Every time your car insurance is up for renewal, you're faced with the decision of where to set your car insurance deductible.
If you raise it up a bit, you could save on car insurance premiums each month. If you lower it, you could ensure that an accident won't completely wipe out your savings, or worse, push you into debt.
How high a car insurance deductible is too high? How low is too low? As with most personal finance questions, there's no one right answer. That's why general rules such as the one-month car insurance deductible rule can be a useful way to ballpark the right amount for your budget.
How does the one-month rule for setting your deductible work, and is it a good rule for every driver? Here's what you need to know as you shop for car insurance.
What is the one-month car insurance deductible rule?
This rule for setting your car insurance deductible argues that you should choose an amount based on how much you put in savings in one month. That way, if you get in an accident, you would have to spend your monthly savings on repairs instead of stashing it in, say, your high-yield savings account.
In that scenario, the savings you've built until then will remain untouched, and you'll be back to building it up again by the next month.
This is a good idea that would reduce the risk of a car-related emergency derailing your financial goals for longer than one month. For those who put away a good amount each month, it's an easy strategy to balance the cost of car insurance with the financial risks of getting into an accident.
What if you aren't saving much (or anything) each month?
The one-month rule is realistic for many drivers, but it doesn't work for those who aren't setting aside savings each month — or not enough to meet even the lowest available deductible.
For example, if you've retired, you typically switch from saving to spending what you've worked so hard to save.
Whether you're living on a fixed income or paycheck to paycheck, in these cases, the one-month rule isn't going to work for you. How should you choose a car insurance deductible?
For most in these scenarios, the answer is likely to push the deductible as close to the lowest available one as you can while still being able to afford the premium. This will make your monthly bill a little more expensive, but also make your expenses more predictable.
For retirees in particular, how much that predictability is worth depends on how confident you are in your savings. Are you already withdrawing the maximum your savings can bear and worried you might run out? If so, you want to lower that deductible as much as possible to reduce the risk of an emergency knocking you off track.
On the other hand, if your retirement fund is healthy and you've padded your monthly budget with plenty of extra for nonessentials such as travel and entertainment, you can instead set your deductible at, say, one month's worth of nonessential spending. In a worst-case scenario, an accident will just mean one month of skipping out on your usual fun or travel plans.
Should your deductible be lower for luxury or collector cars?
Your car model affects your premium, but should it impact your deductible, too? Not necessarily. The premiums for luxury, exotic or classic car insurance are already going to be higher than they are for a less valuable ride. The amount you save by raising your deductible from, say, $500 to $1,000, might seem negligible.
At the same time, if you drive a high-end or specialty car, you've likely already budgeted for higher repair and maintenance costs. If you've been restoring a collector car yourself, you're probably handy enough to take care of some needed repairs on your own.
With all that in mind, you might be able to stick to the one-month rule, or you could raise the deductible even higher, knowing that you've either got the cash or mechanical skill to cover the less costly repairs.
Choose a car insurance deductible that your budget can bear
The underlying idea with the one-month rule is that your car insurance deductible should be set at a number that won't derail your financial plans for an extended period. As you play around with the different deductibles available, think about how long it would take you to recover from an emergency at those different amounts.
If money is tight and even a $500 emergency would be a stretch, accept the higher premium to keep that deductible lower. If you've got a healthy emergency fund or plenty of wiggle room in your budget — even if it means skipping a couple of weekends out or postponing a vacation — raise that deductible to enjoy lower car insurance rates.
