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Look at the skyline of any major city and play the ‘who owns the tallest buildings game’. Almost always it’s insurance companies. These buildings are like the resort casinos in Las Vegas: they are evidence that, on average, people don’t win. I don’t go so far as Ned Flanders (who doesn’t insure himself because `it’s gambling’) but there is a similarity.

A warranty is a kind of insurance. You buy something, and pay the company a bit extra to fix it if it breaks in a given time period.

If you walk into Home Depot and purchase a washing machine, they will try to sell you the extended warranty. Imagine the warranty costs $100 for two years of coverage. Is it worth it to buy the warranty?

Think of the warranty as what it is: you are betting Home Depot that you will need more than $100 of repairs over the next two years and they are betting you won’t If you need $101 in repairs, you win, if you only need $99 (or 0) then Home Depot wins. Is it a good bet?

Well, you really only know one thing: the average person spends less than $100 in repairs on a washing machine every two years. If the average person needed more than that, the warranty would lose Home Depot money — they would either discontinue it or raised the price.

Statistically, if you want to save money, when you are offered a warranty, note the price and then stick that amount into a separate savings account for repairs. On average, over the lifetime of your purchases, you will come out ahead.

While I do have a separate `repairs’ ING account, I don’t always follow my own no-warranty advice. When I bought a shiny new MacBook Air, I also purchased the AppleCare warranty, even though it’s not mathematically the smartest thing to do. However, I did this because my laptop is a mission-critical device for me. In this case I was buying security.

So, if you have a fully-stocked emergency fund and would rather trade mathematical correctness for security, forgo the warranty and save your money.

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Header photograph by pvera

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