Dave Ramsey is the founder of the Baby Step system but what does he think about extended warranties?
You’ve had it in mind to purchase a piece of electronic grilling equipment for a while. You’ve been ruminating about using the item, and imagining how you’ll brag that you’ll invite your friends over and enjoy home-made grills. You finally visit your favourite store to make a purchase. But before finalizing the deal by swiping your card, the cashier asks: Would you like an extended warranty?
Wow! An extended warranty? You take a glance at the grill with concern. You don’t want a damaged grill. So, you’re agreeing to pay an extra amount, even though most grills already have a warranty from the manufacturer.
Of course, no one wants to lose a valuable item. But is it financially expedient to make the purchase? Let’s dive into Dave Ramsey’s thoughts about extended warranty, so you can make a more informed decision.
What is an Extended Warranty?
Before helping you know whether this is a financially beneficial option or not, let’s first help you understand what it means.
Dave Ramsey defined an extended warranty as a pledge from a company. For example, your item under will be replaced for free if damaged under warranty.
A whole lot of things have some sort of warranties these days–cars, backpacks, washing machines, electronics, etc. Warranty contracts are often from 60 days after purchase, to as high as a lifetime warranty. And a great feature of this is that they’ve added to your purchases automatically.
However, Dave says an extended warranty is extra insurance on an item that’s beyond the covering of the original warranty. As opposed to regular warranties that are sold with the product, an extended warranty is sold independently–and this means you’ll pay more for them. Some third-party businesses major in selling extended warranties to product users. There are extended warranties on nearly any item–from computers to toys, pencil sharpeners, to headphones. However, let’s take a glance at some items that people mostly purchase extended warranties for.
What are The Items you Can Purchase an Extended Warranty For?
Although Dave Ramsey noted that there are extended warranties for nearly anything you buy, he also noted that extended warranties are more prominent for some items than others. Here’s a list of items that are mostly synonymous with extended warranties:
- Cars
- Electronics
- Homes
Let’s discuss each of those:
Cars
Dave believes that car dealers prioritize that their clients purchase a car extended warranty as that’s how they increase their earnings. However, Dave pointed out that most cars already have some sort of warranty. Thus, most car manufacturers will repair or replace your car for free when it delivers faults as a result of their negligence. Dave further pointed out that a car extended warranty costs thousands of dollars more, and you’ll hardly use it.
Also, if you sum what you’re paying for an extended warranty with your automobile loan, you’ll find out that it’s an outright rip-off, Dave says. Also, Dave noted that most car insurances don’t cover every liability on your path, you’ll have to get good car insurance that can offer you top-notch protection.
Electronics
Whether you’re making a purchase online, or you’re in line at Best Buy, you can’t purchase an electronic product without getting requests to pay more cash for an extended warranty. This offer comes solely because retailers know that you won’t mind paying extra to protect your purchases.
A good number of people purchase extended warranties for their smartphones without giving it a second thought. However, Dave says in his youtube video that cell phone extended warranties only protect defective parts–and they’re not protected in the case of damage, theft, or misplacement.
Dave further elucidated that there are multiple insurance types for your phone–like “service plans” or “phone protection plant.” But you’ll be expected to pay extra monthly, and you need to cover the pricey deductible before your tablet or phone is fixed.
Home
Dave explains that a home warranty covers home repairs–especially in cases of HVAC units, plumbing, electrical systems, and major appliances overhaul. However, he further explains that a home warranty differs from home insurance–which is more encompassing as it covers more significant problems like fire, theft, and flood. He summarized his opinion about home warranties by saying “if protecting your home is a concern, then it’s best to purchase a better coverage by opting for home insurance instead.”
Why Purchasing Extended Warranties are not Worth It
The fact that you can get extended warranties on several things doesn’t make it a financially expedient move. We’ve mentioned some noteworthy problems with using extended warranties, but here are some of the most prominent reasons why we think they don’t worth it:
Chances of Using Them are Significantly Low
Companies are not so nice to sell you extended warranties simply because they care for you. They’ve factored in their gains. They understand when their product may start developing faults. This means that, if you purchase an extended warranty from a car dealer, they know when faults may start to occur. As such, if a car dealer sells you an extended warranty, they’ll ensure that the warranty ends before the time faults occur in the car–ensuring that the odds of you cashing out from the warranty is super low.
Think of this: If most customers use extended warranties, then companies will likely not sell warranties as they’ll lose a great ton of money. Dave says the standard warranty on your item is fine–also, it’s free. And if you feel a standard warranty can’t protect an item, then you should only opt for a more reliable option.
It Doesn’t Protect Everything
The term “extended warranty” is quite deceitful as most of them cover just a few eventualities. For example, your car may be protected when there’s damage due to an electrical fault, or a major engine issue. However, it’ll not cover accidents, fire, or damage from natural disasters.
Or let’s say you purchased an extended warranty on your smartphone. However, the phone got damaged and you need to fix the screen. But this repair isn’t covered in the extended warranty, meaning that the extra $50 you paid was a waste. Also, you won’t want to be at the receiving end of the service company declaring bankruptcy.
Companies have perfected the strategy to ensure that you hardly benefit from extended warranties.
You Spend More than Necessary
You might be sweet-talked into buying an extended warranty with the promise that it’ll help you save money on repairs. But you can’t say that it’s free since you paid more than necessary for it. Extended warranties are pricey.
If you bought extended warranties for many of the items in your home, add them up, and you’ll see that’s it’s a lot of money in the bin. But assuming you saved that money. This will cover the cost of repairing some of your items if the need ever arises.
Dave also mentioned that about half of the cost of an extended warranty is the salesperson’s commission, and doesn’t come back to you. Extended warranties are common in checkouts because it’s a massive profit for people. Bottom line: Having an extended warranty is best described as a rip-off that will only benefit the seller and salesperson.
Is an Emergency Fund Better than an Extended Warranty?
Since Dave is asking that you don’t buy extended warranties, what does he advise you to do? He recommends that even if the manufacturer’s warranty expires, you should still reach out to them and inquire if they’ll still replace or repair the item. He reiterated that some companies go out of their way to make their product’s consumers happy.
If that doesn’t work, then he recommends using a part of your emergency fund. Rather than purchasing several extended warranties that you won’t benefit from Dave believes that you’re better self-insured by making the warranty payments to yourself. By doing this, you’ll always have enough money to fix your items any time there’s damage. Otherwise, you can just keep your money regardless. It’s a win-win situation for you.
Why you Should Budget for All Expenses
Dave believes that having a good budget is key to being better at managing your finances, and having an emergency fund. Anytime you make your monthly plan, you’re helping yourself reduce the probability of wasting your money buying extended warranties and other things you don’t need. It’ll also help you save for things you need.
The biggest benefit of budgeting is that it boosts your peace of mind and confidence to know the exact place you’re investing your money into.
To help make your budgeting easier, it’s best to opt for budgeting apps, as they help streamline your budgeting. Dave has reiterated on numerous occasions that it’s best to have apt control of your finances and invest in the things that matter most. One app he recommends is his very own EveryDollar. EveryDollar allows you to use its basic features for free. Thus, you may want to get started now by downloading one from your favourite app store.