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One of the greatest things about personal finance is that it is so personal. You can take some thoughts or ideas that you read and apply them to your particular situation. Not all of the information may be applicable at the time, but it may very well be something that you can tuck away for the future to be used at a later date.
While most of the PF blogging world would advocated against buying an extended warranty, I would like to explain why there are certain situations when I think it make sense. I know that it has made sense for me with certain products.
Warranties Based Upon Time
One has to understand that I have six kids and there are certain items for which it makes sense to purchase an extended warranty, and these are the items that are based upon time and not usage. For example, we use our dishwasher twice per day at a minimum. Paying $600 for a dishwasher and adding $100 for a four year warranty is worth it to me since I know that I will be putting between 8 and 12 years worth of use on that dishwasher.
It was just last spring that at about the 3 year mark our dishwasher needed a new motor. We ended up getting a new motor for free when the cost would have otherwise been $360. Now I can figure that I can get another 2 years or so out of the dishwasher before needing to either repair or replace. The warranty was solely based upon time so it makes more sense for me to get it than an old retired couple that might run it 2 times per week.
The same holds true for the washing machine and dryer. I purchased the same four year warranty for these appliances as well. Again because we run about 2 loads of laundry per day on average to keep everyone in clean clothes, it only makes sense that the wear and tear on this appliance is well above average compared to the typical family. About 2 years ago, we had to have the washing machine motor replaced which would have been a $600 repair. Instead, it was absolutely free.
On the other hand, we don’t bother with the extended warranty on vehicles or computers. The amount of traveling that we have to do with 6 kids involved in activities is quite substantial. The fact that these types of warranties are based on mileage doesn’t work well for our family. Our Chevy Suburban turns 3 years old this month and has 102,000 miles on it. Much of the mileage is highway as well. It doesn’t make sense to waste the money on a warranty. Instead, we try to keep the vehicle in top working order and repair what is necessary.
Computers, on the other hand, are either purchased as cheaply as possible for the kids to do schoolwork on or are used by the adults only in the house. I have now had 3 laptops in about twelve years. The first one lasted for five years and the next one for four. I am on year two for the current laptop which is used for work, blogging, and personal projects.
My feeling is why pay almost 25% again the cost of a computer that I can likely take very good care of and make last for several years past any warranty. Plus when the computer finally dies, I usually benefit from the added features of the new technology such as wireless and processing speed.
So, these are my thoughts on extended warranties. For me, I have found something that seems to work.
Readers, what is your experience with extended warranties? Have you purchased and wished you hadn’t or vice versa? Share in the comments.
There are a lot of personal financial bloggers and finance gurus such as Dave Ramsey or Suze Orman who make a big deal about buying a used car and paying cash for it.
I don’t debate for one minute that you should pay cash and not take out debt to finance a vehicle, but I have always taken issue with the concept of used vs new vehicles and the elusive concept of depreciation which gets everyone up in arms and accepts as something to be avoided at all costs. Not that I deny depreciation exists, but it really plays little practical role as far as I am concerned. I will explain in a bit.
New vs Used Suburban
I have 6 kids, meaning it is necessary to have a vehicle that can transport 8 individuals plus have a lot of cargo space. For this reason, my wife and I have selected the Chevy Suburban as the mode of transportation for our large family.
Mini-vans don’t provide enough luggage space and passenger vans ride funny with a higher center of gravity. Plus the usefulness of 4 wheel drive in the snow and sitting at truck height makes my wife feel safer with kids in the car.
I am a scientific person at heart and enjoy data to make decisions. So when it is time to buy a vehicle, I look at used vehicles but don’t see the amount of depreciation that others would suggest.
For example, I went to the Chevy website and built my own 2011 Chevy Suburban LT with 2 wheel drive. I did this to match another vehicle I found on the Car Max website so I could compare apples to apples. I input the same features in the used vehicle I found and came up with a price of $46,785. I even got a DVD that isn’t on the used one because it was part of the sun and entertainment package, and I needed to get the sunroof for the comparison.
