If you have an iPhone on Verizon or AT&T on a 2-year contract, it is generally wise to upgrade the phone every 2 years. Sounds wasteful or financially irresponsible?
Executive Summary – The simple trick is to look at the total price per year rather than the price per month along with the features you need.
Why Upgrade?
1. iPhones or really any phone cost much more than the price advertised. The latest iPhone costs about $650 but is offered for $200 with a new 2-year contract. You don’t own that phone until after 2 years. $20 a month of your phone bill is to pay the balance of the cost of the phone. What about a “free” smartphone? It is likely the monthly cost is the same so that “free” phone actually costs you $450 over 2 years.
2. Residual value of the latest & greatest phone is higher after 2 years than a cheaper phone. For example, the iPhone 4s came out in October 2011. If your 2-year contract happened to expire in October, you could have bought a new iPhone 5s for $200 and sold your 2-year old iPhone 4s for $155 on Gazelle.com. In other words, that new phone cost you $45 along with having higher value 2 years down the road.
3. The hardware cost of the phone is only about 25% of the total cost of ownership (barring you don’t break it or go over your monthly limits). Don’t think of the iPhone 5s as costing $200. Think of it as the latest iPhone costs you $1300 a year vs. keeping an old one for $1250 a year.
4. If you want to get fired up, after 2 years you are paying your carrier $20 for nothing.
The above overview applies to the most common carriers with the most common 2-year contract. If you really want to save money and don’t care about the latest technology, you won’t do a 2-year contract.
Different path to lower cost smartphones
1. Use a carrier other than AT&T or Verizon. The other carriers can be significantly cheaper but how good the coverage is in your area will vary greatly. Key tip is to ask people who have that carrier.
2. Buy the phone upfront for a lower monthly cost. If you take care of your phone or don’t need the latest and greatest, you can even buy a used phone.
3. Get a pre-paid plan
Example – Mr. WiseCheap pays $700/year
1. Determine your target carrier by talking to your neighbors.
2. Buy a used iPhone 4s or 4 for $100-$150 matched to the right carrier. Note although they all look the same the same iPhone model will not work (or work as well) on other carriers. In short, the radios inside the phones are different between most carriers.
3. Choose a plan – example T Mobile $50/month
4. Break or lose your phone once a year. Go ahead, it is used and only cost you $100.
