When should you spend to save?

"Are warehouse store memberships a good deal? How about extended warranties? It all depends on the products -- and on you, the shopper." - Liz Pulliam Weston

Sometimes you need to spend money to save money when accidents happen. A classic instance of this is insurance, be it life, home, medical, travel, or extended warranties. Often the benefits of insurance are obvious: you might pay a thousand to replace your home worth hundreds of thousands; or perhaps ten thousand yearly to protect your family from millions with serious medical injury.

With extended warranties the payback is less certain. Is it worth $20 to cover a $200 appliance for only one year? For me the answer is usually no. However an excellent article at MSN MoneyCentral suggest some cases where an extended warranty can be a good investment: laptops and equipment rental.

The MSN MoneyCentral article also looks at the cost of joining warehouse clubs, roadside assistance (like AAA), theme parks, coupon books and money saving appliances.

Bottom Line
Deciding whether to buy a money savings plan is really quite simple with a little mathematics. To calculate the break even point, divide the cost of club or discount membership by the percentage savings. Example: you are offered a $40 membership that will save you 10% on future purchases for one year at store X. The break even value is 40/.10 = $400*. If you plan to buy more than $400 during the year at store X the discount will save you money. If you spend less than $400, you won't make back the $40 membership cost.

*Math Note: 10% means 10/100 so you divide the cost by .10 instead of 10