What Does Dave Ramsey Say About Extended Warranties?

In the personal finance world, there are few names as well-known as Dave Ramsey. He’s the guy who says “live like no one else so later you can live like no one else,” pushing debt-free living, financial independence, and smart money decisions. But when it comes to extended warranties, Ramsey’s view is clear and sharp—he’s against them.

So, why does Ramsey hold such a firm stance against extended warranties? Extended warranties are often marketed as a safety net, protecting consumers from unexpected costs for repairs after a manufacturer’s warranty expires. The truth, though, as Ramsey often points out, is that extended warranties are rarely a good deal for consumers.

Here’s why: extended warranties are a high-margin product for retailers. Companies make a lot of money off these warranties because they are structured to benefit the company, not the customer. When you buy an extended warranty, chances are you won’t use it. According to data, most products don't break during the extended warranty period, making it a waste of money for the average consumer.

1. The Financial Perspective

Ramsey emphasizes that self-insuring is a better strategy. By this, he means that instead of paying for extended warranties, consumers should set aside money in an emergency fund to cover unexpected expenses. He recommends keeping at least $1,000 in a starter emergency fund and building it up to three to six months' worth of expenses over time. This fund can act as your own extended warranty, covering not only potential repairs but also unexpected bills or emergencies.

Ramsey explains that companies design extended warranties to prey on fear. They make you worry about worst-case scenarios, convincing you that without the warranty, you’ll be left financially vulnerable. However, statistically, the cost of repairs is usually much lower than the cost of the warranty itself, which is why companies push these add-ons so hard.

2. The Psychology Behind Extended Warranties

Extended warranties play into the psychology of risk aversion. People are often willing to pay extra to avoid the perceived risk of expensive repairs. Ramsey notes that this taps into a scarcity mindset, where people feel they need to protect themselves from every possible financial outcome, even when the odds are in their favor.

Ramsey argues that adopting an abundance mindset is key. Instead of worrying about the "what-ifs," focus on building financial security through savings, smart investments, and avoiding debt. This mindset shift moves you from a place of fear to a place of control over your finances.

3. Why Extended Warranties Don’t Make Sense

1. Most Products Don’t Break: Data shows that most consumer products, from cars to electronics, are built to last well beyond the period covered by an extended warranty. For example, in consumer electronics, less than 10% of products experience issues that would be covered by an extended warranty. The remaining 90% of buyers never make a claim, meaning they’ve paid for peace of mind they didn’t need.

2. Limited Coverage: Even when products do break, extended warranties often come with fine print that limits what is covered. Many consumers are shocked to learn that certain types of damage or repairs are excluded from the warranty, leaving them with a useless policy when they need it most.

3. High Cost, Low Value: The cost of extended warranties often far exceeds the potential repair costs. For instance, the average extended warranty on a $1,000 TV might cost $200, yet the average repair cost for a TV is only about $100. Ramsey argues that consumers should do the math and realize that it’s smarter to self-insure than to pay for a policy they likely won’t use.

4. A Better Strategy: Build Your Own “Warranty”

Ramsey’s solution is simple: cash flow repairs. He advises people to focus on building their financial safety net rather than spending money on extended warranties. Here's how:

1. Emergency Fund: Start by building an emergency fund that can handle unexpected costs. Ramsey suggests starting with $1,000 for minor emergencies and eventually saving three to six months’ worth of expenses.

2. Maintenance Over Insurance: Instead of paying for an extended warranty, invest in regular maintenance for your products. For example, if you buy a new car, regular oil changes, tire rotations, and inspections will go a long way in preventing the need for costly repairs down the road.

3. Debt-Free Living: One of Ramsey’s core philosophies is that living debt-free puts you in a position where you can handle unexpected expenses without relying on warranties, credit cards, or loans. By living within your means and avoiding debt, you’re better equipped to handle life’s financial surprises.

5. Real-Life Examples

Ramsey shares many real-life stories on his radio show about people who regretted buying extended warranties. Take, for instance, the story of a caller who bought a $3,000 extended warranty for his new car, only to find out that most of the repairs he needed weren’t covered. The dealer explained that the issues were considered “wear and tear,” which wasn’t part of the warranty agreement.

Another example involves a woman who bought an extended warranty for her refrigerator. When it broke down, she called the company only to find that the specific part that failed wasn’t covered, even though it was a critical component of the appliance. She ended up paying for the repair out-of-pocket anyway, which made the extended warranty useless.

6. The Business Side of Warranties

Ramsey explains that extended warranties are one of the most profitable products that retailers and manufacturers offer. In many cases, the salespeople receive commissions for selling warranties, which is why they push them so hard. The profit margins on warranties can be as high as 50%, making them a huge money-maker for companies.

For companies, warranties are a safe bet. They know that most consumers won’t use the warranty, and those who do may not receive full coverage. This leads to huge profits for the companies and little value for the consumer.

7. Exceptions to the Rule?

While Ramsey is typically against extended warranties, he does acknowledge that there may be rare exceptions. For example, if you’re buying a used car with a less reliable track record, an extended warranty might be worth considering—but even then, he stresses the importance of reading the fine print. Make sure you fully understand what is and isn’t covered and weigh the cost of the warranty against potential repair expenses.

In general, however, Ramsey believes that most people are better off without extended warranties and that it’s smarter to rely on self-insurance through savings.

8. Final Thoughts: Take Control of Your Finances

In summary, Dave Ramsey’s advice on extended warranties is simple: don’t buy them. They are almost always a bad deal, and consumers are better off putting that money into an emergency fund. By building financial stability through savings and debt-free living, you can handle life’s unexpected expenses without the need for expensive warranties.

Ramsey’s message is clear: take control of your money. Don’t fall for the fear tactics of retailers and manufacturers. Instead, focus on building a strong financial foundation that allows you to handle whatever life throws your way.

By avoiding extended warranties and practicing smart financial habits, you’re not only saving money in the long run but also taking ownership of your financial future.