Why I Don’t Buy Warranty Plans:
The $10 Bad Habit:
You have heard the story before, but let me summarize:
Woman: “Do you smoke?”
Woman: “How Often?”
Man: “About a pack a day.”
Woman: “What does that cost?”
Man: “I guess about $10 a day, so around $300 per month.”
Woman: “Did you know that if you took that $300 per month and invested it at 3% interest that after blah blah years and blah blah return you would have enough money to buy a Ferrari?”
The Man responds: “Do you smoke?”
Woman: “No, I do not.”
Man: “Then where is your damn Ferrari?”
The Warranty Myth
The warranty plan, whether its for your iPhone or you new car was NOT designed to save you money. We can all accept that, right?
No, it was created as an additional revenue stream for the corporation who designed it. It was designed to make money. Not for you, but for the seller.
Of course this only works if there is actual value behind it. Security, or at least the perception of security, has value. That is what they are selling.
Spending $600 on a new phone? For another $100 you can buy a warranty plan in cases something happens to it.
Except, when something happens to it, the warranty plan has either expired, doesn’t cover what happened to it specifically, or requires 8 hours on the phone to India and shipping your phone across the planet hoping to get a replacement sent back in 4-12 months.
Yes, I am being a little facetious here. But only a little.
The reason we are willing to spend that little bit extra for a feeling of safety is because of how much we dread paying that initial cost in the first place. We HATE spending that $600 up front, but we actually like the feeling of being able to justify it for only another $100.
On its on, $100 is a lot of money. But in comparison to the entire purchase its only 1/7th of the cost.
Where is Your Damn Ferrari?
The reason I am able to sleep comfortably at night, knowing I do not own a single warranty plan on anything, is because I am my own warranty plan.
My global warranty plan is my Ferrari.
This started over a decade ago. And I will be the first to admit that it is much easier to follow today than when I started simply because my warranty plan is well funded.
Consider this: If warranty plans are such good business, why not get into it yourself?
What this means: Anytime you are going to purchase a big ticket item, fund your own portfolio as your insurance plan.
Here is what I do:
Don’t buy anything that you can’t afford two of if you had to pay cash. This is a big thing for me and I am always so nervous when I hear other people buying $75,000 Chevy Tahoes with $600 in savings. I just can’t fathom that. This is a good rule of thumb to keep you from overspending. Develop this habit early.
Don’t buy the warranty plan that the salesman tries to upsell to you. They will be shocked, disappointed in you, ashamed, I have seen it all. Who cares?
Fund your own warranty plan portfolio. For me, this is my e-trade account. I mostly buy dividend paying stocks, and I do this every week. It used to be every quarter, then month, now week. Start wherever you need to, but definitely start.
Watch it grow. Re-invest your dividends manually or automatically, but reinvest them nonetheless.
Continue to add to this portfolio with your primary income. Always be adding money to this. Always.
Margin Accounts Explained
You may or may not have heard the term margin before. Margin just means borrowing. If you have $100,000 in your e-trade account that owns Dow Jones stocks, then you can margin or borrow 50% of it anytime you need at about 8% interest.
If you own riskier stocks, then your limited to 25% or sometimes even less.
Margin is a great tool that can be used for good and for evil. You should use it for good.
You own $100,000 of a stock paying 4% dividend, or $4000 per year.
You want to borrow $50,000 to buy a rental property. The 8% interest you pay to allow you to borrow against your portfolio instead of sell your stocks is also $4000 per year.
What the what?
You can borrow from yourself with no borrowing costs? You don’t have to sell your stocks and pay taxes on any gains or fees for the trade?
Someone should write a book about this! (Yes, I am writing a book about this right now.)
Back to Reality:
If you haven’t started yet, then this scenario is a few years down the road. But that’s ok.
But remember: If you are going to give up smoking, don’t you want to end up with a Ferrari?
I understand that everyone has heard a great warranty plan story about how the company saved the day. And that is great. This isn’t for everyone.
Mostly because too many people that give up smoking (no warranty plans) forget they need to save and invest in order to get that Ferrari. This is a multi-step strategy and involves more than budgeting. Its a lifestyle.
But what if every small, day-to-day decision you made, was shaped by this lifestyle? A cash flow lifestyle, if you will.