Instead of paying “warranty money” that may or may not be used for the intended purpose – set it aside in an interest bearing savings account and “pay yourself to insure yourself!”
I originally stumbled upon the concept of an extended warranty fund on FiveCentNickel.com. A short while later I saw that Flexo of ConsumerismCommentary.com was also writing about how extended warranties are almost always a bad deal.
When guys in their financial position talk… I listen.
The traditional Extended Warranty
The traditional mindset – the one stores want us to have – is to make your purchase, say “yes” to their offer of an extended warranty, pay them for that extended warranty, then hope that you never have to use it but feel good about the fact that it is there if you need it.
Sounds smart right? It may be, but there is a smarter way… one that involves you keeping your money and only using it if you have to! I love concepts that challenge me to think and live outside the box! This is no exception
The smart alternative to the traditional Extended Warranty
Wouldn’t it be nice if you didn’t have to pay extra for that extended warranty unless you had to? Good news friend… we can.
All we need to do is change the way we think a little – not always so easy to do right? Well… this one doesn’t hurt so bad, there is very little change involved.
Rather than agreeing to pay the store to protect our purchase, we are going to pay ourselves to protect our purchase!
It’s that simple really. When the salesperson offers the extended warranty purchase, gracefully decline but make sure you note the cost. Now take that amount of money and put it aside into an Extended Warranty Fund that you create and maintain, so that your money stays in your bank earning you interest and is there if you ever need it.
Brilliant right? I thought so too.
How I used Capital One 360 to create my Extended Warranty Fund
A few months ago we started banking with Capital One 360 and have never been happier. Because Capital One 360 does not have brick & mortar locations they have much lower overhead costs and thus need to charge MUCH less in fees in order to run their operations. In fact they are not fee based at all, but follow the old-school banking model of earning interest of loaned money. What a concept right?
Assuming you already have an Capital One 360 account… follow these simple steps to create a new savings fund:
- Click “Open an Account”
- Next to “Capital One 360 Savings Account” click “OPEN NOW”
- In the drop down list select the desired account type, I chose “Capital One 360 Savings Account – Joint”
- If opening a joint account, enter the joint owners security information
- Give your account a nickname (I used “Extended Warranty Fund”) and fund the account from the desired source.
- Check the necessary boxes and click “Open Account”
Don’t have an Capital One 360 account? I highly recommend getting one – they are the best bank I have ever dealt with… by far. Did I mention that I love banking with Capital One 360?
Why the concept may be hard for some to grasp
In America we are so used to paying other people for things that it is hard to break free and choose instead to pay ourselves.
The average American spends the majority of their lives in repayment on borrowed money. This thought process is a conditioned behavior that has been formed through years of marketing mastery. If we do something over and over and over and over and over, it will condition our response to similar stimuli. Paying ourselves to insure ourselves is a similar stimuli that, given a chance, will form within us a healthier financial mindset.
To the skeptical… consider this a challenge.
Start paying yourself to insure yourself today!
If you do not already have one, open an Capital One 360 savings account, create your own Extended Warranty Fund and prove that you are not a conditioned to pay others before paying yourself.
Financial Samurai says
Hmmmm, interesting concept. I studied insurance companies thoroughly in business school and the conclusion is simply that Insurance Companies exist for a reason, to make money off of us!
If the insurance companies weren’t making money off of us, they would not exist. Hence, they are usually getting the long end of the stick.
I never pay for an extended warranty. I try to make sure it breaks beforehand and fight like crazy to get it fixed and replaced!
I admit though warranties are great… saved my $800 Def Tech sub woofer this month, and my very expensive watch as well. But again I didn’t pay for an extension.
In fact, I just saved $2.1 million on lunch yesterday by switching the TV on. Huh? 🙂
I always thought the concept of paying for a warranty was funny. The seller is basically telling you that what you are buying may not live up to expectations, so why are you even considering buying it?
A lot of this should be based on someones risk profile. If they are pretty conservative, it may be worth getting the warranty. If they are more aggressive, self insuring the product may be a better option.
