buy or lease your cell phoneGenerally speaking, psychologists have established that positive centers of the brain are activated when individuals use the word “mine.” As in, that cell phone is mine. The word “theirs,” on the other hand, tends to stimulate a negative physiological reaction. This human idiosyncrasy is further provoked by a society that tells us that owning and accumulating assets is a sign of success, while minimalism denotes an inability to acquire and possess assets.

Despite an inherent desire for ownership over our products, there are times when we should consider letting other people own things we use.

Let’s take a look at the wildly successful app-based transportation company, Uber, for instance.  When it launched, Uber didn’t own a single vehicle. Despite that lack of ownership Uber has become perhaps the most successful transportation company of the cell phone era. The founders recognized that owning and maintaining certain assets can actually be quite burdensome. Instead, Uber leverages other peoples’ vehicle to make a profit while completely sidestepping a plethora of costs that come with owning a vehicle.

This concept got me thinking about whether we could apply similar logic to our cell phone use. Can we save money and avoid unnecessary costs by acquiring the latest cell phone via an installment plan? Let’s take a look.

Note: One point of clarification – I consider installment plans more of a lease because the average consumer never actually pays off their phones before upgrading. Thus, for most consumers, payments will continue in perpetuity.

The Price of a New Smart Phone

In 2017, the three most popular cell phone models cost an average of $900. This dollar figure is based on the assumption that a standard, non-upgraded cell phone was purchased within three to five months of the release date. On average, nearly half of these top-of-the-line phones are purchased on an installment plan, most of which feature no down payment and no interest.

Given the prevalence of these new cell phone sales methods, I wanted to look at whether it’s prudent to essentially lease your cell phone using one of these no-interest programs. But first, let familiarize ourselves with some of the more popular installment plans out there.

Financing Options

With a little research, I was able to find approximately 10 plans offered by carriers that allow consumer to make interest-free installment payments on their new cell phone as an alternative to pay-in-full transactions.

T-Mobile and Verizon Wireless offer two of the most well-known programs. Both plans have their own technical nuances, but for our purposes the financing details are mostly the same:

Qualifying customers can set up a two-year payment plan while financing their cell phone with 0% interest.

The big allure of these plans is that once the consumer has paid off 50% of the phone they can upgrade to a new phone and begin making payments toward that one.

Is that a good thing or a bad thing? It depends.

Let’s start with the (potential) bad: The payments you make on your phone don’t build equity. That means you won’t have any trade-in equity to use toward your next upgrade. Instead of starting with whatever equity you have from your payments, you go back to $0 and will probably be making payments for your cell phone in perpetuity.

What about the (potential) good? If you decide to abandon paying on your current phone, you can just walk away from the phone and restart your payments toward a new one. That means you don’t have to continue paying for an outdated phone. Imagine you own a car that you were upside down on (i.e., the amount you owe is more than it’s worth). You’d probably be thrilled if the lender told you that you could stop paying for the car if you just gave it back.

With this in mind, here’s the question you should be asking: Am I typically upside down on my cell phone?

Depreciation Rates

Everyone knows they shouldn’t be purchasing a cell phone as an investment. With each passing day, yesterday’s technology becomes more and more obsolete and your cell phone becomes less and less valuable. Even though we know this, the rate at which cell phone depreciate is still quite alarming.

Here’s how much some of the most popular phone models depreciate after just one year:

  • iPhone 6s 53%
  • HTC One M9 58%
  • LG G4 60%
  • Galaxy S6 Edge 47%

Let’s assume that you’d be halfway to paying your phone off exactly one year after you initiated a payment plan. You’d be upside down in three of the four examples above (and pretty darn close to upside down in the fourth example).

At this crossroads you have two choices:

  1. Continue paying off your phone.
  2. Upgrade to a brand-new phone and restart the payment process.

In light of the rapid depreciation after one year, moving to a new phone with a new payment plan doesn’t appear to be an unreasonable decision. But what do the numbers say?

Analyzing the Cost of Upgrading to a New Cell Phone

As I mentioned earlier, a new phone costs about $900 out-the-door. If you’re on an installment plan, you’ll have to repay $450 in order to reach the midway point where you can upgrade to a newer model. That means if you pay $37.50 a month ($450 a year) you’ll essentially be paying $450 every year for the right to upgrade your phone on an annual basis.

The average American who pays in full for their phone (i.e., does not use an installment/lease plan) upgrades their phone every two years. Assuming these individuals purchased a $900 phone, they are essentially paying $450 a year ($37.50 a month) to own their phone and upgrade every two years.

Sounds like the installment plan is a far better deal, right? Well, it isn’t that simple.

The individual who owns their phone still gets some trade-in value when it comes time to make that bi-annual upgrade. On average, these individuals will recoup about $100 for their two-year-old phone. This dollar figure is based on top-of-the line Samsung, LG, and iPhone owners and assumes the phone maintains the standard for “good condition.”

For instance, you can sell a two-year-old Galaxy S6 in good condition to for exactly $100 (price is as of the time of publication).

After accounting for the $100 resale value, the true cost of owning their cell phone comes out to $400 a year. Keep in mind that the owner gets to keep $50 in his bank account, but the individual who utilized the installment plan gets an entire year of a newer model. It’s difficult to quantify the value of this difference in user experience. But it isn’t hard to justify spending an extra $50 every year if you always want to have the best phone on the market.

The Opportunity Cost Aspect

While there are plenty of nuances to consider when making this decision, there’s one more that I want to look at – the benefit of having your money accessible to invest. Let’s suppose that you take $900 and invest it. If you see a 6% return during those two years while you’re making payments on your phone you’ll have made $111.24. In reality, few people who sign up for an installment plan will do so in order to invest their unencumbered funds. But you are the average consumer so I figured that’s a benefit worth mentioning. This variable becomes even more relevant as cell phones become increasingly expensive and the pay-in-full approach takes a bigger bite out of your bank account.

A Few Final Thoughts

If having a top-of-the-line cell phone is important to you, then it an installment plan could make a lot of sense for you. In this cell phone era people are upgrading their phones more frequently than ever before – sometimes within the first year. At the same time, these frequent upgrades have created an increased supply of refurbished/used phones. There are certainly money-saving options out there for those who are willing to accept a certified used product that is 12-18 months behind in technology. The upgrade installment plan feature isn’t going away any time soon, so there will continue to be a surplus of slightly outdated phones available at a considerable discount.

Anyway, people are using their cell phones for work, socializing, and research like never before. As cell phone utility time dominates time allocation more than every other product (besides the mattress), more people are justifying the acquisition of top-of-the-line devices. So, if you want your most utilized possession to be of superior quality, then I’d suggest taking advantage of an installment plan guilt free.

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