This isn’t a post about the best value for a cell phone, and in fact I’m not suggesting that the cell phone I just upgraded to (a Samsung Galaxy S5 replacing my S3 that after more than two years stopped charging properly and unfortunately it wasn’t the battery).
Instead, it’s a post about how to think about and compare deals and how to approach making a financial decision. It’s one simple lesson: give yourself the time you need to think and compare and don’t be pressured to act in the moment even if you think you understand a deal’s terms.
Dealing with this cell phone my mind was working slowly and somehow I realized this.
I wasn’t making calculations clearly enough in my mind. It’s always ok to walk away. Don’t feel pressure to agree to something you haven’t worked through fully in your mind, there is just about never a reason to truly make a decision ‘on the spot’ — sometimes you can wait a day or more, but it’s hard to imagine a time where you can’t wait five minutes.
Sitting in a car dealership, something I know well, is a stressful time for many people. The amounts of money are large, and there are frequently many moving pieces. I remember sitting in car dealerships (the family business on my father’s side) and listening to salespeople talk about ‘the square’ or ‘the wheel’ showing:
- Down payment
- Trade-in value
- Monthly payment
What they never talked about was the price of the car. They’d push around these numbers, maybe add in interest rate, starting high in all dimensions. The thing you should be focusing on of course is:
- The price of what you’re buying.
- The value they will give you for a trade-in, which lets you evaluate alternatives (“sell to carmax” or “put an ad in the paper”).
- The financing deal they’re going to give you, which lets you evaluate alternatives (long from the bank, paying cash).
But you always start with the price of the car. Make sure that is fixed. Too many moving pieces and you’re more likely to be the one that gets confused than the dealership, and agree to spend more than you intend to.
Returning to AT&T, they offer a deal called ‘NEXT’ where you don’t have to pay anything for the phone and they waive the ‘upgrade fee’ (cough). They collect tax on the price of the phone up front.
But they roll the full price of the phone into your 24 month contract. They tell you this is a good deal, because there’s no financing charge and no interest rate. That’s technically true, but it’s misleading, because there is a huge cost — an opportunity cost. You don’t actually get a subsidized phone built into your contract, they charge you the same thing for the contract and all you get is no interest financing.
Let’s look at two versions:
- Pay $200 for the phone and $40 for an upgrade. Your out of pocket cost is $240 up front (plus tax).
- Pay $0 up front for the phone and $0 for the upgrade. Increase your monthly bill by $25 for each of the next 24 months. Your out of pocket cost is $600 (plus tax).
Which deal is better? Granted $600 over two years is a little less in present terms than $600 today. The exact amount depends on the discount rate used (which should be the opportunity cost of the funds), but may be about $580.
Spending $240 up front is better than spending $580 in present value over two years, clearly by a very wide margin. They sell pretty hard on the value of not paying anything today.
The math is clear enough but it can take a minute to do in your head. Pause, walk away, and come back. Don’t feel pressured to make decisions on the spot, or you increase the chance of making a bad decision.
I’m not suggesting that AT&T offers good deals generally, that you can’t do better switching carriers or buying phones through third parties especially those that kick back part of their sales fee to you. I’m suggesting that this ‘NEXT’ come on is a pretty bad deal, but it can take a moment to realize it, so give yourself the time to think before signing (electronically these days) on the dotted line.