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Should you buy an extended warranty?

Extended warranties are not a good deal and especially not for new cars.

Dave Ramsey says that 75-85% of the cost of an extended warranty of a product goes to advertising, commissions, and profit. Therefore, if you pay $100 for a warranty on a product, perhaps only $15 actually goes to the cost of repairing or replacing the product you purchased.

Do the math: It costs the company $15 on average to repair the item and they charge you $100 for the coverage. For the value you get from the warranty, you could self-insure by putting half that money ($50) into a savings account earmarked for product replacements.

Here’s an option: If you buy a product with your American Express card, then the original manufacturer warranty is extended up to 1 year at no cost to you. That may give you nearly as much protection as the extended warranty the store tries to sell you, and you get it free from American Express. (To make this work: After you buy an item, staple the credit card receipt to the warranty card from the package, then drop them into a file marked “Warranties.” That way, you have the date of purchase, the American Express credit card that was charged, and the manufacturer warranty information all together. This is the information you’ll need if you file a claim with American Express.)