Do it Yourself? Know Your Limitations First.

Here is another one of those “no brainer” ideas for saving money: do it yourself.  More than a long heralded principle of frugal living, “DIY” has become quite the vogue fad in the 21st Century.  With the advent of home improvement stores like Home Depot and Lowe’s and the popularity of home fix-it programs, everyone is jumping on the bandwagon.  We even have shows like Flip or Flop feeding the notion that there is money to be made by simply buying old structures, renovating  them, and selling them for huge profits.

We men are particularly vulnerable to DIY urges, as the belief that any man worth his salt has an inherent ability to use tools and fix things seems to run in our DNA.  The problem is this is a myth.  And as someone who speaks from experience, believe me, you can easily come out in the red — both in terms of money and time — if you embark on a DIY project without the necessary, skills or know-how.

Don’t get me wrong, I’m all for doing the work yourself and saving the money of outside help provided you know what you are doing.  This again is largely a problem for men, as our male pride constantly prevents us from acknowledging our inabilities and shortcomings.  So let’s learn from one of the great macho icons, Clint Eastwood, and realize once and for all that “A man’s got to know his limitations.”

I’ll give you a classic example.  I’ve tried a few times now to change headlight bulbs on my cars.  The first time went OK, but still harder than I expected.  The last two — both Hyundai cars, by the way — were nightmares.  For some reason, attempting to remove those damn lens covers and working my way around the various clamps and other impediments proved to be a nearly impossible task for this layman.  I sweated my way through it, but eventually could only get the bulb in half-way, without securing and aiming it properly.  So in the end I had to take the car down to a service station and have a mechanic finish the job.  The end result was that I pretty well ruined an evening, scratched up my forearm, and STILL ended up forking over twenty-five dollars, plus the cost of the bulb.

Now, wouldn’t it have been a lot better, from a quality of life standpoint, to have just paid the mechanic to do it in the first place?

Sadly, this is not just an isolated example for me.  Other times I have embarked upon do it yourself projects, only to find myself capitulating after a few hours of tortuous frustration.  The worst examples are those occasions when I get about three quarters of the way through before finally hitting a hurdle that I can’t clear.  The result is that I end up paying someone to do the job after all.  And, sorry, but there are no price discounts when the serviceman has to come out to the house to finish the job you have partially done.

Even if you do have the ability to do a given project yourself, consider your efficiency.  After all, it really makes little sense sweating and cursing for an hour or two through a project that you could pay someone thirty bucks to do in ten minutes. Time really is money, and many of us have a tendency to under estimate the value of personal time.

In the end, doing it yourself can be a great way to save money, but as with any strategy in frugal living, you have to think it through — preferably before wasting an evening and self-inflicting wounds.

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Does a Used Car Really Save?

Buy a used car and save tons of money.  How many times have you heard it?  It’s one of the top five suggestions on any “how to save money” article.  It has become part and parcel of the frugalist mindset, so much so that we now scoff at the poor, misguided souls who still buy new at the dealership.

But does a used car really save you money in the end?  The answer is nothing more than an uninspiring, “Maybe, under some circumstances.”

But usually it won’t.

I personally find used car savings the exception rather than the rule if, as I steadily preach, you think it through.

First, let’s start with the savings on price.  Conventional wisdom is that by merely buying used you will save 20 – 40 percent on the purchase price.  That can be true, no doubt, but as with everything you give up something for that price savings.  There’s not a seller on the planet who will give you savings of that magnitude unless the car has suffered a similar diminution in value.  Usually, it is pretty apparent by simply looking at the odometer reading.  The next time you find yourself attracted to a used car price that is at or near half the cost of the same model new, just look at the odometer, and you will probably find the catch there.  Chances are you will find that the car has a good 80,000 to 100,000 miles on it.  This, of course, means that you are very close to buying that car’s next major mechanical failure.  It may be an air compressor, a solenoid, an alternator, a timing belt and water pump — who knows?  But you can rest assured that you are 80,000 miles closer to a $500 – $1,200 repair tab, and probably several of them.

Remember too how many normal wear and tear items might be staring you in the face.  Unless the tires and brakes have just been changed, you will probably be replacing them in the next six months, as opposed to waiting two to three years before incurring that cost on a new car.

