoot: “Tell me about all the scams you blokes use to sucker people in.”

Sam: “Mate, that’s all a beat-up. The real trouble happens when you buy privately.” (Spoken like a true seller of used cars.)

And so the hunt began.

Supply and demand

In talking to Sam I started to understand that the car market is much the same as the share market – it’s built on the back of supply and demand and influenced by external factors like the Global Financial Crisis and government policy.

When GE Money and other lenders effectively pulled out of financing new vehicles last year, some dealers were forced to flog new stock at a loss. This in turn sent the second-hand car market spiralling down – and canny buyers picked up bargains.

It’s a similar situation with luxury cars. The GFC has seen many a banker lose his bonus and therefore his Beamer, which is usually sold off at auction. (Sam also advises that buying a car at auction is a risky strategy, given that in most instances you can’t test-drive the car and that you’re competing against used car dealers. Enough said.)

Government trickery

The Government has artificially boosted demand for new vehicles by giving small business owners a 50 per cent bonus tax deduction for cars.

Most dealers are run off their feet, yet when this arrangement ends in December you may find they’re more motivated to do a deal.

Still, if you’re like me and you know more about stocks than shocks, the internet has you covered.

Surf the Web

Like most things these days, it pays to kick the tyres in cyberspace before you find yourself slugging it out with Sam and his mates.

So your first port of call should be to the government-backed howsafeisyourcar.com.au, which rates most of the cars on the market in terms of safety, and offers a great overview of the features that have been known to save crash-test dummies.

While you’re on the Net, the next thing to do is go to sites like carsales.com.au and carsguide.com.au (owned by News Ltd, publisher of the Herald Sun), where not only do you get expert reviews but you can get a feel for where the market is.

Car Inspection

When you’ve found your dream machine (or money pit), it’s a wise investment to pay $150 to get a vehicle inspection, just to make sure you’re not buying a Timbercorp.

If you’re a business owner there are tax advantages to leasing (so long as you can keep, or fudge, a logbook). If you’re employed you could ask your boss to include your vehicle in a salary packaging arrangement the next time you review your pay.

Avoid car dealer financing

If neither of these options is available, it’s best to use as much cold hard cash as you can afford. Stay away from dealer financing, especially from outfits like Motor Finance Wizard, who flog horribly overpriced cars under the guise of them being interest-free.

Borrowing money for something that falls rapidly in value only serves to compound your losses.

Yet most of this is common sense.

Steal yourself for the car showroom

What’s not so well known is that most car accidents happen on the showroom floor.

We all know that cars are a dud financial deal, but unless you want to get around on a bus they’re a necessary part of life.

The trick is making sure you don’t end up hitting a financial pothole.

My old man says to buy the cheapest car your ego can afford.

Until the other day I was still no closer to working out which car I should choose. Then by chance it happened.

I pulled up at the lights and Buffett and I had our eyes drawn to the left – through his slobbered, slimy window.

It was love at first sight.

A gleaming, white Mitsubishi Triton ute.

It was perfect – just the vehicle for a city dweller and his horse. Er, dog.

Even better, I’m sure that in the fullness of time it will almost certainly embarrass the hell out of my future son.

Tread Your Own Path!

How to be Prepared and Ready for Anything

Sam from St Kilda is an elderly resident in his 60s. One fateful summer’s evening he was out watering his pot plants, when suddenly a car careered through his gate, running him over and breaking his leg.

Unlike many pensioners his age, Sam is still employed as a television personality and thus was fortunate to be able to meet the medical costs.

Yet most of us aren’t highly paid media identities able to shell out thousands in the event of a disaster – then again few of us have partners half our age that are in the habit of running us over using our own European sports car as a weapon.

NOTE: While much of the information below is still relevant, there’s a more recent version of this post which you can find here.

Prepare for the unfortunate

Still, as any good insurance salesman will convince you, there’s a high probability that at some stage an unfortunate – and costly – event will set you back.

Perhaps you will crash your car, or be conned into buying tickets to a Nickelback concert, or maybe your home will be burgled.

When the unthinkable does happen if you don’t have insurance you are risking financial ruin.

Consider the possibilities

Sadly, despite what the contents of your bathroom cabinet might indicate, three Panadols and a box of Band-Aids are not an effective insurance policy.

Although many people spend a lot of time thinking about making and spending money, few spare any time for insurance. The reason is that insurance is about as compelling as going to a Nickelback concert. It makes us think about all the unpleasant things that could happen.

Some insurance agents prey on this fear and in the process convince people to take out unnecessary (and expensive) cover we don’t need.

The fundamentals of insurance

The basics of insurance are this. Throughout time people have been getting themselves into all sorts of bother. Most people don’t have money set aside to pay for the ramifications, and therefore like to pass on the financial risk to someone else – usually an insurance company.

For shouldering this risk you pay the insurer a premium, which covers you against a particular event occurring that is in your policy.

choose to pay an initial amount towards your costs (known as an excess). In doing so, the insurance company will usually lower your premium, since it won’t have to bother doing all the paperwork for a little claim.

According to the Sun newspaper in London, songbird Jennifer Lopez has insured her physical assets for a cool $1 billion, although it’s not known whether her insurance excess increases at the same rate as her backside.

Insurance companies offer all sorts of policies for everything imaginable happening. Shane Warne has apparently insured his winning, spinning fingers.

Stick to the basics

Insurance is the only thing we buy that we hope we’ll never have to use. That being the case, it’s wise to get insurance only for those events that can financially maim you.

