Tuesday, November 27, 2007

A great use for an ING sub-account

Get Rich Slowly posted today about a fantastic way to use an ING sub-account: create your own extended warranty fund. When you make a purchase, instead of buying the offered extended warranty protection, set aside the price of that protection in a dedicated ING account. This amount will earn interest over time, and if you end up needing to repair or replace the item, you will have money set aside for just this purpose. The assumption is that, if you do this every time you have the option of purchasing an extended warranty, the account will grow considerably, since the odds of you needing the warranty protection are low. This assumption that you are unlikely to use the warranty is exactly why stores offer this protection in the first place: the warranty premium ends up being pure profit in most cases.

This is very similar to what Ms. Loonie is doing by saving up her tax payment rather than having income tax withheld by her employer. I really like this idea of paying yourself rather than giving the store an interest free loan (at best) or an outright gift (at worst).

Obviously, the success of this approach hinges on two things:
  • You only use the "warranty" account to repair or replace defective items

  • The expected failure rate of the item in question is low enough that declining the warranty is a "good bet"
The first point above simply requires diligence on your part. The second point is more up to chance, but some research can help to determine whether the warranty is a good buy. However, even if you end up "losing" the warranty bet, you will still have some money set aside to pay for the repairs.

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