I also am willing to pay a bit more for peace of mind.  With a car, that comes in the form of warranty coverage.  If you buy a new Hyundai of Kia, you are buying yourself five years and 60,000 miles of bumper to bumper warranty coverage.  If you buy a used model with anything beyond 60,000 miles, you get no warranty at all.  With most other makes, you get zero warranty protection if you buy a car with a mere 36,000 miles on it.

Of course, you also have no idea how well the used car has been maintained by its prior owner — unless you are buying from a very close friend or from the very rare person who keeps full, accurate service records on file.  Now just think about how many times you have been too busy to change your oil at the necessary intervals and how many times you have done downright stupid things with your car that won’t show to the potential buyer.  Call me a pessimist, but I am less than confident in the diligence of the average car owner, and there is of course a reason why that owner is looking to sell the car in the first place.

But what if you buy a lightly used car, one still well within the manufacturer’s warranty?  That is a great idea if you can still accomplish significant cost savings.  The problem is that is very seldom the case.  Just look at a random example.  Let’s say you live in Atlanta and are in the market for a Toyota Corolla, a sound choice for the aspiring frugalist.  A quick review of Atlanta Toyota‘s website shows us a 2014 Corolla LE with less than 21,000 miles priced at $15,180.  The same dealership offers a new 2015 Corolla LE for $15,739, with other new models ranging into the $16,400 range.  Does the used car price sound like such a good deal?   Not to me.

Many will argue that better savings can be obtained by purchasing used from a private party seller.  But that option also is overrated.  With free, online access to Kelly Blue Book and Edmunds, any seller can easily determine the retail value of his vehicle, and just a quick browsing of Craigslist makes that clear enough.  It is also much more difficult to find a lightly used car for sale from individual sellers.  Again, check out Craigslist and what you will find is a plethora of cars with heavy miles.

In my opinion, the only practical used car option is a lightly used model, still within manufacturer’s warranty that is, for some reason, priced significantly lower than the new model alternative.  About the only time you will find this option is with a close out model or one that has been sitting on a dealer’s lot for a long time.  Dealers will reduce prices on models with “dust” on them.  Otherwise, you will find a better overall deal with a carefully negotiated new car deal and all the warranty and peace of mind benefits that come with it.

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Message to President Obama: There is No Free Lunch

Well, we just endured another nauseating, divisive, pie-in-sky, head-in-the-sand speech from Barack Obama.  Also known as the President’s State of the Union speech, Obama regaled his Democratic constituents with promises of yet new waves of big government tax and spend policies — like the very ones that have crippled American business, stagnated the economy, and left panhandlers still standing on the intersections of every city six long years since Obama’s first inauguration.  He has called for new taxes on the wealthy so that he can better spread the wealth to others.  In addition to the free healthcare and free cell phones that he doled out in his first term,  Obama now proposes to magically bestow free college educations and expanded child care benefits, the better to multiply the nation’s 18 TRILLION dollar debt.  And let’s throw in mandatory paid sick leave days while we’re at it.

Here is the message that Obama and his cronies just can’t seem to understand: there is no such thing as a free lunch.  Someone, at some time, must pay for these things.  Otherwise, you find yourself staring at a national debt several trillion dollars higher than the one you yourself blasted as unethical and unpatriotic six years earlier.  You see, Mr. President, college educations don’t come free, no matter how much we may want them to be.  They have to be paid for by someone.  The same is true for those cell phones and that health care you are “giving” away.  And by the way, even those nice new tax increases you are calling for would never come close to covering the tab.  As Margaret Thatcher once remarked, there is a central problem with socialism — eventually you run out of other people’s money.

But the most maddening aspect of this speech is the utter phoniness of it.  How can any responsible, intelligent person watch Obama’s fellow Democrats sit there and jump with applause for these insane promises, as if these new entitlement promises will save them from the yokes of poverty and despair?  Do people not realize that those Democrats are some of the wealthiest Americans whom Obama constantly blasts?  Like Nancy Pelosi and Mark Warner with their staggering, nine figure net worths?  Or Secretary John Kerry with his? Such a shame that Herb Kohl and Jay Rockefeller were no longer in the audience with their nine figure wealth.  Nonetheless, the list of obscenely wealthy Democrats who tout the “rich need to pay their fair share” mantra remains seemingly endless.