For most of us that means car insurance (if you’ve got a car), health insurance (if you’ve got a body), and home and/or contents insurance (if you’ve got a home and possessions).

Most people have basic life insurance cover included in their superannuation.

Unless you have dependants there’s not an urgent need to shell out your hard-earned to ensure your dog is cared for when you’re dead.

Car insurance

Most people’s first experience with insurance is their car.

There are three main types: compulsory third party, third party property (which can include fire and theft provisions), and comprehensive.

The cars I’ve owned in the past have been worth less than what some people spend on a round of drinks at a nightclub, so I’ve always stuck with compulsory third party.

Everyone who owns a car should have this as a minimum, as it covers you against damage your car inflicts on other people and their property.

A recent survey by SGIC showed that more than one in five motorists don’t believe that speeding increases their chances of being involved in a collision. With that in mind, people with expensive wheels should consider going up the insurance food chain and getting more comprehensive (and expensive) cover for their vehicles.

Health insurance

The second form of insurance you should look into is health.

Australia has one of the best hospital systems in the world in Medicare, which is paid for by our taxes. There are advantages, however, to being a private health patient.

In most cases, there’s no waiting list for hospital procedures, and you have a choice of where you want to be treated and by whom.

I think the cost is well worth it for the peace of mind it delivers.

House and contents insurance

The final form of insurance that you should ensure you have is house and contents.

According to AMP, 70 per cent of Australian homes are underinsured and one in four houses has none.

Perhaps your place isn’t exactly the Taj Mahal. Yet imagine coming home from work and seeing your house on fire. All you have left is the clothes on your back.

How much would it cost to replace everything you had?

The figure for even the most basic of houses can run into the tens of thousands of dollars. At about $250 for contents cover and $500 for building insurance, you’d be absolutely crazy not to get this insurance.

We’ve all seen the damage cyclone Larry inflicted on Queensland. Experts predict insurance claims will run into the hundreds of millions.

When shopping for insurance it’s often a good idea to go through an insurance broker. They can tell you what your policy covers you for, and more importantly what it doesn’t.

Pranging your pride and joy, falling ill or getting robbed are stressful experiences in themselves.

When disaster strikes the last thing you want to worry about is how you’re going to finance your misfortune.

Tread your own path!

However — and this is important — you should always seek independent financial advice before acting, especially when it comes to insurance. This is one area where it’s worth paying for it to be done right.

How Much is Your Car Costing You?

When it comes to dating I’m at a distinct disadvantage. Without my own wheels it’s tough – ever tried picking up a girl for a date in a taxi?

Economists call this opportunity cost; the money I save in not owning a car comes at a cost, namely, the unlikely event of pulling a pash on public transport.

Most people want a car for convenience, but the choice of chariot is not simply motivated by need for transport. If it was we’d all be driving second-hand Subarus.

Status symbols

To some, the car they drive is a symbol of their lot in life, and the moulded metal in their garage says as much about their personality as what comes out of their mouths.

Marketers have successfully shaped this image for decades – the horseless carriage is a freedom machine, a sexual stimulant and a status symbol rolled into one.

But at what price? Whether you care to admit it, the car you drive comes at a big cost. So let’s pop the hood and work out just how much your motor is costing you.

“One of the golden rules of wealth is to avoid, wherever possible, borrowing for things that fall in value.”

Exhausting expense

These days it’s probably cheaper to fill your car with Chanel Number 5 as petrol prices climb to record highs. Higher fuel costs are only part of the problem. According to the RACV most family cars now cost more than a quarter of the average weekly wage to run.

Most people get hot under the collar about rising petrol prices – few maintain that rage when it comes to the overall costs of running a car, which can be thousands of dollars each year.

Let’s say you buy a new Holden Astra for $23,990. According to the experts at the RACV, running costs for the Astra are $146.11 each week. After five years the car will cost you nearly $38,000 – and it would now be lucky to be worth $11,000. That’s what you call wealth destruction.

Australians love their shiny wheels. Sales of new cars have been going through the roof. Industry experts are predicting that we will buy a record one million new cars this year.

To move that many new cars off the factory floor, manufacturers have become skilled at selling the dream. The new-car smell has become a pheromone for many a consumer, and just like a serial playboy, there’s always a new model around the corner to tempt you.

New finance experts

Car manufacturers have also become experts in financing – after all, how many of us have a spare 30 grand to throw at a new car? The largest car maker in the world, General Motors, makes more money from lending people the money to buy its cars than it does from making them.

New-car salespeople will often tell you it’s better to buy new, because with a second-hand car you could be inheriting the previous owner’s problems – like the fact that it almost sent them broke.

What the manufacturers don’t say, of course, is that one of the golden rules of wealth is to avoid, wherever possible, borrowing for things that fall in value. The same goes for the mysterious world of leasing cars for a “tax break”. This form of finance has been a boon for car salesmen as it muddies the picture (and the cost) of buying a car so much that it bamboozles the average buyer.

Think about it logically. The Government isn’t in the business of enacting legislation so people can buy expensive cars. In many instances, the tax benefits can be eroded by hefty fees and charges.

Vehicle value?

As with all financing there is a cost, and it comes out of your pocket. Many times it’s the people with the best cars who are the least able to afford them.

Driving a flash car may impress people and increase your self-esteem, but it can keep you from building up assets that increase in value over time.

Sales figures show that most people are mesmerised by the hypnotic spin that success comes with all-wheel alloys and leather interior. Luckily I’ve met a girl who shares my views – and her car!

Tread your own path!