Personal Finance Tips

It does not matter which part of the country you look at, the recession has been biting hard. One of the less obvious effects has been the fall in the amount of tax revenue collected by city councils and state governments. Property taxes? Well, no properties have held their value and many are unoccupied and awaiting sale. The take from local sales taxes and other sources have also fallen. There are deficits everywhere. No one wants to raise any of the taxes. Everyone in politics is therefore playing the game of finding cuts to public services. Except, every now and again, a politician comes up with an idea and you just have to rise in standing applause. The way of collecting money is just so magnificently outrageous you have to applaud the savviness of the politicians who could sell it locally and have the nerve to enforce it.

Welcome to the world of Californian ingenuity. With an economy equal to several European countries rolled into one, California has been facing major deficit problems for the last ten and more years. It all comes from the massive rise in population from 24 million in 1980 to 34 million in 2000. This is the largest population increase in any US state and it forced government at all levels to expand public services from new roads to schools to healthcare services. This would not have been a problem except Californian voters vote for tax limits as in Proposition 13 reducing reliance on property taxes for government spending. This has left the state with major deficit headaches for years. So, if taxes cannot rise and voters want to see spending maintained on public services, creativity is required.

Welcome to Huntington Beach unless, of course, after reading this, you decide you would rather steer clear of this friendly place. If you get into a traffic accident inside the city limits, you will be presented with a bill of up to $3,000 to cover the response of the emergency services. There’s actually a price list. If you are trapped in your vehicle, that’s $2,000 to pry the metal apart to free you. If there’s a fire, it will cost you $750 for the fire services to put it out – that’s on top of the $405 an hour for every fire truck that attends the scene of your accident.

First, the good news. If you are a taxpaying resident of Huntington Beach you get rescued for free. The tax dollars you pay cover the cost of the services. But if you live outside the city, you are liable. Now the bad news. If your auto insurance does not cover this expense, the bill comes directly to you. So, if you are planning a visit to Orange County (yes, the list of cities following Huntington Beach is growing rapidly) check out your auto insurance policy to ensure you will not be even more out of pocket than usual should you get into an accident. It really does not pay to have an accident in Orange County.

If you were building a time machine, you need only find a way of travelling back two years to find a land of plenty. Remembering how good it was almost brings tears to your eyes. Every week a bank, credit card company or finance company would mail you their latest offers. Cheap overdrafts, reduced interest with expanding credit limits or yet another way of converting that positive housing equity into cash for spending. There seemed no possibility of this coming to an end. Yet suddenly the price of gas was up to $4 and more a gallon. That proved just a passing straw in the wind. A month or so later came the bank failures, the credit crunch and a full recession with major problems of unemployment. Comfortable lives disappeared. Family budgets suddenly had to pay for debt reduction. Everyone was looking for ways to save money.

Lives must go on but the problem was how to stay mobile. During the good times, towns and cities had exploded. Gone where the high density housing developments close to workplaces. In their place came suburbs and then exurbs. People were organizing their lives around private transport and expecting to commute further and further to get anything done. What do you do when you find you cannot afford to replace your current vehicles but live too far away from work, schools and convenient shops? There is no private transport so, as a first response, you are looking at constantly patching up your old vehicles to keep them moving. But small repairs become major repairs, particularly if your mileage is high or you get into a traffic accident. You look around the neighborhood for carpools. This can work for routine journeys, but it ties you to other people’s timetables. That leaves renting.

