David Bakke, writing for the Money Crashers personal finance blog, says he “cannot think of a single instance where purchasing an extended warranty is a good idea.”
With one exception (which I will get to at the end of this column), I’d say Bakke has it exactly right.
And extended warranties — also known as protection plans — are often a bad idea whether the price is only a few dollars or hundreds or thousands.
Sometimes the less an extended warranty costs, the worse it is.
One example: A friend bought a $14.95 stylus to use with her tablet and was offered a protection plan on the stylus for $4.95. One-third of the original price of a small-ticket item for an extended warranty? It would cost her more in time to chase that warranty down on the very off-chance that the stylus broke than simply buying a new stylus. Talk about a poor deal for the consumer.
Extended warranties on more expensive items like appliances and cars are often equally bad but a lot more expensive. Consumer Reports points out that “retailers may push hard to get you to buy these plans because they’re cash cows for them.”
Good point! People are smart. If extended warranties offered real value, they’d recognize the value and want to buy. But that is simply is not the case.
If you’re organized and enjoy being thrifty, you can actually hit a bit of a jackpot with extended warranties. How? By not buying them and creating your own personal “protection plan” fund instead.
Open a savings account that’s separate from your other savings — a statement savings account or a passbook, if the passbook makes it less raid-able. Call it your Self-Insurance Savings Account.
Whenever you’re offered an extended warranty, note how much it would have cost you, and instead of buying the coverage, put that amount into your Self-Insurance Savings.
Shortly, if you need to repair or replace an item, you’ll have the money to do it and — bonus! — you’ll never have to worry about the retailer actually honoring the extended warranty. If an item never breaks, you haven’t paid for an extended warranty you didn’t use. It’s a win-win-win.
Self-insuring gives you the valuable opportunity to see firsthand why extended warranties are so profitable for the companies selling them.
Because every time an item doesn’t need repairs (which is most of the time!) or is covered another way (like a retailer’s return policy, credit card purchase coverage, lemon laws, or other insurance), you keep the money you would have paid for the warranty. It’s your cash cow now!
The one exception where it may make sense to consider buying even a fairly expensive extended warranty: If the amount of the loss is one you can’t cover with Self-Insurance Savings yet and have no hope of covering otherwise. And the worry would keep you awake at night.
That level of worry can be a signal to reconsider a purchase altogether, perhaps exploring other options until you find a way to feel comfortable moving forward without needing a protection plan.
Nick Maffeo is the President & CEO of Canton Co-operative Bank in Canton. “Smart About Money” is a regular column he writes for the Canton Citizen. Have a financial question you’d like to ask? Email to info@cantoncoopbank.com.