Take Control of Your Finances: Don’t Let Inertia Rule the Day

We tend to think that history repeats itself. I believe that’s because we have no idea how to predict the future. Or maybe we’re lazy. Whatever the reason, we think that because things have happened one way in the past they will continue that way in the future. Psychologists call this inertia bias.

This assumption of continuity might be convenient, but I’ll show you why it’s poison for your wallet.

Financial success relies on knowing when to change and when to stay the course. For example, how do you know whether to stay with your auto insurance company or switch to a new one? How do you know your cable company isn’t ripping you off? Do you still use that land line or is it there out of habit?

Just because you found a great deal today doesn’t mean it’ll still be a deal a year or 5 years from now. Your goal is to save and be more efficient, so you have to put in some effort. You can’t afford to assume things will always stay the same.

Auto Insurance

I’ll admit – it’s a pain to shop around and get several quotes. The internet hasn’t provided an easy way to compare prices between companies, so we’re forced to call each one separately. Calling to get three quotes could easily take an hour. This is well worth your time though, because yearly premiums can vary by $1,000 or more.

Insurance companies differ in how they assess risk and how much of that risk they’re willing to take on. To one company you might be a moderate-risk driver, but to another you could represent a low risk. In addition, companies often raise and lower their premiums based on which area of the country they’re targeting. If they’re trying to rid themselves of customers from your zip code, you may find your premiums increasing quite a bit.

Those who remain with their auto insurance provider year after year are probably paying more than they should for coverage. The same goes with home and renters insurance, so shop around at least every two years.

Cell Phone Providers

I’ve covered how to save on your cell phone bill several times in the past. Most people remain with the same old provider they’ve always used – most likely one of the Big Four (Verizon, AT&T, Sprint and T-mobile). If you’ve been reading the news recently you know that these behemoths are passing through large price increases whenever they think they can get away with it. They’re doing away with unlimited data, which is ironic because that’s where we’re headed with cell phone usage in America.

What does this mean for your wallet? You’re probably paying 50% more for cell phone service than when you signed up a decade ago. You’re also stuck in one of those nasty two-year contracts, where they lock you in and provide inferior customer service. Instead, switch to one of the low-cost, no-contract providers like Straight Talk, Virgin Mobile or Metro PCS. With Straight Talk for example, you’ll get unlimited across the board for $45 a month, no contract.

Here, remaining in an overpriced contract with one of the Big Four will cost you about $500 a year, or more if you have additional lines. Just because it may have made sense before doesn’t mean it does now. There are better options out there.

Buying a Home

Since the start of the crisis people have moved out of houses based on economic necessity and have moved in with parents or other family members. Some have become renters. Housing prices have tumbled the past five years as a result.

Now it looks like housing prices have finally hit bottom, and interest rates hover around 3.5% for a 30-year loan. That’s the lowest rate on record. If buying a home makes sense in your life, this is the time to act. Prices don’t have anywhere to go but up.

If you’re looking at the gloom of the past five years you might assume prices will continue to drop indefinitely. You may be sitting on the sidelines, waiting for the economy to pick up again. When it does you will have missed your chance.

So Much “Normal”

With inertia bias such a large part of our lives, is it any wonder we have so many words in the English language to describe how things are always done? Typically. Usually. Normally. Generally. Ordinarily. Regularly. Characteristically. Did I miss any?

Like bad habits, inertia is tough to break. But your financial health depends on your ability to know when to change and when to stay the course. Shatter those molds and watch the savings add up!

Can you think of a time when inertia caused you to spend more than you should have?

Photo by thestrategyguysite.com

3 thoughts on “Take Control of Your Finances: Don’t Let Inertia Rule the Day

  1. Pingback: Friends of the Family: Labor Day Weekend Edition - The Family Finances » The Family Finances

  2. Inertia bias is probably one of the reasons that most people disregard the likelihood of black swan events. For example, the US gov has never defaulted on its debt, it has never happened and therefore never will.

    Probability distributions in reality are not the perfect “standard distributions” that we are taught in statistics 101, rather they have fat tails which are represented by extremely unlike events. These events, while rare, are dangerously destructive to systems that are too streamlined and lack the redundancy required to absorb any abnormal shocks, think Lehman or AIG. Ironically, the more efficient the system the more susceptible the system is to tail end risk.

    • Yes, inertia bias can also be applied to macro events like government default. The danger comes when we fail to see catastrophic events like the housing bubble bursting or large banks failing.

      While it’s important to acknowledge events like this, in the world of economics you have to make certain assumptions. And in a capitalist economy that encourages entrepreneurship, those assumptions boil down to continuity of large government and banking institutions.

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