In my last post I mentioned that extended warranties are one of the worst types of insurance you can buy. The odds are heavily against the purchase of extended warranties working out in your favor. In spite of this many people swear by them and purchase them every time they are offered. Why is this?
Most likely these people have benefited from an extended warranty at least once. The one time when something broke and the extended warranty they so wisely purchased saved them several hundred dollars is never forgotten. This makes them feel kind of smart for purchasing the warranty and they will swear by them from that time forward. It will be almost impossible to convince such a person that extended warranties aren’t a good deal.
On the other hand, the many times they purchased warranties that were not used are long forgotten. It’s like they have a scoreboard that only keeps score for one team. No matter what the score really is, the scoreboard is always going to show they are ahead.
A scoreboard that kept score for both teams would quickly convince them that extended warranties are not a wise financial move, and would save them a lot of money in the process. I am proposing using a self-insurance fund as just such a scoreboard.
Here’s how it works. The next time you are offered an extended warranty, turn it down, and instead put the amount the warranty would have cost you in a separate bank account. Add to this account every time you are offered extended warranties. You might also consider increasing the deductible on your auto insurance policy and placing the cost difference each month in your self-insurance account.
If you have a situation where an extended warranty you passed up would have benefited you, or you have to cover a deductible on your car insurance, use the money in your self-insurance account to cover the cost. Over time this account will almost always grow to be more than enough to cover the little emergencies that extended warranties covered in the past.
You can also do this even if you are not in the habit of purchasing extended warranties. When that new TV breaks right after the manufacturer’s warranty runs out, even if your head knows that an extended warranty wouldn’t have been a good bet, it will still hurt to shell out the money for a replacement. Having the money in your self-insurance fund to cover the replacement will make you much happier about your decision not to purchase an extended warranty, and will help you continue making wise insurance decisions in the future.
A self-insurance fund is a fun way to put the odds of insuring against some of life’s little emergencies in your favor, and is a painless way to start building an emergency fund. Consider giving it a try.