Financial Plan for a New Computer Under Warranty
In my recent article on why software defined RAID 1 on a PC workstation that I built myself, I explained why recovery time is so critical when the computer that you program on for a living goes down. Let’s take this a step further and talk about how I have financially planned to always have a working computer on hand. I will not only show you how to calculate how much it costs each month to constantly have a high performance computer at the ready, but also when things go well how you can have a fund for guilt free technology purchases.
As a bit of background about myself, I have been self employed for so long that I’ve never had a employer provided computer except those bought by my own company. If you do have such a computer then your employer needs to budget according to this math. I’ve seen too many developers saddled with slow nearly unusable computers. A word of warning, I’m going to talk about use of credit and leases for high end computers. My advice is assuming that you are a paid developer who needs a high end computer capable of compiling software, running virtual machines, running many different browsers at the same time, and that without such a computer your income stops. If you are a home user or student, please save money and buy just the computer you need and don’t use credit or leases to buy a computer you want but don’t actually need. Please don’t go into debt.
As a professional developer, a working computer, is a necessity not a luxury. There are a few rules that I observe in relation to my computing work:
- Always have a working computer
- When #1 becomes false, move swiftly to get a working computer
- Constantly save money to purchase the next computer
What this looks like in practice is that if I wake up in the morning to work and my computer has malfunctioned (a thing that has happened many times in my working life), I will immediately get up, go to an appropriate store, and buy a replacement computer on the spot on my credit card (with money in savings to pay it off that month). Warranty repairs are great, but they only repair the laptop, do nothing to address the 3-5 business day turn around time for those repairs, or the income you will not be able to generate during that time. Unlike car repairs, there are no loaner computers. As a professional, you don’t have the freedom to go without a working computer for 3-5 days. Development time is money! Tick tok.
Growing up I was always a bit of a talk radio and finance nerd, which was one reason I was so excited to happen to be on the same flight as Atlanta-based Clark Howard a few years ago.
Clark is extremely nice in person! As we sat on the flight others realized who he was and passed notes to ask questions, he was really interested in my wife’s mental health counseling work, I happened to ask his opinion on non-retirement investing for things like home repairs, car replacement, and other shorter term goals. He told me about the Vanguard balanced index fund option and I have since used that as part of my approach.
When one has access to credit, they might buy a computer on a credit card or a lease from the retailer (Apple and Dell and others all have leases), but if one looks at the total of payments this is seldom a good deal. It’s better to have the money ready to go. I personally buy my computers with my small business American Express credit card because it provides an automatic extended warranty on top of the manufacturer’s warranty. I then pay it off with money I’ve already saved for computer replacement. I have redeemed this American Express extended warranty at least four times in the last ten years, it’s been a very good deal for me as a professional who runs my computers hard.
Some well respected financial advisors are against extended warranties. The third party warranties generally have a low return vs cost and are hard to get the service work done in a timely manner. Additionally, you give up the benefit of your credit card warranty by buying a third party. For all these reasons I do not recommend buying a third party warranty for your computer from the retailer. However, manufacturer warranties have been worth it in my experience both from Apple and Dell.
While most manufacturer’s warranties cover 3 years, an additional year of coverage from your credit card will likely protect value when the computer fails shortly after the main warranty runs out. We developers run our computers significantly harder than the average home user, thus our machines fail faster. You will have 48 months that someone else will pay to repair or replace it when it inevitably fails. In my personal experience with major credit card extended warranty, they do not care if you actually repair the broken system. So when a MacBook Pro dies at age 44 months, and Apple gives you a quote of $700 to replace the system board, you can just buy the replacement system, claim the $700 back from the credit card warranty, and recycle the old system. This protected you from loosing the useful value of the now broken system.
Like with cars, buying a computer on a lease is a very expensive way to own the computer. But even more expensive is buying on unsecured credit that you do not pay in full. If you do not have the money already saved, then leasing the computer is better than nothing but that doesn’t mean you can’t prepare for the future.
If you find yourself in the position to plan a bit, you can take advantage of ordering lower end, but good for professional work hardware. If your work requires Apple hardware (iOS developer, etc) remember to buy from the Apple Certified Refurbished to save some money.