So here’s a practical idea: why don’t these multi millionaires step up to the plate, lead by example, and volunteer to forego those $174,000.00 salaries they take home?  Really, does a multi millionaire need that additional money anyway?  If they are truly so concerned about the plight of the less fortunate and outraged by the rich not paying their fair share, why not volunteer their services and live off of the paltry multi million dollar investment income that they receive annually (along with the lavish allowances, health care  (free of the Obamacare beauracracy, by the way), astounding “retirement” packages, and other benefits they will still enjoy)?  Come on you principled Congress folk, you want to give back to society; you want to help the less fortunate; you want to be good, altruistic “public servants.”  Go ahead and do it free of pay, like Ross Perot volunteered to do when he ran for President.

By now, you are probably thinking that I am one of those wealthy Americans who would be directly affected by the new tax increases Obama proposes.  I’m not.  Actually, I don’t come anywhere close.  I know, the prevailing wisdom is that I therefore should not care.  “Why do you care, you won’t have to pay it?” is the question I often hear.  Well, I care because I know that more and more spending by a government that is already $18 trillion dollars in debt is a bad thing; it is unsustainable.  I care because I look beyond the short-term and care about what happens to my children.  I care because I know that feeding this frightening tidal wave of entitlement demands is the last thing our country needs.  And I care because I truly hate this politics of division that Obama himself promised to change yet constantly takes to new heights.  It frankly pisses me off, in fact.

I also care because I believe people should be permitted to set their priorities, make wise choices, work hard, and spend their money on their own families and the causes they believe in rather than on the special interest groups that jump on the populist bandwagon.  I also believe every person should be permitted to spend and invest their hard-earned income as they wish without having political prostitutes stoke class envy and buy votes by promising to take that money and redistribute it.  I believe in working hard, living frugally, saving and investing, and providing for my family, rather than for the 50 million Americans who receive food stamps.

If you have followed and read this blog, you already know the importance of living frugally.  Rather than seek the mythical free lunch, you have perfected the art of frugal brown bag lunches.  You pay your own way while mastering cost reduction strategies such as aggressive coupon use and frequent shopper discount cards.  You monitor your vehicle’s tire pressure and avoid impractical gas-guzzling SUVs.  You seek to minimize insurance costs by dropping unnecessary coverages rather than force people to purchase insurance coverages they neither want nor need.  You know how embarrassed responsible Americans are by the nation’s irresponsible burgeoning debt and entitlement mentality.  You have, in short, perfected the liberating frugal mindset.

We need to tout the virtues of responsible, frugal living and self-reliance.  This runaway freight train of entitlement spending and class envy will get us nowhere good.

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Thinking Early Retirement? Beware of the Four Percent Rule . . .

Recently, USA Today revisited a popular subject amongst early retirement hopefuls: the so called “four percent rule.” The basic concept is that if a retiree withdraws no more than four percent of his portfolio per year, he should have enough to last for thirty years. The thought is that by limiting withdrawals to this amount, the remaining principal, along with investment earnings, should keep the portfolio cranking for years to come.

The question posed by the article is whether the 4 percent rule is still relevant to retirees.  The article concludes that it is, “somewhat” relevant – maybe – but only as a guideline.  In other words, the financial advisers interviewed in the article hedge and dance.  Later in the article, some of the analysts become more frank in acknowledging that the rule really does not work with today’s financial realities, including the low interest rate environment that has been in place for years.  In fact, just a few months earlier, USA Today published another article on the subject of the 4 percent rule that explained why the 4 percent retirement rule is broken.

It is unclear what induced USA Today to mute the alarm sounded by its earlier article.  (It may have just been a writer’s desire to recycle old material with a new spin so as to bolt before the New Year’s holiday.)  Whatever the motive, it does a great disservice because the four percent rule is anything but a reliable rule of thumb on which to base retirement decisions.  It is hardly a concept for practical people to rely upon.

I say this for several reasons.  First, as previously mentioned, the rule was formulated at a time when interest rates were much healthier than they have been over the last several years.  We have gone from the days of six percent interest of 3 month T-bills to the current scenario of a near zero rate on the same vehicle.  Even the thirty year bond is paying a mere 3 percent, or half of what 90 day treasuries paid when this “rule” was formulated in the 1990s.

Why is this important?  Because retirees need to have a substantial portion of their nest egg invested in conservative investments.   Otherwise, they could find themselves promptly in the poor house as the stock market enters its next frightening bear market.  Just image the troubles a retiree would have faced if 80-90% of his retirement portfolio had been invested in stocks during the 2000 – 2002 bear run.  Think about 2008 when the market blew up and erased over half of investor’s portfolios.  Yes, it came back, but only after years of sweat and angst.  That’s no way to plan a retirement.

