You’ve scratched and saved for it. The object of your desire. During the checkout process comes the question?
“Would you like to protect your purchase with an extended warranty?”
It sounds so reasonable.
A family member bought a computer recently and asked me, “Do you think I should get AppleCare?”
Apple product are expensive, though that’s mostly because we compare them to cheaper things (another post for another day). If you are going to spend $1500 on a premium laptop, why wouldn’t you spend another $269 to protect it?
I’ve bought extended warranties. I’ve even bought AppleCare. I’ve bought “service plans” on computers, phones and cars.
It’s never been worth it.
I’ve lost money each time, because the feared breakdown of the item didn’t happen; or it happened well out of the timeframe of the service plan; or what happened wasn’t a covered issue; or because the delay in servicing through the warrantor took far longer than if the repair service took place on the open market (this is the most frustrating).
We all have that friend or family member that swears by an extended warranty they bought. They “got their money’s worth” because they just had so much trouble and the product had to be repaired so many times. Maybe they did come out ahead, even though I never have.
This is anecdotal, a handful of small examples. The aggregate is where the insurance (and extended warranty) game is played.
And it is played by multi-national corporations who are better than you at math. They are better than you (and me) at math because they employ Actuaries, who study for thousands of hours and who are paid $100,000 or more a year to measure risk.
If they weren’t making gobs of money on you, they would go out of business
Companies that sell you insurance for life or property are necessarily making money on those who purchase insurance (you and me). Else, they would go out of business. Insurance companies are vital contributors to our modern society, as they allow people to leverage a huge amount of risk for a small amount of money.
There are things you can’t afford to replace. You can’t easily replace your income that your family relies on if you die. You should have term-life insurance on yourself if others rely on your income.
You can’t easily replace your house, or your car. You should be buying insurance on property that you can’t afford to easily replace. Home insurance (or renter’s insurance), and auto insurance are not optional for most people. Even if you are rich enough to buy a new home or car for cash (this is rare), the insurance is so comparatively cheap you should be buying it anyway (and millionaires do).
Of course, extended warranty companies are also making money. Tons of money, else they would go out of business. You don’t have to be part of the profit centers for companies that sell extended warranties.
Should you be buying extended warranties on consumer products?
If you are buying things you can afford, then you are buying things that you can afford to repair or replace. That means repairing or replacing them without worry or stress.
Isn’t that impossible? How can you repair or replace a car, a washer and dryer, a refrigerator, a computer, a cell phone – without worry or stress? Who has that much money lying around.
First, the bad news. Eventually, all of those things will break and need repair, or break badly enough or become old enough that they need to be replaced.
Now, the good news. Not everything will break at once, and that means you can be prepared. Here are some tips I use to reduce my worry and stress about the things I buy.
Tip #1 – Save up and pay cash
You may have bought furniture, cell phones, a computer, and a car all on payments. 90 days “same as cash”, 1 year no-interest financing, etc.
Buying things on payments is now in the past for you (even though the payment may still be around). Starting now, you can stop buying things on credit or with payments, and start saving for them to buy in cash.
If you buy a computer with cash, or furniture with cash, etc., a few things may happen. Since you only have so much cash, you may choose to buy something more affordable instead of lavish. You may choose to shop around instead of buying impulsively, thereby getting a better deal or waiting for the “good” sale. You may find you don’t actually need the item you thought you needed.
These are all good things to discover, and saving up to pay cash is the initiator of those good things. You’ll buy more than you can afford with you do it “same as cash”, so fight against that temptation.
Here’s the thing you won’t realize until later. When you pay with cash for those purchases, if they break; are destroyed; get scuffed or scratched; don’t last as long as you’d hoped – you feel less stress and worry less about them.
Your life is better because you aren’t still making payments on an item that is now disappointing you. Paying payments for another year for a phone that stopped working is the worst feeling. I know from experience!
So, that’s why you should save and pay cash – what about how?
I’ll write more in future posts about budgeting your money each month. I use a budgeting app called You Need a Budget, but you can use Excel, or even a blank sheet of paper, to do it too (it’s just harder that way).
Whatever method you choose to make your budget, you will simply list the item you plan to purchase as its own budget category, determine how much you want to spend on the item, and then decide when you want to purchase the item.
If you want to buy a new MacBook Pro for $1299 next year, you would consider the total cost ($1299 + tax = $1428.00, for example), divided by the number of months between now and when you want to buy it. Need it four months from now? Save $357 a month, then buy it.
If you need the computer four months from now, and you can’t save $357 a month, you must make choices. Consider a different item that’s less expensive, or if you actually need it in four months (maybe you don’t).
These are key considerations you wouldn’t be making if you bought it on payments or credit.
Tip #2 – Pay yourself the extended warranty instead
Don’t buy the extended warranty, and instead put the cost of the extended warranty aside in its own budget category, and never spend it. This takes discipline to leave money in your account (though it’s easier when you visualize budget categories in You Need a Budget).
If the product breaks, you have a head start on the repair cost. If the product works as expected, you saved the money and can eventually apply this to the inevitable replacement item.
Tip #3 – Pay yourself the repair costs
Find out what the average repair cost per year is for the item you are buying. Then, divide that amount by 12 save that amount of money each month in a budget category.
This works well for figuring out car maintenance or any item that has a regular fail rate or that you think will break. After a while, you may stop adding to these budget categories if they get large enough. The fund size will give you the peace of mind.
Here’s an example that hits close to home: if replacing your iPhone screen costs $129, and you saved $11 a month for a year in anticipation of breaking your screen, you can stop now. If you ever break your screen, you have the repair cost saved. If you never break your screen, at least you didn’t drop hundreds more on AppleCare.
For items without regular maintenance or repair costs, just have a (real) emergency fund and use that as needed.
If you don’t buy extended warranties, pay yourself the repair costs and warranty costs instead, and pay cash for items that you can afford, you will come out ahead. You will have less stress and more cash on hand to handle an issue, should it occur. And you won’t spend time thinking about how your stuff could break, because it is a small enough part of your life that you paid cash for it.
Thanks for reading!
If you have a story about an extended warranty working out for you, or not working out, share in the comments!