The used Suburban, on the other hand, was nicely appointed with power windows, door locks, power brakes, cruise control, and sunroof. It was a 2007 version and had 58,000 miles for a cost of $25,849. The question for me then is how many miles do I have to put on the vehicle to get an identical cost per mile driven. Then I decide whether I should buy new or used.
Let’s assume that I can get 116,000 miles from a Suburban. That means half the life of the used vehicle is gone but it costs more than half the price of the new one. It becomes a no brainer that I should buy new. If I can get 150,000 miles out of a vehicle then the cost per mile is $0.3119 for new.
I can get an additional 92,000 miles out of the used one and am paying $0.2810. So the used is cheaper in this instance. (I am assuming the cost of maintenance will be the same so that if transmission work is need at 100,000 miles, it is equal for both.) Thus the cross-over in cost per mile is somewhere between 116,000 and 150,000.
Getting Better and Wiser with Age
Previously, I always felt that 100,000 miles was about the best that I could get out of a vehicle. As a result, I have always purchased new. That is probably because of my personal experience more than anything.
The Buick Regal that I got from my parents was smoking from the engine on the day that I pulled it into the dealer to pick up and trade in for a car that I purchased earlier in the week. I was afraid they were going to kick me out and change the deal. It had about 105,000 miles on it.
My first Suburban was traded in with 135,000 in 2009 which was my previous record. I now have a Pontiac Montana (room for 8 passengers) that has 157,000 miles on it. I had to rebuild the transmission at 116,000 miles but it is paid for which is a great feeling.
As I get older, I think I am getting better at taking care of my vehicles and getting more mileage out of them which seems to change the equation toward getting a used vehicle. I still wonder about the level of maintenance that a used vehicle has enjoyed prior to my purchase.
But what if I were able to get 300,000 miles consistently. Using the above Suburban example, then the new costs $0.1559 per mile and the used $0.1068. The new costs 50% more per mile! But keep in mind that at lower levels of mileage (150,000), the difference was only 3 cents per mile or about 10%
So the bottom line is that if you tend to drive a vehicle for about 100,000 miles or so, often the new vehicle is the better deal. However, if you plan on keeping a vehicle for 150,000 miles or more, used is the way to go when strictly considering cost.
If the average American drives 15,000 miles per year and needs auto transportation for 50-60 years, he/she will drive 900,000 miles in 60 years. If he/she is able to get 300,000 miles per vehicle and save 5 cents per mile, the savings would be $45,000 over the course of a lifetime in 2011 dollars.
It is up to each individual to figure out how those savings might impact or benefit him/her. Contrast that the the savings from avoiding the $4 Starbucks twice per week during those same 60 years. The number is $24,960 to provide a little perspective.
Back to Depreciation
Personally, I don’t feel that depreciation is that much of an issue. There are only two times that it would matter. First, if you absolutely totaled the vehicle with a year or so of purchase at a time when you might be upside down and owe more than the insurance company will pay for the vehicle. I have never been in an accident that resulted in any bodily injury nor incurred more than a few thousand dollars damage.
The other instance might be if you had to sell a vehicle shortly after purchase. I have always owned my vehicles eventually and driven them until I became nervous about their ability to mechanically function. As I get older, I have been able to get more and more out of a vehicle. So depreciation has never been a consideration for me.
This exercise has been instructive for me. I enjoy teaching but also learning myself. Personally, I think it is worth the extra dollars to know that my wife and kids are in a newer vehicle whose maintenance I have controlled from day one. But I do try to get more and more out of these vehicles with each passing year. I am trying to get 200,000 miles out of my Montana and our current Suburban.
I am curious to know your thoughts. I know what several PF bloggers will say. But I would also like someone to do the same lifetime mileage exercise and cost comparison for a smaller car to see if the difference is more or less pronounced. My situation is somewhat unique with the large family I have. So feel free to do a comparison, write a post and let me know about it or comment below.