If you decide to drive other people around and take payment, you need to check whether your existing policy covers you. The majority of insurers believe taking money makes you a taxi business and they want a higher premium. As with all insurance, use the online search engines to find affordable cover. But, in some parts of the US, it’s now economic to give up ownership. There are new rental systems allowing you to take a vehicle from a local pick-up point as and when you need it. Booking online, you only pay for the vehicle for the hours you use it. Economists have calculated the average yearly spend on car ownership is about $8,000. The average hourly rental rate is $15. That’s 533 hours a year in a rental car before you pay more than an owner. But here comes the warning. The rental car always comes with cheap auto insurance, but the companies are only interested in protecting their capital. You are usually asked to pay more to top up on cover against medical expenses for your own injuries. But even with this extra premium, it’s often significantly cheaper to rent as needed. Even better, you do not pick up from local offices where sales agents pitch extra options. Pick-ups and drop-offs are in local garages with no formalities. Check out what services are on offer in your area. If the cheap auto insurance terms are right, you will save to go down this road.

Many years ago, there was an early version of James Bond called Bulldog Drummond. Like Bond, he was a Brit and he had true grit when fighting an international criminal and his moll. The movies were less successful but the books are truly memorable. One of the best is “The Female of the Species”, the title being the unfinished version of “. . .is more deadly than the male” – a line from a poem by another Brit called Rudyard Kipling. When Drummond finally kills his arch enemy, the battle is resumed by his moll and she proves a deadly opponent. Indeed, throughout literature, the women who step on to the dark side always prove to be more complete villains than their male equivalents. It’s as if our horror of women doing bad stuff makes anyone good at it seem doubly frightening. Curiously, women drivers have always inspired a mixture of fear and derision. Men seem convinced women drivers are either uselessly timid or homicidal maniacs with little left between. Yet insurance companies who get to see all the traffic accident statistics across the US have a rather different opinion. The reality is women drivers are safer than men. They are involved in fewer accidents and, when an accident does occur, there are fewer people seriously injured and the vehicles are not as badly damaged. When it comes to setting premiums, you reward the people who drive more slowly and follow the rules of the road, and penalize the drivers who drive at reckless speeds and crash into anything that gets in the way.

There are several theories about differences between the sexes. Some say men have better spacial awareness. This allows them better control over moving objects at speed. Some say women do what they are told and so apply the speed limit and the laws on safety. Whatever the reason, three times more men than women are killed on the roads every year. Men aged under 25 are the most likely to die. They are the ones most likely to buy high-powered vehicles and want to show off. They are also likely to drive while under the influence of alcohol or drugs late at night when it is most dangerous. It’s a sad picture but insurance companies deal with the world as they find it. Premiums are high where the risk of claims is high. That means young male drivers pay the highest premiums of anyone on the road. Their only strategy is to prove they are the exception to the rule. They should buy low-powered family saloons and drive as little as possible. There must be no tickets for speeding or any other moving violation. There must be no claims. The men who prove they are as safe as the women earn the same lower premiums. As for the women, they will always get cheap car insurance premiums. The biggest savings comes from the insurance companies offering special women-only policies. It is worth shopping around to find the really cheap car insurance policies in the age range of 30 to 45. Assuming low mileage at conventional times of the day, the lowest rates will be offered to this group. Then as age increases, the premiums will edge slowly up again, reaching a maximum after the age of 75.

Looking around the US, all but three states mandate drivers to carry liability insurance. Some states have no-fault schemes. Others add in a requirement to buy a personal injury protection policy. As the healthcare reform bill was signed into law, many asked whether all insurance mandates were unconstitutional. This is a fun debating topic which sounds possible but will get nowhere. States have always had the right to impose conditions on people’s voluntary activities. If you want to drive, you have to carry liability insurance to pay compensation to anyone else you may injure. A more interesting question is the amount of the minimum requirements imposed by your state’s lawmakers.

Most of these minimums have not been changed for thirty and more years. For example, in 1972, Maryland set $20,000 for a person injured subject to a maximum of $40,000 for losses arising out of a single traffic accident. This was intended to cover medical treatment, loss of earnings while recovering, and so on. In 1972, the average annual salary was $12,000 and most hospitals charged no more than a few hundred dollars for treatment. Most new vehicles cost less than $4,000 to put on the road. You could easily buy a new home for less than $30,000. Looking back now, you wonder how we managed on so little money. Prices have risen fast for medical treatment. Injure the wrong person and the claim against you for loss of earnings is going to be frightening. Why should this matter?The liability coverage only pays out the minimum. You get to pick up the bill for all the other losses. So any savings or property you have may be taken to satisfy a judgment against you.