Another reason why the rule is no longer relevant is because it does not account for the minimum required distribution that the federal government imposes on retirees nowadays.  The basic rule here is that retirees are required by law to withdraw certain amounts from their portfolios — whether they want to or not — so that the government can be sure to collect taxes on the earnings before the retiree dies.  Yes, you can still reinvest the money once you have withdrawn it, but only after you have paid the tax man.  It is therefore a net loss to the portfolio that does the retiree absolutely no good whatsoever.

Remember too that we are living under a cash-starved government that is constantly on the prowl for new ways to take still more of your savings.  You already know that our government has managed an 18 TRILLION dollar debt, the interest alone from which adds six figures with the blink of your eye.  As the number of Americans on the dole increases at a similarly startling rate, and as government monstrosities like Obamacare take hold, the already unsustainable debt will spin more wildly out of control.  Remember too that the social security system is also cash-starved and unsustainable; ditto for Medicare.  As this happens, you can pretty safely bet that the tax erosion of your savings will become more and more dramatic over your lifetime.

The four percent rule also was created during the run-away bull market of the 1990s.  That was the time of “irrational exuberance,” when investors thought we had magically reached the perpetual land of milk and honey.  It was the time when dot com companies were rolling in wealth and success, just before the clock struck midnight in March of 2000.  How do those dot com companies look now?  Has the NASDAQ returned to that 5,000+ point high in the fourteen years since?  No.  Surely we can all agree that a crash that has still not recovered in fourteen years is a bit more than an isolated down year.

But what really shakes me up is how further distorted the rule has become by pie in the sky young people fixated on escaping the world of work.  Mr. Money Mustache, for example, is a very popular website devoted to “Early retirement through Baddasity.”  The site is run by a man who reports that he retired in his early thirties and now lives off of investment earnings.  It is, understandably, an extremely popular site amongst young adults who find the thought of retiring in only a few years very appealing.

Now, don’t get me wrong, I too enjoy many of the blog posts because much of the espoused “Badassity” pertains to frugal living.  The blogger also boasts an enjoyable writing style that reflects a laid-back lifestyle and a healthy philosophy on life.  Unfortunately, however, one of his keys to early retirement is an extreme take on the four percent rule.  In his post on the subject, MMM describes the rule as the maximum rate at which you can withdraw your retirement savings and never run out of money.  Explaining why he personally believes four percent is that rate, he then reasons that an investor can generally count on an average annual investment return of seven percent, while conceding three percent to inflation, and voila, the four percent from which to live appears.

This interpretation, of course, raises yet another problem, which is the eroding effect of taxes.  You see, as soon as you sell off four percent of your holdings, you will get to pay capital gains taxes on any gains.  See also the minimum required distribution of cash poor government discussions above.

And yet countless fans of MMM regale one another with their plans to retire at the age of 30 or 35 with absurdly underfunded nest eggs of $500,000 – $700,000.  Browse through message board threads on the site and you will be amazed at the confidence, indeed certainty, with which these young people assume their plans are rock solid.  How frightening is this?  Do these people honestly think these are realistic scenarios?  (As an aside, I am also always troubled by how few of these people seem to care about the prospect of providing such things as college educations, weddings, and basic inheritance to their children, but that’s another topic for another day.)

But, please, think about it pragmatically before you make a dangerous career decision on such faulty premises.  Do you really want to kiss goodbye a job (and a career) in a country that has a bankrupt government and an unsustainable social security and Medicare system?  Do you believe your nest egg will be perpetually safe in a country where one of two primary political parties flourishes by promoting class warfare and a Robin Hood philosophy of taking from the “haves” and giving to the “have nots?”  Do you want to make yourself dependent on the returns of an oversold stock market that is eerily reminiscent of the 1990s?  I sure don’t.  The prudent course is to err on the side of too much, and allow your children to benefit from any excess.


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The Evolution of a Frugal Mindset

If you really want to excel in frugal living, the first thing to work on is not so much your spending habits but your mindset.  All the rest follows. living, you see, is more than making deliberate effort to save money.  If is more akin to a philosophy, one in which the person realizes that there is more to life than material possessions.  In fact, as you become more advanced in the way of practical frugal living, you come to realize that material possessions are, in many ways, antithetical to a peaceful, tranquil existence.  You value simple living.

