Dave Says No: The Controversial Home Warranty
Imagine this. You are working the baby steps, you realize you bought a house maybe before you should have, but ok, you are still doing alright, you are going to get out of debt and then tackle the house later, but then one day you are sitting in FPU or listening to The Dave Ramsey Show, listening to your Financial Hero and he says Home Warranties are STUPID, Don't BUY One! You have one. Oh CRAP!
Let's stop and evaluate. Dave is all about COMMON SENSE. He teaches us to THINK for ourselves. So it may be that you should go and cancel it, but FIRST you need to think through whether or not you can CASH FLOW the repairs that warranty would cover.
For those who are in Baby Step 3+, a home warranty is definitely NOT Necessary. A partially or FULLY funded emergency fund would cover any repairs that a home would need, right? But, a home warranty, might actually be a viable option if you are in baby step 2 AND forsee actual repairs that need to be done in your home during the year.
Take our house as an example. It was built in 1964 (that was the year my mom was born), 50+ years ago! It is going to have a few issues that need to be worked out, we have a boiler that was put in the same year the house was built and a 20 year old air conditioner. Both of those are ticking time bombs. It is only a matter of time before their parts break or the whole unit breaks. In the last year, we have already had to have the boiler fixed because it wouldn't heat the downstairs half of our house. Also in the last year we have had to replace: the water heater, the garbage disposal, fix (then replace) the dishwasher, 14 feet of the main sewage line, and have had some work done on a drain in the kitchen. All of this was covered under our home warranty.
Those repairs would have cost us thousands, when instead it only cost us hundreds because we had the home warranty in place. We did an analysis on how much the warranty cost v. what repairs we thought we might have and how much they might cost. At the end of the day the price of the warranty was only a fraction of what it would have cost to pay for those repairs out of pocket until we got to Baby Step 3. While you are working towards getting out of debt, as long as the repairs cost more than the warranty itself, then the home warranty is worth it in the short term, so that you can continue towards your goal of getting out of debt without stopping your debt snowball to pay for costly repairs.
If you have a newer house where you don't forsee costly repairs, then this is not worth it. Again, you must perform the cost-benefit analysis to make sure this is something that you can utilize while you are in Baby Step 2. It is common sense.
How do we pay for it? We don't like to add extra payments to our expenses, so we choose to pay for it all at once, general with our small tax return or with our "extra check" because we are paid on a bi-weekly basis, which means two times a year we have an extra pay check in a month. If we paid for it monthly or out of our monthly expenses (cash flowing it) it could slow down our debt snowball, for us that isn't something we wanted to do, so we tend to do one of those two options. Another option is working extra hours or getting money from an extra job for it.
The reason Dave says NOT to buy home warranties is because almost ALL of the people who purchase these warranties DO NOT end up using them and most of the cost of the warranty goes towards commissions and marketing, and that is how they make their money, so it is a complete waste for most people. On top of that the ultimate goal is to be able to pay for emergencies with your emergency fund. I would say YES, that is our ultimate goal. But while we are in Baby Step 2, we need to be able to not have major set backs and if we can mitigate that by paying a small price upfront (again if we know something big may be coming), then it is worth it.
So take some time and evaluate if it is the right move for you. If not, that's an ok answer. The idea is to use common sense, a little math, and to learn to think for yourself.
Like what you see here? Follow us on Facebook or Instagram for more weekly Personal Finance tips!