What an extended warrantee really is
It’s like adding short-term, add-on insurance to a purchase. When you sign up for an extended warrantee on a refrigerator you are paying for the convenience of having someone else pay for your repair. That sounds like a wonderful benefit except that you are over-paying for that benefit. You still have to go through the hassle of returning the item, arranging for pickup, or waiting around the house for the guy to show up.
How extended warrantee companies make money
All companies have to make a profit to stay in business (except charities and non-profits but I don’t know of any in the extended warrantee business). In order to make money they have to charge more for their product/service to cover the following expenses:
- Payroll for laborors
- Administration costs
The actuarial tables show that you have a very low probability of using an extended warrantee, at least not to the extent of how much you paid for it! If everyone used the extended warrantee then the company would be broke.
What a frugal person would do instead of an extended warrantee
Instead, do the following to save money and pay less for a warrantee-worthy repair yourself:
- Put the money you would have been charged for an extended warrantee into an interest-bearing savings account
- Use this special savings account only for repairs, if any
- Continue to save money to replace the item someday. For example: Save $10 a month in this account for 5 years ($10.00 x 60 months = $600).
- If the extended warrantee on a Sony flat-panel TV would have cost you $349, you save $10 a month, and you earn .60% interest then this savings account would grow to $949.19 – enough to fix any repair or replace the item outright.
- Continue for 3 more years and you would have $1,309.40. By the way, almost none of this is interest. I just tricked you into saving with a “sinking fund”.
Use savings in conjunction with the manufacturer’s guarantee
Most everything has a 30, 60, or 90 day return policy for defective products and many have a 1-year warrantee automatically included by the manufacturer – even the iPhone. I would venture a guess (this is coming from past experience) that most defective or broken items are delivered in that condition. Purchasing an extended warrantee on a brand-new item just doesn’t add up.
How does the the old joke go? “My [fill in the blank] broke the day after the warrantee expired”. Unless you have purchased an extremely expensive “Murphy’s Law Extended Warrantee” you probably just need to have savings to cover silly breakdowns or to save up and replace an old, out-of-date 60″ TV.