You realize, for example, that life is more enjoyable at a slow pace; that there is tremendous value simply sitting on the front porch watching the sun rise or set; that few things are more enjoyable than playing an old fashioned board game with your spouse and young children; that being pulled thee different directions at the same time, all with a cell phone planted to your ear is stressful and to be avoided.  You rediscover the tremendous sense of satisfaction that comes from completing a car repair or a do-it-yourself project on your own.  You realize that using a good, old-fashioned rake is far healthier, both physically and mentally, than annoying your neighbors by blasting a leaf blower for hours on end.  You appreciate that a bagged lunch from home is not only healthier and lower in cost, but that it can be consumed in far less time than a restaurant meal, thus leaving you more time for more productive activity.

Aside from these epiphanies, you also come to learn that SUVs serve little purpose and that a Toyota Corolla or Yaris can get you somewhere every bit as effectively and for more efficiently than a Mercedes.  Then, as you advance in your development of the frugal mindset, you even learn that the people who feel the need to drive luxury cars for such reasons as to “show they’ve arrived” are shallow drips who you do not need to worry about impressing.  Likewise, you appreciate the fact that simply paying off the mortgage on your existing home is a far wiser accomplishment than moving up to a needlessly bigger house in a higher end neighborhood and that the rationalized excuse of “outgrowing the home” is pure nonsense.  You come to realize that many of the pretentious people who fixate on vehicle and home sizes are up to their ears in debt, and you realize what the expression “All hat, no cattle” means, as described in Stanley and Danko’s landmark book the Millionaire Next Door.

Putting these realizations together, you will eventually reach that utopic point of financial independence — the point where you are fee of debt and your resulting savings are sufficient to cover your modest living expenses with or without a job.  You may well continue to work out of personal choice, but you are no longer chained to a job or a boss that you hate.  You accrue that cherished “go to hell fund” described by the millionaires interviewed in the aforementioned Stanley and Danko book.

Sound pretty good, doesn’t it?

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Does Hypermiling Really Improve Fuel Efficiency and is it Worth it?

Hypermiling is the latest vogue approach to maximizing fuel efficiency with extreme driving techniques and vehicle modifications.  The father of hypermiling is arguably Wayne Gerdes of Wisconsin, who boasts of such achievements as getting 59 miles pergallon in a non-hybrid car.  There are now websites dedicated to hypermiling, complete with message boards on which drivers discuss the latest theories, techniques and accomplishments.

The hypermiling techniques employed by guys like Gerdes include such things as driving with windows up (to minimize wind drag) and with the air conditioner off (to minimize fuel consumption); tailgating trucks; turning the engine off at any time the car stops for more than a few seconds;  and even turning the engine off while driving on down grades.  Gerdes takes if much further by, for example, trying to coast to stops without using his brakes at all.

Still other approaches include vehicle modifications.  Some hypermilers like to install wheel covers to prevent wind from entering the wheel areas and creating drag.  Some go so far as to block off the vehicles grill, again to minimize wind drag.  So clearly the techniques run the gamut from odd to outright dangerous.

To hear the hypermiling believers talk, it is all well worth it as the techniques produce markedly increased fuel efficiency.  But do they really?  As someone who has experimented with many of the suggestions, I find the results mixed at best.  Admittedly, I’ve never taken things to quite the Gerdes extreme, but I have applied most of the techniques over the course of multiple tanks of fuel.  Suffice it to say, my results vary from those boasted by hypermile advocates.  In city driving, I accomplished only about a 2 mpg increase.  Highway driving does see a better improvement, perhaps 5 -6 mpg.  Here are my thoughts on some of the more common techniques:

Cutting the engine off at stops

I’m generally not a believer in this approach, unless you know you are catching the entire red light cycle of a known long light.  Gerdes says that he kills the engine if the light or stop will be for more than 7 seconds.  I don’t know why he decided to draw the line there, but I can’t imagine it’s worth it.  I say this because if you truly restart the engine that frequently, you are probably going to be buying a new starter every 10,000 miles.  That violates one of our fundamental rules of frugal living, which is the need to think it through and look at the bigger picture.

My practice is to turn the engine off if I know I am going to sit for at least a full minute.  That is generally only the case at a handful of traffic lights at major intersections.

Cutting the engine off while driving

The basic theory here is that by shifting to neutral and cutting the engine off, you can steal miles without burning gas at all.  While an appealing thought, it is generally not a good idea at all.  Why?  Because when you kill the engine, you will have only a few pumps of power braking left.  After that, you will have to press the brake with much greater force in order to stop or slow.  You also lose your power steering, which can be a frightening thing if you are on a curvy road.

