Five Minute Finances is a series of tips on how you can save significant money or reorganize your financial life in just five minutes. These tips appear Monday, Wednesday, and Friday on Money360.
Many people sign up for auto insurance when they acquire a new automobile and then forget about it. They get comprehensive, collision, and liability insurance on their newest auto and leave this insurance on there until the vehicle is ready to be traded in, continuing to pay for insurance that’s no longer cost-effective.
The truth is that once your car reaches a certain point, comprehensive and collision insurance are no longer cost-effective. One rule of thumb for this is when the cost of a year’s worth of collision and comprehensive insurance is more than 10% of the current cost of your car. Why? When your car is devalued to this point, it’s often getting close to the point where you would merely trade it in for a newer model.
If you’re driving an older car that is getting near the end of its lifecycle, it’s almost always just one major incident away from being traded in for another car. When you start to feel this way about your current vehicle, save some money by calling your auto insurance agent and canceling everything but liability insurance on the car.
I don’t want to trade in a nonfunctional car! Why not? When the inevitable does happen and you do need to trade it in, the car’s value will be small regardless of whether a part needs to be rebuilt or not.
Of course, for many of you, this doesn’t apply – many Americans don’t drive a vehicle until it reaches this point. However, if you do find yourself actually getting the full value out of a car by driving it to this point, you can pocket some additional cash by just giving your agent a quick ring.