One of the pillars of Wealthy Turtle is the idea that personal finance is personal. What works best for one person doesn’t necessarily work best for everyone. This is partly because we’re emotional beings and our decisions are not always rational, and partly because our circumstances might be completely different from everyone else’s.
That’s not a complicated concept but it is an important one to remember as you read through the growing number of blogs dishing out financial advice. You can’t just accept what you read online to be true, even if it was written with good intentions. It’s up to you to do your due diligence and see if the common rule of thumb is true or just an old wives tale.
Let’s take auto insurance as an example. No one likes paying for car insurance and we’d all like to find a way to minimize the amount we have to pay for coverage. Not surprisingly there is an abundance of articles with tips for saving money on auto insurance.
One tip that I have seen time and time again is to raise your deductible which will decrease your premium. On the surface that’s great advice. You take on a little more risk and save a little money for doing so.
The problem is that many people will just accept this rule of thumb as gospel and assume it to be the best course of action without even taking the time to think things through.
A Real Life Example
Two months ago I moved to a new home and when I called my auto insurance company to give them my new address I took the opportunity to see exactly what would happen to my premium if I raised my deductible from $500 to $1,000.
After running the numbers each way for me the customer service representative told me that I would save a whopping $36 per year by raising my deductible by $500.
At that rate it would take 13.88 years to make up the $500 difference in deductibles.
Would I save money? Sure.
But is it worth the risk? Not to me. I’d much rather kick in an extra $3 a month and not have to worry about coughing up the extra $500 if I’m unfortunate enough to get into an accident.
Now if the difference was more significant, like say $30 a month…then I’d have to seriously consider raising the deductible since I know I’d break even in less than two years instead of 13.
It all comes down to how much you are willing to spend and how big of a risk you’re willing to take. If you have a healthy emergency fund set aside you might be more comfortable with a higher deductible, though even if you have the money set aside it might still be wise to spend the extra money so you don’t have to risk losing it.
Please understand I’m not telling you to lower your deductible just because I did. The whole point is that you shouldn’t just assume what works for one person will work for you too. They call it personal finance for a reason, and you should always take the time to make sure that the standard rules of thumb apply to you.
It will only take about 5 minutes to call your insurance carrier and ask what will happen to your premium if you raise or lower your deductible.
Is Increasing Your Deductible Really a Good Idea?,