On his personal finance blog Consumerism Commentary, Flexo wisely advocates never falling for the extended warranty trap, instead setting aside the money you might have spent on the warranty and putting it into high-yield savings. The tactic lets you subsidize the cost of a replacement with interest, creating your own extended warranty.
Step 1. When you purchase an item, make note of the cost of the extended warranty. Don’t buy it.
Step 2. Transfer this amount to a special savings account that you will not touch until one of your “protected” items needs to be repaired. ING Direct lets you create sub-accounts, one of which you can name “My Extended Warranties” or “Warranty Fund.”
Step 3. Repeat steps 1 and 2 for all products you buy that might break or are associated with an extended warranty. This will build up a sizable Warranty Fund in your own name at your own bank earning interest for you.
Step 4. When one of your self-insured products breaks or otherwise needs repairs, dip into your Warranty Fund. Try to avoid using your Emergency Fund unless the Warranty Fund doesn’t cover the full expense and the product must be fixed or replaced.