Buying your first home or upsizing to a larger pad comes with bigger responsibilities than you might realise. The risk of losing everything – your life savings, your investment, your home – is much greater than probably anything you’ve ever purchased before. So that’s why it’s important to be prepared for the worst and start an “insurance bucket”.

This is not a replacement for home or life insurance, but if you don’t have life insurance you should at least consider starting an insurance bucket. Not only will it give you some peace of mind knowing that you have some savings to fall back on in case of emergencies, but it can also save you heaps in interest charges on your mortgage.

An insurance bucket is basically a pool of savings you accumulate over time and leave for emergencies such as if you lose your job and can’t meet your repayments. A good guide for an insurance bucket for your home is to set aside at least three months of repayments, so for a $300,000 mortgage with a 7.2 percent interest rate, your insurance bucket should have at least $6480.

While it’s best to start your life as a mortgagee with an insurance bucket ready to go, it’s not the worst scenario to enter a mortgage without one. After all, moving into a new home is expensive and there’s so many improvements and pieces of furniture to purchase!

But it’s a good idea to start your insurance bucket as soon as you can and in no time you will have a safety net of savings. Use an offset account, which is a transaction account linked to your home loan and all the money in the account is offset against the mortgage balance. For instance, if you have a $300,000 mortgage and $10,000 saved in your offset, you will only pay interest on $290,000. Some lenders charge a hefty fee for an offset so it might be cheaper to make a regular deposit straight into your mortgage.

You can obviously combine insurance buckets to the one pool of savings for all of your financial responsibilities – everything from utility bills, child care and personal loans. So make sure you compare your home loan options and the features they include so you’re set up with an insurance bucket that will save you stress and money.

Posted by Michelle Hutchison, NINEMSN on 28th April, 2011