All Business & Investing

Cost of Paying Over Time

How much do you pay for the option to pay over time?

Credit cards allow us to buy now and pay later. Likewise, the Internet and smartphones have literally put the World at our fingertips. Unfortunately, getting what we want quickly isn’t always the best for us. Eating a cupcake every time you get the urge will not make your life better. Same goes for a lot of purchases that we get dinged on.

Credit card debt is insidious. We see it only once a month and can quickly forget about. Yet the rates – anywhere from 11% to 25% – are much higher than anything you are likely to earn in the stock market in a year (although it does happen).

While you may be careful with your credit cards, you may already be paying borrowing rates and not realize it. Common examples are gym memberships and gadget leasing (Internet service and phones).

Gym Memberships

Like most people, I used to pay for my membership monthly until I realized that I can get a discount for prepaying. With my gym, Crunch I negotiated 6 months free in return for prepaying for a year. I ended up having to put a lot of money down at once – about $1000 – but over the course of a year and half I effectively made $500.  Using a savings interest calculator, this comes out to a 31% interest rate!

When negotiating, try to get more months free and find out how much cash you can get back if you cancel.

Gadget Leasing

Leases are a sneaky way that companies charge us credit card-like fees. I used to pay Time Warner Cable $10 every month to lease an Internet router (aka modem) – this was $120 a year of rental fees with no end date! I found my provider’s list of compatible modems (TWC) and bought one for $80 two years ago. It was super easy to set up and took less than five minutes. By prepaying $80, I already saved over $240 in rental fees – netting over $160.  That’s equivalent to a 42% interest loan.

I should add that I now own the router. If I decide to change internet providers, I can keep it or sell it on to someone else. TWC’s leased cable always remains their property. If it is damaged or not returned, you may get charged full price!

Picking a model to buy yourself may seem like a daunting task and the cable company may try and scare you into leasing their model. They offer promises of optimal speed and upgrading the equipment as your service gets upgraded. This gets harder to knowing that the New York attorney general Eric Schneiderman sued TWC in February 2017 for not living up to this promise!

Take Away

Letting go of hard earned money is not easy. Viewing activities of all kinds – from gym memberships to college education – as investments allows for the application of a valuation framework. By quantifying what is measurable and qualifying what is not, we add order to uncertainty and make logical choices over emotional ones.

What do you think?

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