Extended Warranties and service plans are everywhere. You can get one on almost any car, power tool, cell phone, major appliance, computer, vacuum cleaner, etc. They’re encouraged by employees and online by almost all major stores around the world. Salespeople can be so motivated that I dare you to try to escape from CompUSA without one!

So, do they make sense or not? In the last 2 years, my incredibly beautiful and intelligent wife dropped a cell phone in the toilet, another in a cup of water, and she sent my PDA phone through the wash machine. If you’re a cell phone serial killer, it may be a good idea. Otherwise, the casino has better odds for the rest of us. You don’t believe me? Look at the numbers.

Let’s look at how these things work. Some well paid number nerds (like me, except for the pay) figure out how many people out of every 1000 use their extended warranty and how much it costs per person. They use that information to figure out what their average cost will be for each policy they sell. Then, they mark up the price to include a nice profit and offer it to their customers. This means that extended warranties are statistically designed so that most people lose money (like casinos). So, the odds are against you. But, by how much?

Consumer’s Union found the majority of products that do break and are bought alongside extended warranties do so in the first 30 days. Your service plan isn’t going to help you there. You see, most stores have their own warranties for the first 30-90 days. After that, most manufacturers guarantee their stuff for the first year. Since most extended warranties don’t kick in until then, the majority of people waste their money on these service plans from the very beginning.

What if it breaks down after that? Consumer Reports found that just 13% of major appliances need repairs in the first three years. That desktop has a 37% chance, laptop is 33%, washing machine 22%, digital camera 8%, and the 30 to 36 inch TV comes in at 5%. Would you seriously hand over $149.98 for a 2 year extended plan on that 40 inch TV if the salesperson told you that there’s a 95% chance you won’t use it? Statistics show that the average loss on the slot machines is 4% and loss at the tables is 14%. And the media calls Madoff the biggest scam in history! .

At least the UK caught on. In 2002, the Office of Fair Trading found that the industry had failed to self-regulate its extended warranty policies. The Competition Commission concluded the industry was not acting in the best interests of the consumers. Bright bunch.

OK, so what if you are one of the unfortunate minority that bought the extended plan and your gadget actually broke? Please notice the fine print that says doesn’t cover anything outside of normal personal use or anything that is normal wear and tear. I think it’s amusing to point out that normal wear and tear usually occurs during normal personal use. I know, the point is to insure against mechanical mistakes of the manufacturer. But, I’ll get back to the point.

If you were one of the statistical minority that could use their extended warranty, the amount you’d spend on the policy was about the same as the repairs. In many cases, the cost of repair was less than the price of the policy. In plain English, you’re shelling out money in hopes that you’ll beat the odds twice just to break even. Not a good investment strategy.

Every time you’re approached by a policy pusher, “just say no!” Instead, put half of the policy price in a separate savings account (NOT your emergency fund). Then, watch with patient glee at the magical effects of compounding interest. If for nothing else, at least you have the money to repair or replace your gadget or appliance without having to wait 8 weeks for them to fix it and ship it back. Yes, that’s in the fine print, too.

Extended warranties and service plans can seem like a good idea… at first. But, the numbers show that they only pay off for an exceptional few… like my wife. Oh, she’s going to kill me. Maybe, I’ll talk about life insurance in the next one.

If you’d like a little more perspective about extended warranties, I can suggest Dave Ramsey’s book: “The Total Money Makeover” or David Bach’s “Fight For Your Money.”