Apologies in advance if today’s post contains a large element of stating the obvious.
But I’ve come to realise that the bleedin’ obvious needs to be spelt out. Repeatedly.
Part of the problem is that almost everyone thinks they’re normal and sensible when it comes to money.
I wouldn’t be surprised if Boris Becker thinks he’s normal and sensible when it comes to money. Boris’ career earnings from prize money alone were about $25m. Which should have been enough. But apparently its not easy for Hard-Pressed Working Celebrities to make ends meet and Boris was declared bankrupt earlier this year.
For Boris’ sake, I will repeat that every £1 you cut from your annual spending by reduces the amount that you need for financial independence by roughly £25. So attack your costs with gusto.
Part of the reason that people often think financial independence is impossible is that (other than a few megastar entrepreneurs, footballers etc) it’s not one big obvious thing that leads to financial independence.
No, financial independence comes from The Aggregation of Marginal Gains. In other words, being a bit smarter about each financial decision. Over time, each of those little gains adds up to bigger gains. And many of the gains then get together to have babies that grew up and have other baby gains. And so on and so on.
People often make the incorrect assumption that we all pay broadly the same money for the same stuff. This is not true: we choose how much we want to pay for most things.
So when a journalist gets told to write a complainypants article about inflation, falling living standards etc etc its never very hard to find examples to “prove” that the cost of living is spiralling out of control. Meanwhile frugal people are quietly saving money and wondering what all the fuss is about.
Let’s illustrate with car insurance.
The Escape Artist will concede that no one ever got rich JUST by saving money when renewing their car insurance. But sadly, millions of people seem to draw the incorrect assumption from this that its not worth saving money on car insurance and other routine expenses.
Despite all the complaining about utility companies, ~60% of people have never bothered to change energy supplier and are therefore on expensive price plans. So The Escape Artist can’t help feeling puzzled when people say its impossible for Hard Pressed Working Families to save money because of [insert your favourite reason here…e.g. high taxes / inequality / leaves on the line / wrong type of snow etc etc…].
Back to car insurance. We recently received our renewal quote for our annual insurance for the trusty Skoda Octavia. This was £328….a punchy 52% increase from the price of £216 we paid a year ago.
When The Escape Artist receives this news, does he fire up his keyboard and leave angry comments on the internet about how hard it is to make ends meet?
No he does not. The first thing that The Escape Artist says to him or herself is that:
Yep, that cheeky price rise is totally to be expected… the insurance company are seeing whether I can be bothered to check the renewal price against the market…this is a laziness (or busyness) test!
And then does something about it.
The correct way to buy insurance is not to automatically renew with your existing provider as if you had slipped into a coma.
Nor is it to choose the company with the most familiar name or with the cutest kids in their TV adverts. Nor go to a high street insurance broker with lots of expensive premises and employees. These are high cost delivery mechanisms based on expensive marketing.
No, the correct place to start is to unleash the deflationary power of the internet. So my first stop was a price comparison website.
I put in my details and the internet spat out a “cheapest” quote of £945 (!!!). At this point, I resisted the temptation to run back to my existing provider and
bite their hand off gratefully accept their renewal quote of £328.
Instead I put into practice the first Principle of Life Hacking: Experiment.
First, I tried varying the types of cover to see how that changed the price. I had asked for a quote on the basis of Third Party cover only (where you are only covered for damage you do to other people). You might think (as I did) that the less insurance cover you ask for, the cheaper it would be. After all insurance is expensive and most people buy far too much of it.
But not in this case. Apparently the logic is that many insurers assume that people just looking for Third Party cover only are slapdash types that don’t care about taking care of their own car or their own safety. Increasing the cover to fully comprehensive (where you are covered for damage done to your car, fire, theft etc etc) actually brought the cost of the quote down significantly.
I then did some more tinkering with other input assumptions to see how the quote varied in response.
Obviously some of these inputs are black and white answers to factual questions. For example, where the form asks whether you have any convictions for criminal offences, The Escape Artist recommends that you answer this question honestly. Partly because lying invalidates the insurance…but mainly because its the right thing to do.
But other inputs have some subjectivity and therefore wiggle room. Different answers to these sorts of question can make a difference to the cost. One such example is how you describe the occupations of the people covered under the policy. Mr and Mrs TEA have some leeway here, combining as we do a number of different vocations.
Insurance companies vary the pricing to reward less exciting occupations. So the trick here is to avoid describing your occupation in the manner of a badass from Game of Thrones. So rather than describe my wife’s occupation as Businesswoman, Entrepreneur, Mother of Dragons, Khalesi, Queen of the Dothraki, Ruler of The Iron Throne etc etc I instead opted for part-time accounts assistant. Which is also true.
You can also experiment with making yourself or your spouse the main policy holder (which is different from who drives the car the most) to take advantage of any sexism (if that’s what it is) in the insurers underwriting criteria.
I also experimented with changing the start date of the insurance policy. It turns out that if you want your insurance to start immediately you pay a higher premium than if you plan ahead a little and have it start in say 10 days time.
Why is this? Well the insurance companies know that the more time pressure you are under to renew, the less price sensitive you will be. Your objective is to avoid ever being a forced buyer of water in the Sahara. Once you understand this principle, you can see it operating everywhere in the consumer economy.
I experimented with different levels of excess (the amount of damage before you can make a claim). By raising this, you are partially self-insuring (cheaper) and you are also benefiting from The Alignment of Interests (another principle of life-hacking). You are credibly signalling to the insurance company that you are less likely to have an accident (now that your interests are more aligned with theirs).
I also experimented with the “add-ons”. For example, insurance cover for legal bills in the event of an accident. Or paying for a courtesy car. Unsurprisingly, adding these increases the premium. In general, these are sucker moves because insurance is expensive and most people buy too much of it.
But bizarrely, my tinkering revealed that ticking the box for unlimited Europe-wide cover cost no more than just UK coverage. This seems to violate the theory of “no free lunch” in economics. In practice, companies know that not all consumers are equally demanding. Sometimes, it’s a case of don’t ask, don’t get.
The result of all this tinkering was that the coverage got expanded to Europewide (take that Brexit!) and the premium came down to £224 a year.
I then had a choice of paying monthly versus paying one annual installment. The monthly installments (targeted at those living paycheque to paycheque) would have added up to about £25 more. So paying upfront yields a risk free return of over 10%….not bad in a world of zero interest rates. This illustrates the principle that those who don’t have a stash miss out on the best deals.
And other decisions made in the past contributed to lowering the cost. So my previous choice to pay less for basically the same car (and get a Skoda versus an Audi) will have reduced the insurance premium…as will the fact that wherever possible I choose muscle over motor. We don’t do that much mileage and so are less likely to have an accident. Every little helps.
These saving add up and, if invested, compound over time. At a return of 10% per year, every £100 you save aged 25 will be worth £4,500 in 40 years time.
I’m not saying the insurance couldn’t have been bought cheaper. One of the “risks” of writing a blog about saving money is that I know that a lot of the readers will be more hardcore than me.
So I accept that some readers may now be laughing at how much I paid. But that’s fine. If one of those readers calls out The Escape Artist in the comments and shows a much better solution, I will not dig in, bluster and attempt to justify “my” way as the best.
No, I will bow the fuck down, listen with respect and share the answer on this blog. And then go away and shamelessly copy the better idea myself next time.