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Hidden Costs of Driving

September 9, 2013

This weekend was so much fun and will likely be one of the last fun weekends I have for at least a few weeks. On Friday, I met up with my best friend for drinks to catch up. We usually go to this amazing happy hour where wine is $4/glass and a bowl of mussels in white wine sauce is $5 so we can have drinks and dinner for about $12/person including tax/tip. Our usual place was super crowded so we decided to check out this new wine bar instead. It was a bit pricier that our usual place but with some careful planning we only ended up spending about $5 more than we would have. Since we do this maybe once a month, it was $5 well spent to catch up with a dear friend:)

Saturday was pretty awesome as well – in the morning, I read a couple cases for class this week and did some reading (not so fun), but in the afternoon we went to a birthday party for one of the kiddo’s classmates. It was so nice to get to talk to some of the other parents outside of pick up/drop off and the kiddo had a blast! After the party, we headed to my parents’ house for dinner and some QT with my grandmother, her brother, my cousin, my aunt, and my brother. It was so much fun hanging out and catching up with everyone, even if I did pass out at 9:30 when I went to check on the kiddo:P

Sunday was also a pretty fulfilling day – my company rents out a theme park for an employee appreciation day once a year and we can bring our spouses and dependents for free. Friends and family can join but must pay for tickets at a slightly reduced price. We were lucky enough that my parents, brother, cousins and niece all joined us for the event! Last year, the kiddo had a great time going on a bunch of rides (like 4 or 5) plus the water park. The kids had a great time this year, but definitely not to the extent of last year. This year my niece and my son made it through 2 rides each, plus lunch before promptly passing out in their strollers! We were hoping to take them on a couple more rides after lunch and hit up the water park but that was not to be.  I felt really bad because all of these awesome people in our life paid to come with us and didn’t get to really experience as much of the park as I think we all hoped we would.  Plus, we all had to drive a rather long distance to get there.

This brings me to one of the main points of my post – the hidden cost of driving. Too often when we think about the cost of the event or attraction we are going to and completely forget about the cost of driving. On a really long trip we might say that it takes a half a tank of gas to get somewhere, but don’t really convert it into dollars and cents. I know we tend to do this quite a bit, so this weekend ,I figured out how much we actually spent on gas for all our lovely activities. Luckily, I had filled up my tank right before meeting up with my best friend on Friday and I’m neurotic and always reset my mileage after filling up so I knew that all my gas usage was related to weekend activities. We used my car all weekend, and ended up using about half a tank of gas. My car has about a 15 gallon capacity, so half a tank is roughly 7.5 gallons. In our area, gas costs roughly 3.57/gallon which means we spent $26.78 just driving everywhere! Now, that’s not a crazy amount in isolation, but if we spend that amount driving around every weekend, that would amount to $1400/year, which is a rather crazy amount!

All this thinking about the cost of cars and driving got me thinking about another often overlooked expense – car insurance. It’s super annoying to deal with, and generally something that crosses my mind only when it’s time to renew our premium. I have had the same car insurance provider since I started driving and they’ve always had the best rates for me so I stopped comparing a couple years ago. Today, just for fun, I did some research to see what my premiums might be elsewhere, and doing so saved us about $60 on our biannual premiums. We didn’t switch carriers, but by looking at the default assumptions used to generate quotes with other agencies, we realized that our deductibles were too low and some of our coverage was too high – we don’t really need towing coverage. In over 13 years of coverage, I’ve used that service once.  I could easily just take the premium for that coverage, invest it, and have more than enough to cover that level of usage.  The other piece of coverage we reduced was rental car coverage – we’ve used that exactly 0 times.

With things like insurance and warranties, we often get short-sighted about the costs. It’s only $20, we think, that’s a great deal. What we often forget is a very useful statistical principle called “expected value.” And, I got news for you, after studying enough MBA cases, I can tell you that companies make a killing on premiums. So before adding that extra bit of insurance figure out what the likelihood is that you’ll use that coverage.  Let’s take the rental car coverage I mentioned above. $900 worth of coverage per incident came at a cost of about $19 per 6 months or $38 per year.  At this rate, you should maintain the coverage if you believe that there is a 5% chance per year that you will (1) have an accident and (2) that accident will leave you without a car for long enough to require $900 worth of rental car usage. Let’s use some historical numbers here:

  1. Assume you drive your car 2x per day, every day for 13 year = 9,490 drives
  2. Assume you used this insurance coverage 1x during that time period
  3. Assume for simplicity’s sake that you can only get into this kind of accident once per drive
  4. Your historical probability of success (i.e. getting into an accident and using the insurance) is .01%

Given the information above, you would break even if you paid $9/per year for this coverage to be worth it.  Any more than that, and you’d be better off without the coverage. I will caveat all of this by saying there are some things that are very hard to predict or whose expected value exceeds the cost of premiums. For example, having a baby with complications or  health problems, cancer, etc. In these cases, having adequate insurance is essential. I’m not saying that insurance is bad, just that we as consumers need to be more aware of how insurance works, and being honest with ourselves about what we actually use. Too often we add $5 here and $10 there to our premiums for coverage we don’t really need or that we get talked into purchasing. And while $5 here and $10 there doesn’t seem to be that much, over the course of a year, 5 years, 10 years – it becomes substantial amount and it is how wealth is accumulated.

Often, it’s hard to figure out how to cut $200 or $300 per month from a tight budget, but one can usually think of a way to spend $5 – 10 less per day.  It’s about taking baby steps and making small, sustainable changes to gain financial independence. And what’s easier that eliminating a cost for a product or service you almost never use?

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