Personal Finance FAQ Series: Are Extended Warranties Worth It?

Do you want to know the real dirt about extended warranties? Are they in your best interest or in the salesman’s best interest?

You could be blowing your money by buying the warranties, or you could be blowing your money by not having a warranty.

What’s the right answer?

Take a look at the video below and find out what to do. While you’re at it, you can get my 52 week Financial Game Plan by filling out the box right beneath this.

Are Extended Warranties Worth It?


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The transcript for this video follows below.

No.

In almost every case, you’re either going to be paying much more for the warranty than the probability of having the item break, or by the time it breaks, it’s nearly obsolete.

The best approach to determine if you need the warranty is to look at the probability of an item breaking. The category where warrantied items break the most is laptops. This makes sense, as you probably carry a laptop around but treat it like luggage, tossing it around like the gorilla in the Samsonite commercial and expecting it to take a licking and keep on ticking.

However, even in the case of laptops, which have a 33-43% chance of needing repair within 4 years, depending on whose numbers you use, you’re missing a couple of things.

First, chances are that there’s already a manufacturer’s warranty, at least for the first year. Second, you might have a warranty if you bought it with your credit card. So, chances are good that you are already covered for the first year without buying the warranty.

Then, you have to look at the value of your laptop when it gets repaired. With the continued advances in technology, a four year old laptop is generally pretty outdated. You’re repairing an obsolete item.

Instead of buying the warranty, put what you would pay in warranty costs into a warranty savings account. Each time you buy something where the salesperson offers a warranty, transfer the money you would have spent on the warranty into a savings account.

By the time something breaks which would have justified the use of the warranty, you should have enough saved up in the warranty fund to just replace that item with a new one, and you won’t be lining the pockets of the salespeople who offered you the warranties in the first place.

Reference: Washington Post

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About Jason Hull, CFP®

Jason Hull, CFP®, is the Chief Technology officer of myFinancialAnswers, an online comprehensive financial planning service.

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