Admittedly, I do occasionally apply this technique when coasting down grades with which I am very familiar and comfortable.  But it needs to be a fairly long one to make it worthwhile.  (See starter discussion above).  So if you have mile or so downhill stretches on your regular commute you might want to experiment with this technique.  Note too that this combines well when you have a long downgrade that ends with a traffic signal.  That way you can double up on the benefit by picking up a free mile or so and avoiding any consumption of gas at the light, all with a single engine stop and start.

For shorter hills, the better approach, in my opinion, is to simply shift to neutral while leaving the engine on.  This “free wheeling” approach gives you most of the same benefit without the wear and tear on the starter and without losing power brakes and steering.

Windows up and a/c off

Thumb down to this idea, at least in the southeastern U.S. where I live.  Again, this site is about practical frugal living.  Driving around in  a self-imposed sauna and arriving at work wet is not a practical approach to living.


I hate to admit it, but this one is a tough call.  From a safety standpoint, it is definitely not a good idea.  Not only does tailgating significantly increase the risk of accidents, it really pisses off other drivers, thus also increasing the risk of road rage.

And yet drafting off of a larger vehicle also works.  In fact, of all the techniques discussed, this is the one that has produced substantially elevated fuel efficiency for me during highway driving.  Nothing will boot miles per gallon greater than finding a nice large tractor trailer and following closely behind it for 30 or 40 mile.  And you don’t have to follow that close to see the benefit.  A one second following distance produces results.  Closer is better, but more dangerous.  In fairness, I should note that truckers hate this practice, and we can understand why.  But if you keep the one second following distance it’s not that bad.  I also try to spread it around, following  different truck every 8 – 12 miles or so.

So what is the bottom line on hypermiling?  It works, to some extent.  Most of the techniques, in my opinion, are not worth the trouble, risk and larger picture expense.  They also pale in effectiveness compared to the simple approach of regularly maintaining adequate tire pressure with a simple tire gauge.  Incorporating a few of the suggested methods, however, does have a place in the art of practical frugal living.

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Save Money on Insurance by Knowing the Harsh Truth About Insurance Companies

Oh brother, that annoying Allstate ad is airing again.  You know, the one with the obnoxious dweeb who pretends to be the latest hazard or absent-minded mistake that causes a huge accident before warning how screwed you will be if you have “cut rate auto insurance?”  The laughable suggestion is that you will be much better protected and defended if you pay more for invaluable Allstate insurance.  Allstate also likes to torture us with the endless stream of Dennis Haysbert “Are you in Good Hands?” ads.

State Farm, of course, promotes a similar myth by touting how this insurance company is “like a good neighbor,” while Nationwide promises how it is “on your side.”  Honestly, can these tacky companies finally stop it with the tired, cornball platitudes?

As both a seasoned consumer and an attorney who formerly worked with my share of these insurance companies, I can tell you all that you need to know when deciding which insurance company to choose for personal insurance lines (e.g., auto, home, and life).  It can pretty much be summarized with one sentence: They all suck, so go with the cheapest.

It sounds harsh, I know.  Why do I say all of these insurance companies suck, you ask?  For many reasons, but mainly because every one of them — Allstate, State Farm, Nationwide, GEICO, Liberty Mutual, and your local Farm Bureau Mutual Company — are penny-pinching, profiteering schmucks who don’t care a whit about you and who would gladly sell you down the river if it means they can close a file and save a buck on defense costs.  I like the way a law school professor explained the concept of personal insurance.  This, he explained, depicts the Allstate good hands while accepting your premium dollars:

This, conversely, is what becomes of those same hands when you file a claim under the policy:

All kidding aside, let me share some real life examples of how bad these insurance companies are.

First, from my consumer experiences: About eight years ago I finally got around to comparing my current insurance premium with other companies.  My wife and I had been State Farm insureds for roughly fifteen years running, with nary a claim made.  During that span of time, between our homeowner’s and auto policies, we had probably paid at least $25,000.00 of hard-earned money to State Farm.  I was quite surprised to learn that GEICO, with whom I had never been insured, gave me a quote that was a good bit cheaper than State Farm.  At my suggestion, my wife visited our State Farm agent and pleasantly explained the lower premium that was available to us.  I foolishly believed that State Farm would immediately offer to match, if not beat, that lower premium.  Surely, I thought, my long-time, “good neighbor” would be able to offer a loyal insured with no claims history the same premium as a company that had never insured me.

