Insurance is a great thing. With the great invention of insurance, thousands of homeowners are able, in a sense, to pool their resources; when calamity strikes the unlucky few, this financial pool can be drawn upon to rebuild their houses. This is what insurance is for: to protect you from devastating financial losses that you could not afford to suffer. To insure big-ticket items like your home is, again, a good idea. To neglect to insure your home would be foolish and irresponsible.

But, just because it makes sense to insure big-ticket items, it doesn’t follow that the same logic applies to small-ticket items. This is the mistake that many, many people make. They understand how insurance works for things like their houses, and they think the same logic works for insuring things like their cell phones and VCRs.

The bottom line is that you should not buy insurance to protect against losses you could afford to pay for yourself. This applies to items such as consumer electronics, cell phones, items being mailed, contact lenses, glasses, and predictable expenses, such as dental cleanings. And if you do the math, you’ll find that you’ll also come out ahead if you buy high-deductible auto and health insurance.

You may choose to try the following exercise. Every time you’re considering buying insurance for minor purchases, such as when you are buying a new DVD player, don’t buy that insurance. Record the amount that you saved on insurance, and keep track of the policies that you didn’t buy. Keep a running total of the amount that you saved by not buying such insurance. Then call your auto insurance agent, and increase your deductible from, say, P200 to P500, or from P500 to P1000 (the higher deductible the better, as long as you know you could afford to repair your car if you get into an accident, and as long as you feel comfortable with the amount). Do the same for your health insurance. Record the amount that you save each time you pay your premiums. (The best way to do this is to keep separate ledgers: Keep one for items such as consumer electronics, contact lenses, glasses, and so on, one for auto insurance, and one for health insurance.) Subtract from this running total the costs that you incur because of the insurance you decided not to buy.

While your ledger may dip into the “red” now and then, the vast majority of people who try this experiment will enjoy watching their balance move further and further into the “black.” The amount you save can be substantial. Ideally, you should put away the money you’ve saved, instead of just tracking it; consider opening a special “self-insurance” savings account. This way you won’t spend the money on something else. If your VCR does break, you will be able to buy yourself a new VCR using the money in your self-insurance savings. Over time, this account will likely grow. Once it grows large enough, you might feel comfortable raising, say, your collision insurance deductible even higher. The higher the deductible you can comfortably risk having to pay, the more money will go into your account instead of into your insurance agent’s pocket.