When buying an appliance, a car, or even a house, we usually have to decide if we want to buy a warranty that ensures that the store or manufacturer will replace or fix the item if it breaks down. Warranties are generally limited to a few years, and the more years you opt for, often called an extended warranty, the more the coverage generally costs.
According to multiple sources like Time Magazine, and the New York Times, extended warranties are almost always a waste of money. American consumers spend billions of dollars every year on warranties, but for every $100 spent on a warranty, only $20 is actually paid out.
The failure rate for most appliances is remarkably low, somewhere around 4%, so your odds of needing a warranty are actually pretty small. This is why such warranties are so ubiquitous – since they rarely have to be paid, companies offering them keep a lot of money.
But, there is always a chance something could go wrong with your new dishwasher or stove, so it is a good idea to have some way to take care of needed service or repairs. Instead of buying a warranty from the store, why not buy one from yourself.
Just open an additional savings account, name it Warranty or something similar, and each month put in the amount of money you would have paid for the warranty.
Then, if something breaks down, you can pay for the repairs yourself. But since 80% of warranty dollars never get used, the odds you never will need to repair the item. Instead, you just created a nice little pot of money that you can use down the road – and you have been earning interest on it.
This approach is often called self-insurance. It works great for appliances and electronic items, but you can also do the same for car or home insurance. You can raise the deductible on your policies which will lower your premium. Then take the difference between your old and new premium and put it in savings every month. You will have the money whether you need to use it or not.