When to buy a warranty? The one rule to remember

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The Wall Street Journal's Cheapskate column took a look at extended warranties (subscription required) earlier this week. According to the column, "There's no mystery why retailers push them. In some cases, they make more profit selling the warranty than they do selling the actual gadget. The mystery is why consumers get them. If the retailer makes a lot of money selling them, then it stands to reason the consumer buying the warranty isn't getting a great price."

I'm firmly in the no extended warranties camp -- it's overpriced insurance and in the long run, I'll do better taking on the risks of product damage myself. Here's the rule I use for when to buy and when not to buy a warranty:

Never insure against a risk that you can afford to take. But if a product is expensive and vital to your life/work/happiness and would be prohibitively expensive to replace out of pocket, you should cough up the cash for the extended warranty, even if it's a total ripoff.

If someone tries to sell you an extended warranty for an iPod, you shouldn't buy it: It's a risk you can afford to take and most of the time you'll come out ahead by not buying the warranty.

But if you're starting your own business with very limited capital and need a $5,000 piece of machinery that your business will die without, you should cough up the cash for the extended warranty.

And that, I would say, is about all there is to extended warranties: If you can afford the risk of having to buy a new one, skip the warranty. If you can't, buy it.
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