The Truth on When to NOT Buy A Warranty
THE BIG THING I WANT YOU TO KNOW:
Seems like everything we buy offers some kind of warranty, and there’s a reason for that. Salespeople make A LOT of money selling you warranties, but do you need them?! If you have an emergency fund with at least three months’ expenses, which I recommend we all have, the answer is probably no.
Our senior advisor, Cliff, and I were chatting this week because he just bought a car, and he was laughing about his experience at the dealership because they were trying to sell him the warranty.
The salespeople at the dealership wound up the pitch to try and get him to pay an extra fifty dollars or so for a warranty and Cliff, who has been doing financial planning for MANY years, explained to them exactly why he wasn’t going to get the warranty and gave them a little financial planning lesson.
(Honestly a little jealous that they got a free lesson — he is a dynamite advisor.)
have you noticed that everything offers a warranty?
I went to Best Buy to buy a Fit Bit and they asked if I’d like to buy the extended warranty.
If you buy a home, there’s a home warranty.
If you buy a car, there’s a warranty.
If you buy underwear, there’s a warranty.
Okay, maybe not that last one, but you get the idea.
there’s a reason you can’t walk out of the dealership without a salesperson talking 17 times about the warranty
I bought my first car from Car Max, and if you’ve never bought a car from Car Max, well then you’ve never had the pleasure of sitting through a PowerPoint presentation leading you through all the reasons you should buy the warranty.
Is that because the car dealership is so interested in your well-being that they want to do everything they can to protect you? Or, is it possible, that perhaps they’re making some money off these things?
the reason everywhere you go offers a warranty is because they make so. much. profit. on these things.
Am I saying you should never buy a warranty? No!
A warranty is a financial tool, but not it’s not fit for every job. Sometimes the right tool is a hammer, sometimes the right tool is a screwdriver, and sometimes the right tool is hiring a handyman because I’m not good at fixing things.
warranties aren’t good or bad. the question is, “is it the right fit for you?”
How do I know if a warranty is right for me? Good question, and I’ll answer with another question:
Do you have an emergency fund?
If you’ve listened to the show for any length of time, you’ve heard me talk about my enduring passion for emergency funds. Before you invest, before you put money in your 401k, before you do anything, you have to start with a foundation of financial security. (More on my love for emergency funds here.)
Once you have that emergency fund in place, there’s really no need for a warranty
If anything were to happen to your car, or your Fit Bit, or your TV, you’ve got three months of expenses sitting in your emergency fund to cover it. It’s an emergency fund, that’s what it’s built for!
So instead of paying $50 a month on that warranty, you can bank it or invest it and let it build, because you’re covered!
but of course, there are always exceptions.
There are times when it makes sense to add a warranty even if you have an emergency fund.
A lot of people would say that the exception would be a home warranty, because, even with an emergency fund, what if the AC goes out or you have to put a new roof on? Etc, etc, etc.
Having that home warranty gives you a lot of peace of mind… BUT, I’ve had home warranties before through one of the very well known home warranty companies in the industry (*cough* American Home Shield *cough*) and my experience was, let’s say, not so spectacular.
Years ago, the heat went out in our home in the dead of winter and we had two little ones at the time.
I call up the warranty company, sit for HOURS on hold, and finally they tell me they can get someone out there in like four days.
So I do a little yelling, then my wife does a little yelling, and they decide to send somebody out the next day. Then they come out and try to fix it, and it’s like pulling teeth the get them to just replace the dang thing.
You tell me, friends, is that worth it?
If you don’t have any savings, and it’s a furnace that’s going to cost you thousands of dollars, it might be a good idea.
But if you have an emergency fund, that’s set up specifically to handle emergencies, then wouldn’t you rather just put it to use and hire whoever you want to replace your furnace?
My advice to you, in general, is if you have liquid assets, if you have an emergency fund, don’t get the warranty.
Most of the time, not all the time, but most of the time it’s going to be a pain in the tail to deal with those companies anyways. If you have that emergency fund, you can be free to invest that money and have the ability to fix something that needs fixing.
What does your emergency fund look like right now?
We are here to help you be financially healthy so that you don’t have to feel anxiety about money, and you can focus on what really matters — your LIFE and your DREAMS. We want to help you get there.
Have you ever make a purchase based on the salesman’s pressure?