While I thought there would be more buzz about the increasing costs of an iPhone 5, there hasn’t been much discussion. A good friend of mine recently bought the iPhone 5 and was telling me that it is noticeable better than its predecessor. As he was showing it to me, I was jealous as I reached for my “dumb phone” in my pocket. While I wasn’t aware of it at the time, I was grabbing for my phone instinctively in order to measure its worth. By touching it, I guess I was looking for a reminder on how my frugal lifestyle is ultimately worth it.
In the end, I didn’t find any such comfort. Instead, I was reminded of the things that, as a dumb phone, it can’t do. It can’t surf the web. It can’t check my email. And if it can’t do the basics, it certainly won’t allow me to keep up with Facebook or tweet to my friends. Instead of being reminded that my sacrifice was worth it, I felt the weight of it in my hand. It is remarkably much heavier than my friend’s iPhone 5, despite offering significantly less features. It is certainly bulkier and more difficult to fit in my pocket.
Before I knew it, I found myself justifying the splurge. My life would be so much better with this new device, I justified. It would add more than it would take away. Within only a few minutes, all of my frugal principles that I stand for and write about each and every week on this blog were in question. And so, I did what any other financially-obsessed person would do: I did the math. (Side note: apparently most families don’t do the math before leaping as phone plans are taking up a larger portion of family budgets; or maybe they are and just don’t care)
How Much Would it Cost me to Own an iPhone 5?
Most people don’t do the math. They may think that they do the calculations for owning an iPhone, but they don’t. Here’s a look at what the average consumer will probably calculate:
- Retail Price of Phone + Taxes and Fees
- Monthly Data Plan
That’s it. The two figures that come into play is the price of the phone and the monthly data plan. In many ways, this is a rational path to take. It is after all the amount of money coming out of your pocket. Why would the calculation be anything different? When you are doing the calculation like this, here’s a look at what the numbers look like:
- Cost of the iPhone – $199 with 2 Year Contract
- Cost of Plan for iPhone - $40-$70 per month (from Verizon’s website) Assuming an average plan of $50 per month, the total comes out to $1200 for two years
- Total: $1,399 for the 2 year period (assuming no necessary repairs or replacement)
That’s right – whether you realize it or not, you are committing to an approximate $1,399 over the next two years, depending on your plan.
Cost of Upgrading to an iPhone 5
Now, in all fairness, the iPhone 5 does not bring that much of an additional cost for just the device, or even as an upgrade from a dumb phone. The figure of $1,399 is how much more someone who does not already pay for their phone. While all plans vary, I would assume a dumb phone user, like myself is paying $25-30 per phone per month. This would make the difference between getting a iPhone and keeping the current dumb phone much smaller.
Let’s take a look at the calculation when taking into consideration an already existing plan of $25 per month for one dump phone user (this is an estimate, assuming there are at least 2 people on a shared plan).
Current Cost for 2 Year Window:
- Phone: $0 (lots of free phones with 2 year contracts)
- Plan: $25 per month / $600 for 2 year contract
- Total: $600 for 2 year contract
Difference of iPhone 5 and Dumb Phone Costs:
- Difference in Phone: $199
- Difference in Plan: $600
- Total Difference: $799
While I am using some estimates, I am saving $799 over two years, or an average of $400 per year by not upgrading to an iPhone.
The Actual Cost of a of Owning an iPhone 5
While $400 per year is a lot of for us recent college graduates, that’s only the beginning. This is only the cost of money coming out of your pocket. It fails to take into consideration the missed opportunity or return if you were to invest it. (In case you are wondering, yes, I would invest the money. Any extra money that we make is either going into retirement funds or a taxable investment account.)
Before I illustrate the actual cost of buying an iPhone 5 right now, let’s clear up a few points about my current situation. Please note that I don’t expect these calculations to transfer appropriately for everyone else, but it should still serve as a valuable illustration.
- All investments currently being made are for long-term retirement goals
- Because there will likely be years with negative returns, I am estimating 5% return on the money invested instead of the historical average of somewhere around 8%. This is meant to be a conservative figure, not one that is exaggerated.
- I am currently, 25, so I don’t need this money for approximately 35 years (assuming retirement age of 60)
- While the additional cost of $799 would be seen over a two year window, I am calculating the future amount as if it were all invested today (as I don’t think it makes that big of a difference)
- I am also not calculating the continued cost from lifestyle inflation (i.e. never being able to go back to a dumb phone after the 2 years of using an iPhone 5) because I don’t know what future costs of data plans will be. Thus, the figures below are only illustrating the future amount of this $799 difference.
Okay, so how much would it really cost for me to upgrade to an iPhone 5?
As this graph illustrates, the money that I would have spent to upgrade to an iPhone 5 ($799) would be worth almost $4500 when I were at retirement age (again, assuming just a 5% increase each year).
From looking at this data, there are several points that I want to highlight:
- When you factor in inflation, the value of this $4500 does not seem like that much, but remember that it fails to consider the future cost with lifestyle inflation.
- Again, this is just the impact of one minor decision. Imagine if you made 10 of these type of decisions a year. Just for that first year alone, it would reduce your retirement savings by $40,000. I don’t even want to think about the cost of making 10 of these type of decisions each and every year for 30 years straight.
- What seems like a $200 (or $650 without a contract) purchase to some is ultimately costing you much more than that!