If you’re like most people, you rely on your car to get you places so you can live your life — and that includes getting back and forth to work so that you can earn your daily bread. Unfortunately, the price of freedom comes with a lot of extra line items in your household budget: fuel, maintenance, unexpected repairs, excise taxes, parking permits, license and registration fees, and mandatory auto insurance.
Cars aren’t cheap.
Still, if you’re working to embrace a more frugal lifestyle to pay down your debts and gain more control over your finances, there’s a lot you can do to cut expenses when it comes to your vehicle. One of the easiest hacks is one you’ll barely even notice, since you probably only deal with your car insurance policy once a year.
The Universal Law of Insurance
If there’s one thing to remember about insurance, it’s this:
When your deductible goes up, your premiums go down.
A pessimist would argue that all this means is that you’ll pay through the nose for insurance no matter what you do.
I’ve got better news: You can play the odds to make smarter choices that will allow you to put money in the bank.
Think of it this way. Like death and taxes, you are guaranteed to pay your car insurance premiums on a regular basis. You can’t avoid this unless you break the laws of most states. Premiums are a given in your budget.
But —and it’s a big old but! — you aren’t going to pay that deductible every year. You’re only required to pay it if you have an accident. And if you’re a good driver and a reasonably lucky person, you may never have an insurance claim-worthy accident at all.
Bottom line: It makes sense to raise your deductible to lower your premiums as long as you are a reasonably cautious driver. This puts you in the position of definitely saving money today instead of maybe saving money in the future.
But What About the Risk?
I know first-hand that the idea of raising your deductible can be, quite frankly, terrifying. I’m incredibly risk-averse, and I had my fair share of car accidents and breakdowns when I was younger and could only afford a jalopy of a silver Chevette from the 80s (may she rest in peace).
The nagging fear in a nutshell: What if some jackass hits me and I have to pay up on that $2000 deductible?
I was able to swallow my fear with some basic math. Here’s how the numbers shook out for me:
For my one little Prius, I paid $564.83 per year in premiums. My deductible for both comprehensive and collision coverage was $500. That meant that if I had an accident, I’d only be out $500 for any repairs. Not too shabby.
When I play with the numbers and raise the deductibles to $1,000, however, my annual premium drops by $82.70 per year. If I kick the deductibles up even further to $2,000, I save $132.10 per year.
But — and I can hear the quiver in your voice as you ask it — is saving $132 a year worth it if I have to shell out a couple grand for an accident? Isn’t that the whole point of insurance?
The Numbers Don’t Lie
Here’s the thing: Even the car insurance industry — the very people who want you to buy lots of insurance in the first place — will tell you that the average person will file a collision claim only once every 17.9 years.
If you multiply your yearly savings of $132.10 by those 17.9 years, you’ll have amassed $2.364.59 before you have that hypothetical accident, which means you still come out several hundred dollars ahead of your deductible payment.
And if you invest that extra cash for even just a lowball 3% return? You’ll walk away with $3,177 over those 17 years. (Seriously, go play with an investment calculator to see how this works — it could change your whole outlook on the importance of saving a little here and a little there!)
If you have more than one car (or bigger cars, or live in a place with even higher insurance rates), your savings could be even more impressive.
The Bottom Line: Safe and Sound
If you’re still nervous about raising that deductible, do what I did and go incrementally. I raised it up to $1,000 in the first year, and then promptly put the money I saved on the premium into a savings account to beef up my emergency fund. As long as I have $1,000 set aside at all times, I can afford my deductible with no problem.
Don’t have a cool grand on hand yet? Keep your deductible at the middle-of-the-road level until you amass the savings to cover it, then raise it again. When you bank your savings right away, you’ll have a cushion to fall back on and you’ll be earning interest.
It’s a win-win if there ever was one.