One thing to note, though, is that the price of the warranty isn’t (imo) the amount you should set aside. The companies get that value because of pooled risk… something you can’t take advantage of.
Assume: Product retails $1,000 and costs $900 to make, 100 people purchased the product with a warranty, 10 people need replacements (cost $900), 10 people need repairs costing $350 (valued at $450 if you had to do it on your own), 80 people don’t use it.
The expected value of this warranty is E(x)=probability of an event times the cost of an event…. E(x)=.1(900)+(.1)350+0(0)=$125.
So, the company can charge $125 per warranty and break even. Any amount above is pure profit. Let’s assume they charge $200.
Now Matt Jabs (being a savvy shopper) declines insurance and instead puts $200 in his bank account. However, you would have a 10% chance that the repair costs $450 and a 10% chance the replacement costs $1,000 (you would be paying retail, not cost like the mfg). Your expected value is $145, but is that a risk you are willing to take?
Just something to think about. Unless you buy A LOT of items that have warranties offered, hence pooling your own risk by having a warranty fund with 8 contributions, you should probably put in more than the warranty actually costs.
As a note: I don’t buy warranty funds unless on specific items. I think Consumer Reports usually recommends getting them on laptops (above a certain price) and LCD/plasma TVs.
Matt Jabs says
Ha ha, I love it when economists break the numbers down for me. Good stuff MLR, thank you.
I suppose this concept would be highly personal, where each of us saves what we feel comfortable with. What’s most important is that we grasp the concept that our money is better spent earning us interest with the possibility of never being spent than it is in the pockets of others.
My thing is this – most people never even take advantage of the regular manufacturer’s warranty, and our society has become a disposable society. A TV fails? you just buy a new one. Your camera starts taking fuzzy pictures? You get a new one. Most people never even realize that a lot of the problems they have with their consumer products may actually be covered under their manufacturer’s warranty. i wrote about it here
so my advice? Take advantage of the manufacturer’s warranty, because most products if they’re going to fail do it within the first year or two. Like matt says though – don’t buy an extended warranty. Self-insure against risk of product failure.
Matt, you’ve covered this topic before, but the one line that really does it for me is “In America we are so used to paying other people for things that it is hard to break free and choose instead to pay ourselves.”
You’re on to something quite a bit deeper with this. We like to pay others then assume everything is covered, though the outcome is usually something different.
Obviously companies aren’t going to issue warranties if they’ll take a bath on them, so they set them up with sufficient exclusions that they’ll come out ahead.
Our trust in these arrangements tends to be of the blind nature, rooted in the fact that we don’t know what we don’t know, and assume all is under control.
Most of us are better at looking out for ourselves than paid strangers will ever be.
I heart ING sub-accounts.
having worked retail (selling something that they finally offered an extended warranty on) . The purpose of selling the warranties is more revenue for the store.
When you buy an extended warranty at the time of purchase, did you ever consider the fact that most items (major appliances and televisions already come with a mfg warranty, so you are getting AND paying for double coverage>)
Pay yourself first, get the minute rewards of “interest” at least and be sure to take good care of the things you purchase.
We have gotten wreckless, including with our own physical self. No one is immortal.
If you buy 10 things that cost $1000, and the extended warranty on each is $100, when 1 of the 10 (10% failure) breaks, you have $1000 saved to pay for a new item. It’s not that each item gets its own extended warranty, but rather that they’re all lumped together.
This is a great idea and we’ve been happy with not buying an extended warranty. Saving some money on the side is a great way to protect yourself and still have control over your money.
I think one thing that’s helped is the amount of time we take before making a big purchase. Depending on what the item is, typically one of us will go ahead and scour the web, consumer reports, and friends to see what products have a good reputation in quality.
It’s not fool proof, but I think the time cost upfront researching helps keep costs down.
This is really a great idea because individuals will be earning from it as well. One should not be afraid to step outside of the box. Wonderful article.