Have you ever wondered how cell phone companies can afford to give away “free” cell phones when you sign up for a service plan? Its simple. They know that few people would sign up for a 1 to 2 year plan if they had to pay $150 for a cell phone. So instead they build the cost of the phone into the plan. $55 per month doesn’t seem so bad to most people even if $15 of it is going to the phone.
When you are evaluating different deals and services ask yourself, “How much does this cost me in an entire year.” It is easy to see a low monthly payment as a savings especially on big items when it is actually a terrible deal.
Automobiles are a good example of this. Paying $250 per month to lease a nice car, doesn’t seem like too much, but when you consider that it is $3000 per year going into a vehicle that you don’t own, it doesn’t seem like such a great offer-especially when you consider that you can get a reliable used vehicle for $4,000 to $8,000 that you can drive for several years and then sell for several thousand dollars.
Membership programs are another expense area where it is easy to spend a lot of money. I was looking at a health club membership this week and it was about $80 per month per person. So for two people that comes to $1920 per year. Now if you spend 5 or 6 hours per week at the gym using the equipment, swiming, playing tennis, etc. it might be a good deal. But many people would be better off investing in a stationary bike or home weight set.
For evaluating membership programs like this, I suggest looking at how much you are paying per hour. If you pay 80 per month for access to the gym and you go for one hour per week, you are paying $20 per hour to use the gym. To me that seems kind of high. If you are spending 1 hour per day, the cost is $2.66 per hour. To me that seems much more affordable. I’m not saying that you shouldn’t go to the gym, but make sure you know how much it is really costing you.
Lets look at another popular membership plan with DVD rentals. Blockbuster and Netflicks have DVD rental plans where they send you DVDs through the mail. You watch them and send them back. The most popular plans cost around $17 per month and let you have 3 DVDs checked out at a time. They advertise that you can have “unlimited rentals.” Of course in actual practice you can only watch so many movies a week and it takes time for DVDs to get shipped back and forth.
If someone watches two movies each week they will end up watching 8 per month. This puts the cost at $2.13 per movie. Where I live video rental stores have several days per week where you can rent two for the price of one and the charge is normally $.99 to $2.50, so $2.13 isn’t that great of a deal. If you watch more movies per month, it can start being a better deal, but you don’t know until you look at your actual usage. What may be a good deal for someone else might be an awful deal for you and vice versa.
On the other hand if you sign up for a DVD rental membership and cancel your cable subscription of $50 per month, you’ll be saving a significant amount of money. $50 per month works out to $600 per year. The DVD rental membership will cost you $204 per year, but you will get to pick the movies you want to see and spend significantly less time watching commercials.
I’m sure you can think of many other monthly payments that may or may not be good deals. Just make sure that you evaluate your expenses based on the total cost over time and your actual usage.
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