How to Lose Your Shirt: Extended Warranties and Insurance
Posted by admin in Buying Stuff
There are a lot of financial products out there that claim to protect you, and most are, in the words of Guy Kawasaki, total shiitake.
The worst culprits: extended warranties and insurance.
I believe there's a special place in hell for extended warranties. These warranties that you can buy for your car, your electronics, whatever are sold to you with the absolute assurance that the company selling them will win and you will lose. They've done the math and they know that on average, you will spend more on that warranty than you will ever get out of it.
They sell you on the "what if?" knowing that it will rarely come. What if it breaks? you wouldn't want to have to pay for a whole new computer, would you? With this handy little warranty, we'll come to your home, take it away, fix it and return it to you. If we can't, you'll get a new one.
Fine, but you know as well as I that it's likely nothing's going to happen & I'll have sprang for an extra hundred bucks or more to insure this thing that I'm already paying plenty to acquire. I can't call it a scam, because there's nothing really underhanded about it, but it certainly uses the psychology of fear to wrangle more money out of you.
Insurance is the same. Agents want to sell you more and more insurance, giving you all kinds of reasons for it. You should insure your baby, old people should buy life insurance before it's too late, you should insure your car for more, get a lower deductible if something should go wrong. All the while knowing that most insurance works against your financial goals.
You may be thinking that warranties are valuable, that you can name me one or two times when they sure did come in handy. Or maybe you're thinking that it's always good to cut your risk with a little insurance. I say phooey.
Yes, your car's going to need repairs, yes your computer might break or your XBox go on the fritz, sure you might need major surgery unexpectedly.
That's not a reason to spend your money on warranties and heaps of insurance. That's a reason to save, a reason to create an emergency fund that sits in your bank earning interest instead of in someone else's bank, never to be seen or possibly used again. Skip the warranty and make sure you've got a pot you can draw from that YOU control. Ditch extra insurance and heighten your deductibles so you're paying for catastrophes, not run-of-the-mill expenses for your car or your health, especially if you're young.
I know some insurance is necessary. You can't go without home insurance, and you wouldn't want to–your home is too big of an investment. But you can ratchet up your deductible so the monthly payment is lower, and you can do your very best not to use that insurance unless something major happens, so you don't get a rate hike. And, yes, you need to insure your car for liability reasons, but skip most other insurance except for catastrophic accidents. Pay for the fender benders on your own. And of course you need health insurance–but force yourself to pay for some doctor's visits with a higher deductible if it'll keep your overall costs down.
It stinks when something happens and you suddenly have a big outlay of cash. It is nice to call the insurance company and let them deal with it, or call the electronics superstore and have them give you a new machine. But it could be just as nice to pull from your emergency pile when something goes wrong, knowing that you saved yourself a bundle by not snapping up every protection on the market.
It's like Las Vegas–you win sometimes but the house gets you in the end. If it wasn't making them money, they wouldn't offer it to you. The difference? Vegas is fun.
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