Ask Dave: Extended warranties usually not a good deal
Q. Are home warranties a waste of money if someone has been following your plan and already has six months of expenses set aside in an emergency fund, plus home insurance?
â Andrea
A. Home warranties are a waste of money even if you donât have quite that much set aside in an emergency fund. I recommend an emergency fund of three to six months of expenses to cover the unexpected things that life will throw at you. This amount of cash, sitting in a good money market account with check writing privileges, will give you easy access in the event of a financial emergency.
I donât recommend extended warranties of any kind. Theyâre just not a good deal. Youâre better off to self-insure against things breaking down, and putting what would have been profit and marketing dollars for the extended warranty company in your own pocket!
Put retirement on hold temporarily
Q. Should I stop making contributions to my 401(k) account for a year in order to save up an emergency fund? Thanks to you, Iâm 33 and debt-free.
â Blake
A. Congratulations on being debt-free at such a young age! I appreciate the credit, but the truth is I just pointed you in the right direction. You made the sacrifices and did all the hard work. Iâm really proud of you! Yes, my advice is to temporarily stop making contributions to your 401(k) until you save up an emergency fund of three to six months of expenses. It shouldnât take a year, though, to set aside an emergency fund if youâre debt-free and making decent money at your job. Just make it part of your monthly budget plan, and get that emergency fund set up in a few months.
Hereâs the way I look at it. If you donât have an emergency fund, but youâre contributing to a 401(k), thereâs a good chance youâll end up cashing out your 401(k) if something happens that leaves you with a large, unexpected bill. When you cash out a 401(k) early, you get hit with a penalty plus your tax rate. Thatâs not a good plan! And thatâs just one of the reasons I tell people to have an emergency fund in place before they start investing.