Should states increase their minimums? Many are thinking about doing so, but the politics of actually making new laws is difficult. During the recession, people are under financial pressure. Forcing them to spend more on vehicle insurance is not going to be popular among the poorer sections of the electorate. For the middle classes, there is the option to buy more coverage including an uninsured and underinsured policy. This is the American way. Those who have money can use it to protect themselves against losses. Those who are poor must take life as it comes.

In Maryland, the legislators have just increased the minimums to $30,000/60,000. This is curiously unreal. An increase to match the rate of inflation since 1972 should make the minimums $100,000/200,000. But, the political situation does not permit the lawmakers to restore the value of the minimums overnight. The answer was annual increases to inflation-proof the amounts. We would have arrived at $100,000 without anyone being too upset about it. But we have grown used to accepting the cheapest solutions even though millions of people across America actually lose money because of it. Why millions of people? These are all the victims of bad driving who never recover anything more than the minimums and suffer major financial losses as a result. This is injustice on a massive scale. And it will never be cured because it would cost too much to make the necessary increases. The only people who come out of this smiling are the investors in the auto insurance industry. Their profits and dividends have been rising steadily despite the recession. To protect yourself, always get auto insurance quotes from this site to find the most affordable coverage. Insurance may be mandated but you don’t have to pay excessive premiums.

The business of insurance is called underwriting. The company enters into a contract (called a policy) and agrees to indemnify a group of people like you against defined losses. So it uses some heavy duty math to work out the probability of the losses being incurred. It’s called risk assessment and relies on a complicated use of statistics. For vehicle insurance, the companies collect the details from every reported traffic accident in the US looking at the age, sex and occupation of the driver, the make and model being driven, the time of day, the road conditions, and the extent of the damage. The insurers share the information on the current costs of replacement parts and the labor to fit them.

They also manage to talk the health insurance companies into sharing their current costs on medical treatment for those injured in traffic accidents. With all this information, they can make good estimates of the cost of loss, i.e. the total amount they may have to pay out if they insure, say, 100,000 drivers. They take this estimate, add the cost of running the insurance company and a profit margin. This total is then divided between all the 100,000 as their premiums. Some companies divide the total equally so the good drivers subsidize the bad. But the majority adjusts the individual amounts based on the driver’s safety record. That way, each policy holder pays more or less depending on how well he or she drives. This is more fair.

But, to cut costs, some insurance companies make more general assumptions about the likelihood of losses. Instead of personalising the risk assessment, they focus the assessment on generalities. The most common is the use of the zip code. In some areas of a town or city, there are higher levels of vehicle theft and vandalism. Some areas have more people driving while intoxicated or impaired through drugs. Because of the design of the local road system, there may also be a higher number of accidents. The insurers therefore charge everyone living in those areas a higher premium. Apart from the unfairness at an individual level, some lawyers believe it is active discrimination because many of the zip code areas loaded with higher premiums have higher concentrations of particular racial or ethnic groups. California has formally prohibited insurance companies from using zip codes, credit scores and other factors not directly relevant to the assessment of driver safety. In those states, insurers continue to trade and make a profit. It has not been the end of the world they predicted.

So, depending on the US state in which you live, your premium may either be calculated based on your personal driving record, or it may be based on your zip code and credit score. Either way, the task of finding the cheapest car insurance remains the same. You have to shop around the companies licensed to sell policies in your state and find the best deal. If there is active competition between the insurers, the premiums will be lower and you will find cheap car insurance without too much difficulty. But if the state is unregulated and insurers do not compete, it will be more difficult to find a cheap policy.