Here is the math I have used for the last twelve years with the estimation that the mean time between failures for a computer is about 18 months.
Download rietta-new-computer-calculation.xlsx (Excel format, saved with LibreOffice)
| Item | Value | Explanation |
|---|---|---|
| Computer Cost | $2,900 | Scenario is that you will buy the new computer at the end of the term and then sell the old one. |
| Useful Life in Months | 44 | Save cash and use an American Express card to get an extra year of warranty. |
| Old Model Resell Value | 25% | Over time your replacement bucket will grow as the results of your contributions, the resell, and your income tax deductions. |
| Credit Card Cash Back % | 3% | Your credit card’s cash back. Mine does 3% for computer purchases. Change as necessary. |
| Sales Tax Rate | 7% | Your State Sales Tax Rate, they get their cut |
| Income Tax Rate | 25% | You’re going to be paying income taxes on saved money |
| Old System Resell | $725 | <- Estimation of what you can sell the old computer for on the second hand market (eBay, your local community, bless a family member, etc) |
| New System After Resell | $2,175 | |
| Purchase Price after Taxes | $3,010 | |
| Apportioned Monthly Replacement Cost | $68 | |
| Total Income Tax on Savings | $46 | |
| Monthly Cash Savings Required | $69 | <- Transfer this amount automatically into your replacement savings account |
| Financial Cost After Resell | $2,331 | |
| Monthly Financial Cost | $53 | <- Your actual net cost per month for keeping a top of the line computer in use |
| Emergency Replacement Period In Months | 18 | |
| Resell Value of Warranty Replacement | 60% | Estimation of what a 18 month old high end model is worth second hand. |
| Apportioned Monthly Replacement Cost | $167 | |
| Total Income Tax on Savings | $21 | |
| Monthly Cash Savings Required | $168 | <- Pre-fund requirement to replace this soon with cash |
| Financial Cost After Resell | $1,212 | |
| Monthly Financial Cost | $67 | <- Your financial (not cash) cost to replace the system at 18 months with the warranty repairing the previous one. |
Think of this laptop replacement fund as sacrosanct as your 3-6 month emergency fund that all the financial advisors recommend you have. It is best not to use your regular emergency fund for this purpose though. If you had to, that’s one thing, but you know for a fact that the development computer upon which you earn your living and run hard will suffer hardware failure on a predictable schedule. Saving for its replacement is not an emergency, it a planned purchase.
As you set aside the money, I generally think of the following options as places to save:
- Save the first $3,000 in a High Interest Online Savings Account
- Will not protect you against inflation losses but is extremely liquid; and
- if you don’t use credit cards, be sure this savings is accessible via a debit card for your emergency purchase need.
- After $3,001 invest the funds to grow and protect from inflation
- you can start dripping into US Series I Savings Bonds that tie up money for 12 months but are guaranteed to match or beat inflation by the US Government; or
- invest in the 60% stock, 40% bond index fund such as from
- Schwab MarketTrack Balanced Portfolio (I don’t have personal experience, but understand they have no minimum investment); or
- Vanguard Balanced Index Fund (VBIAX) (this is what I personally do though it did have a $3k minimum initial investment)
Note that this investment should not be in your retirement account. Open a taxable brokerage account for it so that you can withdraw the money for the purposes of your technology purposes when you decide to do so. You will pay taxes, but only because the investments make money. When they lose money, you can deduct that from your taxes. Try not to cash out during a downturn in the market if you can help it. When you have been saving consistently month-after-month for years you have some flexibility on when exactly to do the replacement as long as you have access to the funds to replace the computer immediately at all times.
Finally, what happens when you have funded your laptop replacement fund and didn’t have a disaster strike and your current computer is working just fine. Well, that’s the fun part. You can do anything you want! You can stop adding to the investments and direct the money to other purposes, or you can use it as a guilt free source of funds to buy technology for yourself. Want a newer computer just because, you already have the money! Feel like a 16 TB USB hard drive would be super useful, buy it without guilt. Interested in donating a computers to a charity, you can do that to. You have the freedom to do what you want guilt free because you already saved the money for this purpose.