Extended Warranty? Bad Idea!

I recommend that you never purchase an extended warranty.  They could be one of the biggest rip offs in the retail industry!  The probability you’ll ever use the warranty is pretty small.  They’re also really expensive so I create my own warranty by saving into a sinking fund for repairs and replacements.

The odds a product you purchase an extended warranty for will break within the warranty period are pretty low.   According to Josh Clark at HowStuffWorks.com, “Statistically speaking, a product is likeliest to break either early on, within the free manufacturer's warranty, or years down the road, after an extended warranty has expired.”  Consumer reports even states that “Products seldom break within the extended-warranty window.”

Extended warranties are also very expensive!  Approximately 80% of the cost of the extended warranty is commission paid back to the seller of the warranty. Often times, the cost of the repair is either less than or equal to the cost of the extended itself and many repairs are covered by the manufacturer’s warranty!  If you do use credit cards, some of them automatically double the manufacturer’s warranty.  Purchase the item on the credit card (then pay it off right away, of course) and you have peace of mind for a couple of years. 

Instead of buying an extended warranty, create a sinking fund!  A sinking fund is a way to save now for something you know you’re going to have to replace.  So when it’s time to replace that item, you have the money to pay cash!  Let’s take a TV for example.  If I’m offered a 2 year extended warranty on a new TV for $100, what I’ll do is save that $100 every year, or $8 a month, into a sinking fund so that in 4-5 years, if the TV breaks or needs to be replaced, I can pay for it, no worries, in cash without having purchased the extended warranty. 

So, I hope the next time you are offered an extended warranty, you say no, no matter how hard the sell! You probably won't use the warranty, and it is way too expensive.  You can create your own warranty plan by saving a few extra dollars a month into a sinking fund!