Bank Deal: Earn 1.00% APY on an FDIC-insured savings account at Barclays Bank.
Extended warranties are, almost without exception, a bad deal for consumers. In fact, according to Consumer Reports:
“Retailers are pushing hard to get you to buy extended warranties, or service plans, because they’re cash cows. Stores keep 50 percent or more of what they charge for warranties. That’s much more than they can make selling actual products.”
Thus, while extended warranties were once reserved for high dollar purchases, many retailers have started pushing them for relatively minor items, as well. And why wouldn’t they? They’re practically printing money.
In most cases, however, you’re only paying for marginal coverage when you buy an extended warranty. Consider the case of a gadget with a one year manufacturer’s warranty. You can easily extend that to two years by using the right credit card.
Thus, the three year warranty that you’re being offered is essentially a bet that your purchase will break between 24-36 months after you purchase it. And guess what? Even if it happens, you can probably get something far better (and cheaper) by then.
So what’s a savvy shopper to do?
Create an “extended warranty fund”
Instead of buying warranty after warranty, why not create an “extended warranty fund.” In other words, whenever a retailer offers you an extended warranty, simply transfer that amount of money into a dedicated savings account*.
If/when problems arise, you can simply pay for the repairs (or replacement) out of your warranty fund. And once the fund builds up to a sufficiently healthy size, you can back off on your contributions.
There are two main benefits to self-insuring in this way. First, you’ll get to earn interest on the money as it accrues. Second, you’ll be the one that gets to keep the cash when your stuff doesn’t break.
Sure, there are bound to be some instances in which you would’ve been better off with the extended warranty, but remember… These warranties are designed to be profitable. Thus, more often than not, you’ll come out ahead by skipping them entirely.
*Note: Yes, I realize that this sounds suspiciously like an emergency fund. I prefer to make a distinction, though, as a broken TV doesn’t really constitute a true emergency, and thus shouldn’t be paid for out of your emergency fund.
- How to Become a Millionaire
- How to Get Out of Debt
- The Best Dollars I've Ever Spent
- How Our Estate Plan is Structured
- How We Paid Our Mortgage In Less than 10 Years
- Money Making Ideas
- How to Manage Your Asset Allocation with Multiple Accounts
- Consumption Smoothing - Save While the Saving's Good
- How to Save on Groceries
- How Much Life Insurance Do You Need?
- Eleven Great Books About Money
- Dave Ramsey is Bad at Math (693)
- Dish Network Customer Service SUCKS (536)
- $8,000 Homebuyer Tax Credit (429)
- Pay Off Mortgage Early or Invest? (424)
- How to Claim the First-Time Homebuyer Tax Credit (352)
- Termite Control: Sentricon vs. Termidor (329)
- How Much Should You Pay a Babysitter? (288)
- Ethanol Blended Gas = Lower Mileage? (272)
- Reduced Credit Limits? Share Your Experience (256)
- $15,000 Homebuyer Tax Credit (242)
- Buying Furniture off the Back of a Truck (237)
- Will Mac OS X Lion Kill Quicken 2007? (191)