But I was wrong.  The local agent informed me that premiums are set my their underwriters with no room for negotiation.  I still had no clue how it was that GEICO’s underwriters were able to beat State Farm’s.  But the lesson was clear that customer loyalty amounts for nothing to the insurance companies of the world.

The State Farm agent did urge us to stay with her and suggested that we would see a marked change in quality of service.  The suggestion was that because GEICO does everything over the phone with long-distance faceless customer service representatives, we would be sorely disappointed with the quality of service.  This, of course, was little solace since I had never had occasion to make a claim in fifteen years.  So we made the switch and never regretted it.  (Fairness requires me to point out that about five years later, we called around again only to find that State Farm was beating GEICO at that time, thus proving that the lack of loyalty is hardly unique to State Farm.)

Now, let me share my more extensive experience working with insurance companies as a litigation defense attorney.  To appreciate it fully, you need first to understand how liability insurance works.  Not everyone realizes it, but when you have an accident, your insurance company owes you two primary duties.  One is called the duty to indemnify — or pay — for the loss.  In other words, the insurance company has to pay for the injured party’s damages up to the limit of your insurance.  If you have a $50,000.00 limit, for example, the insurer will have to pay the person you hit for up to $50,000.00 for personal injury damages.  Beyond that amount, you are on your own.

The second duty, which many people are not aware of, is a duty to defend.  This is a separate obligation that requires the insurer to provide you with a legal defense if you are sued as a result of an accident.   If you are sued by the driver that you hit in an accident, your insurer has to hire an attorney to defend you.  Insurance companies are supposed to defend your interest aggressively, the same as if their interests were on the line.

Through the years, however as the Allstates and State Farms of the world have sought more and more ways to increase profits, they have come up with a myriad of approaches to cutting defense costs.  One of their favorite tricks is to chisel away at their defense lawyers’ bills.  The trend started about twenty years ago when auto insurers demanded that defense attorneys provide discounted hourly rates.  Instead of paying $150/hr., the insurer might demand that the rate be lowered to $90/hr.  Insurers would also arbitrarily refuse to pay for certain expenses incurred in the course of defending a lawsuit.  They would refuse to reimburse defense lawyers for mileage incurred driving to courthouses in other counties; they would refuse to pay for postage and long-distance telephone charges.  They would arbitrarily complain of the length of time that a given defense tasks might take, then whack away at the bill further.

Even as these tricks cut away at defense costs, the insurers became greedier still.  It has reached the point to where many of these personal insurance carriers now simply pay a “flat fee” to attorneys who defend the lawsuits.  They might pay an attorney one or two thousand dollars for defending a case from start to finish, thus making the effective hourly rate $25/hr. or less.  Now ask yourself, how aggressive of a defense do you believe you will receive from an attorney who is paid under such an arrangement?  Fortunately, as my career advanced, I stopped working for these companies fifteen years ago, and I have never worked under this flat fee arrangement.  But I would hate to think of what a poor defense I would receive from an attorney paid by this method.

So what should you, as the consumer, do?  Two things.  First, call around and obtain quotes from all of the major carriers every year or two.  Do not hesitate to go with the cheapest option.  However, you also must be sure that you have a sufficient amount of coverage to protect your assets.  If you own any personal assets of any value, minimum liability coverage is not enough.  If you own substantial assets, you should not consider anything less than $250,000.00 in liability limits.  The far wiser course is to also obtain an umbrella policy that will provide you with an additional one million dollars of coverage.  Surprisingly, the additional premium for such an umbrella is not substantial, and it is well worth it.  I say this because it takes only one major accident for you to face substantial exposure to an injured party.

If you indeed purchase sufficient protection, it really does not matter which insurance company you choose.  Why?  Because the insurance company will essentially be gambling with its own money.  Allstate or State Farm can chisel away at its defense attorney and discourage him or her from doing what needs doing to defend the case effectively.  You will not care because the high verdict or settlement that results will come straight out of the insurer’s pocket, not yours.

As for first party insurance, which covers you for damage to your own property, you should also try to minimize your need for insurance at all.  Do this by carrying the highest deductible that you can manage and, better still, by dropping comprehensive and collision coverage altogether as soon as the value of your car declines significantly or as soon as you have enough in savings to buy a reasonable replacement car in the event that your vehicle is lost.

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