The headline says exactly what peddlers of things you don’t need to buy don’t want you to read. Or do.

One rarely saves money by spending it. There are two examples that make the case, the first being extended warranties such as those peddled (endlessly) by Endurance and Car Shield – to name two of the most aggressive peddlers of these fear-based insecurity blankets.

Many people are understandably terrified of being the owner of an out-of-warranty vehicle that needs a repair, in part because they don’t know much about vehicles and in part because because they know how much it can cost to repair them when something fails that’s no longer covered by the original (manufacturer’s) warranty. The extended warranty peddlers play remorselessly on this fear, peddling the psychological comfort that what they’re selling will cover the cost of fixing whatever broke.

There are a couple of points to consider, the first being that the extended warranty may not cover the cost of the repair. This is common with the shadier of the extended (aftermarket) extended warranties that are not endorsed by or backed by the vehicle’s manufacturer or the car dealership you bought the vehicle from. It ought to trigger some red flags when you hear them say they’ll “cover” any car – irrespective of its age or mileage. This is of a piece with those ads that say you can get “quality” health insurance with no medical exam, even if you’re 85 years old.

Sure you can. The question is whether they’ll pay out anything after you’ve paid in.

That sketchy extended warranty isn’t likely to. There will be all kinds of exclusions and limitations buried within the fine print you probably didn’t read (which is why it’s fine print; the idea is that they don’t want you to read it). When you try to get the issuer to pay for the repair you thought would be “covered” – it isn’t.

What is styled “health insurance” – our second example – operates similarly. The fear many people have that they’ll get sick and won’t have the money to pay for the care they need is what sells health insurance. It is a silly (and misleading) term , in the first place – because nothing can insure health. It is something you have today that you may not have tomorrow. Dread of the latter is what sells the insurance. More finely, dread that the cost of treatment will be so high as to bankrupt you – if you haven’t got “coverage.” Of course, it is well-known that even when people have paid for this “coverage,” it often does not cover these costs. Very much of a piece with the shady extended warranties. Both are money-making (not paying) operations. Many people fall for the bear trap that the companies that make money selling “coverage” are something like benevolent aid societies when in fact they are predatory wealth extraction schemes.

So, what to do? Well, how about saving some money – rather than spending it? Then, you’ll have some money, in the event you need to spend it – including on other things besides car repairs (and medical bills). The typical cost of an aftermarket extended warranty is about $140 per month. That works out to spending about $1,700 annually. If you spend that much for say three years, you’ll have spent about $5,000 on the “coverage.” How likely is it that, during those three years, your vehicle will need a $5,000 repair? It is possible, certainly. Just as it is possible you might have a crippling stroke tomorrow.

But is it likely?

The answer is – the odds are – probably not. Especially if you take good care of your vehicle (as you hopefully try to take good care of your body). You may have to deal with various repair costs over those three years, but will they amount to more than what you paid for the “coverage”?

If not, you haven’t saved any money, have you?

Even today, shy of a catastrophic failure (e.g., your vehicle’s transmission has to be replaced) it is unlikely you will face a repair that costs $5,000 over the next three years or even five. Imagine if, rather than having paid $140 per month for the psychological security of “coverage,” you put $140 per month aside for just-in-case. After three years, you’d have roughly $5k in a rainy day fund – probably sufficient to pay cash for most repair needs that come up, leaving you net positive at the end of three years. Possibly very much in the net positive, if only minor repairs are needed during those years. Unlike the warranty coverage, that $5k will still be there, too, in the event you need it going forward. The math gets better the longer you set aside some money every month. After five years of setting aside a sum equal to the cost of a typical extended warranty – $140 per month – you will have about $8,500 available, which will pay for even a catastrophic repair, such as having to buy a new/rebuilt transmission.

Yes, of course, you might have to deal with a repair cost that is more than you’ve saved. But the other option is the certainty of paying a small fortune for “coverage” that probably won’t cover anything. Keep in mind that the odds of a transmission failure or similar catastrophe  happening are statistically low, which means the odds are high you’ll be paying for psychological security. Keep in mind also that the odds are high the warranty-issuer will decline to cover the cost anyhow.

It’s a little scary to think of it this way, but that is precisely what the extended warranty and health insurance peddlers are counting on you to not think about.

. . .

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