Are extended warranties worth it?

Save a small fortune

The debate about whether extended warranties for electrical goods such as washing machines are worth it may not be the sexiest or most exciting personal finance subject out there, but it could save you a small fortune.

I was forced to consider this conundrum recently when in one single month our washing machine, tumble dryer and oven all packed up at the same time. It was a conspiracy, I was sure. As I put my hand in my pocket and drew down from my emergency savings, watching as all that hard work, discipline and time it took to save up get smitten by 80% in one fell swoop, I had to ask myself; ‘would I have been better off buying the original extended warranties?’

Using my emergency savings for such an event actually felt pretty good and I wrote about it in the article The Emergency Fund – how much, how to start and where to keep it. Having come out the other side, I ran the numbers to assess whether I would have been better off buying the extended warranties offered at the time when I bought them.

What exactly are extended warranties?
What exactly are extended warranties?

What exactly are extended warranties?

Most machines come with a manufacturer’s warranty which may last for three, six or 12 months. After that you’re on your own and they’ll accept no responsibility for anything that goes wrong.

Extended warranties are the add-ons that people try to sell you that go beyond that initial ‘free’ period. They cover repairs, parts and usually replace the whole thing if it’s irreparable. You know the score; the sales person really goes for it, uses scare tactics and makes a big deal about how not having it is basically financial suicide….’why wouldn’t you buy the extended warranty?’ You start asking them why it is needed in the first place when they’ve just been telling you for the last hour that this is the most reliable washing machine on the market today and you need it in your life, period. Occasionally, you get a half-hearted attempt from the sales rep and as soon as you decline, you’re met with that knowing smile that says ’nah, I wouldn’t either but I gotta do my job, ya know?’. So, are they really worth it and who’s right?

This was put to the test recently when in the same month my washing machine, tumble dryer and oven all packed up. One thing was for sure that as a family of four with two young children, these are mission critical appliances in the FI Guy 101 household. I never took the original extended warranties and now they definitely needed repairing or replacing. So I was mighty glad that I had an emergency fund saved up for such events. I’d always viewed extended warranty as a waste of money and a scam, but should I have actually bought them in the first place? Let’s look at the maths.

airport bank board business
Worth the investment?

Are extended warranties a good investment?

Using my example of the three white goods that went wrong in one month, I ran the numbers.

For each of the three machines, the extended warranty was about £5 per month. I have other such machines including the dishwasher and TV. So let’s say five qualifying items in our household, each with an extended warranty option of £5 per machine per month.

That’s £25 a month or £300 a year on something that may or may not go wrong. Over five years that’s £1,500! It’s a gamble, but did it pay off?

Well, if I had invested that £1,500 as a lump sum with an average return of 8% (I didn’t by the way), that would become £2,204 within five years! A total return of almost 47%. I know it doesn’t work quite like that (the above calculation is based on 8% return paid annually), but in principle it makes sense.

The above example, however, could be argued to be a little unfair as it assumes a one-off investment deposit of £1,500. I wouldn’t have paid for the extended warranties as a lump sum. They would have been £25 monthly instalments. So, what if I had invested £25 per month at an annual return of 8% instead? Well, the numbers still looked good. £1,835 in total by year five good, to be exact. The online calculator I used by the way can be found on our Resources page. It’s pretty handy.

What I hadn’t accounted for, was that three machines would go all at once…….after about two years. Nice one. The oven needed replacing entirely at £500 whilst the washing machine and tumble dryer could be fixed by the manufacturer but only if I now bought that extended warranty. This would cover the immediate repair required including parts and labour plus a further 12 months extended warranty.

white and black desk calculator on white graphing paper
What do the numbers say?

So, did I save money NOT buying the extended warranties?

For the washing machine and tumble dryer then, which broke after only 24 months,  I saved £240 by not buying the original extended warranty (£5 a month per machine over that two-year period).

To get them repaired, I had to now buy the extended warranties to get the repair. And what did they cost? About £300 for both. But that covered the repair cost and a further 12 months warranty. So I would have paid £300 for three years warranties when needed, rather than £360 had I taken them out in advance.

In fact, going on the basis you can buy the extended warranty at the time you need the repair and they are indeed repairable, it is never worth buying it in advance.

Annual Extended Warranty

(five machines)

Buying the £300 warranties for two machines at time of repair*

Year One

£300

£300

Year Two

£600

£300

Year Three

£900

£300

Year Four

£1200

£300

Year Five

£1500

£300

*assuming they are repairable…which is a gamble itself, particularly as the years go on!

battle blaze burn burnt
When it’s all just a burning, melting pile of crap

What if everything just blows up?

Extended warranties don’t just cover the repair, they mean that if the machine is totally mush, then you get a brand new machine. Clearly, this is unlikely in year one (and probably covered anyway), but the odds increase as the years go by.

And in my case, more than one machine can in fact go wrong.

Let’s add two more scenarios to the table: either three or five machines break and are irreparable within five years. Are buying the extended warranties in advance worth it now?

Annual Extended Warranty

(five machines)

Buying the £300 warranties for two machines at time of repair*

Replacing  three machines

Replacing five machines

Year One

£300

£300

£1,500

£2,500

Year Two

£600

£300

£1,500

£2,500

Year Three

£900

£300

£1,500

£2,500

Year Four

£1,200

£300

£1,500

£2,500

Year Five

£1,500

£300

£1,500

£2,500

*assuming repairable

So even if my three machines were totally irreparable, over the five years I would have been ‘even stevens’. But if all five blew up, worse case scenario, then the warranties are worth it.

Essentially, it all comes down to chance as to when you’re going to need that repair and how severe the faults are. If it all goes wrong quite quickly and the situation is major, you’re going to wish you had the extended warranty. But how likely is that to happen? It comes down to your appetite for risk and whether you feel lucky…..punk. Well do ya?

Aces high?
Aces high?

When does it make sense to buy the extended warranty?

What may change things is the cost of the item itself. My machines cost about £500 each. But what about if I was going to buy one of those fancy American fridges that dispense ice cubes or even crushed ice, so I don’t even have to open the door when preparing my 6pm Tanqueray Gin and Slim? Not only that but the small computer in the back that connects to the Internet and automatically orders more Fever Tree tonic water before I run out (doesn’t bear thinking about, does it)? Those things can cost thousands of pounds and imagine the price of parts and repairs? Whilst the extended warranty would also be comparatively more, I may well consider buying the extended warranty in this case, but it would depend on the cost and I would definitely negotiate.

There are also times when you can get an extended warranty just for registering the product on the manufacturer’s website. I did this with a Bosch hedge trimmer and got a further two years warranty on top of the 12 months it already came with. Nice.

For my situation and had I had my time again, would I have bought the extended warranties originally? No, I still wouldn’t have. Even though my machines broke inside two year’s, I saved money. One thing is for sure though, if I don’t take out the extended warranties next time (here’s looking at you ol’ faithful ‘small British fridge that makes me get off my ass and get my own ice’), I’m definitely going to invest it!

Now, wasn’t that exciting?

Here’s to the pursuit of financial fitness and freedom.

FI Guy 101

This blog has been part of the Crushing Costs series which explores ways to get your living costs down, so maximising your savings and living a more simple, happy and financially independent life.

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For more information on my background and financial goals, check out my first Personal Update #1 – Introducing FI Guy 101.

 

2 thoughts on “Are extended warranties worth it?

Add yours

  1. Love it, take the money that would have covered the warranty and invest it instead. If it’s needed then that’s why it was set aside. If the appliance outlives you or your home then that’s money made.

    Like

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