#Household math, #Investing - Paying in instalments or all-at-once...

Question

I pay $1,300 rent per month. If I pay a year's worth of rent at the signing of the lease, I'll pay $15,000. Is it worth it?

Answer

It depends on your particular circumstances. See below for a discussion:

Analysis

Let's first look at the numbers.

You are paying $1,300 per month, which over 12 months is $15,600 per year. If you pay $15,000 all at once, you end up saving $600 over the course of the year, or $50/month.

The question is - is it worth it?

I'm going to assume that there's little to no risk of wanting to leave or break the lease or anything like that that would cause you to want to no longer live in your apartment. And so I'll further assume that you'll live in the apartment for the full year.

One thing people will often look at is the "dollar value of savings", which in this case is $50 per month. A lot of people would stop right there and say that paying $15,000 all at once to save $50/month isn't worth it - in fact it makes no sense at all. However, I disagree with that assessment - what's being saved is $600/year (it's important to make sure the time periods with both the cost and the savings are the same time periods!)



Let's look at the percentage savings, which is the $50 savings per month divided by the $1300 monthly rent (we could also do this on a yearly basis with $600 and $15,600 - again, we make sure the time periods on cost and savings is the same):



So roughly a 4% savings.

Is a 4% savings worth it?

Keep in mind that a savings account only earns about 1.5% or so and a checking account even less, so if you have the money and it'll sit in the bank otherwise (or worse yet, it'll just get spent), go ahead and pay the rent up front.

However, if you have the ability to invest the money at a rate that is above 4%, and you have the ability to otherwise make your rent payments, then I'd say invest the money and pay the rent in instalments.

So let's walk this through:

• if you have the $15,000 available, can invest it at above 4% per year, and have a source of income that will allow you to pay your rent (and all your other expenses), then invest the $15,000 and pay the rent monthly, and
• if you have the $15,000 available, but either can't invest it at above 4% per year or don't have a source of income that will allow you to pay your rent (and all your other expenses), then pay the lump-sum rent (you'll effectively be getting a 4% return on that money)

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Questions and comments always welcome!

#Budgeting, #Household Expenses - Budgeting for Expenses - Putting in numbers...

Question

I've made my list of expenses. Now what?

Answer

Let's add some numbers! 

Analysis

In my last budgeting blogpost, I talked about identifying all the expenses and ways that money leaves your pocket. We want to look at the budget over the course of a sensible and useable timeframe, and that's usually one month.

The overall idea here is to budget for expenses using the Accrual Method - as soon as you are obliged to pay an amount, that should be recorded in your budget. This is why credit card payments will not make an appearance on this budget - we don't care how we pay for something, we only care that we need to pay.

Some items in our list of expenses are very easy to figure out monthly. Rent, mortgage payments, car payments, and the like are usually a single monthly payment and are easy to put into our budget sheet.

Some expenses are monthly but fluctuate. Electricity costs, for example, fluctuate based on the season (when it's colder, the costs go up). For costs that fluctuate, cycle, or otherwise change significantly over the course of the year, I'd recommend adding up the amount spent over the course of a year, then dividing by 12.

Other expenses are yearly. For instance, when paying insurance costs, I tend to pay a yearly lump sum, which results in a bit of a discount. Again, drop those costs into the yearly column and divide by 12.

And for costs that are every few months? Find the costs per year and divide by 12.

Here's an example:

https://docs.google.com/spreadsheets/d/1bDvJ0qpCvjIGNMs9AhliwCIlYY8XLLP8dnXbH1TxueE/edit?usp=sharing

This post is part of a series on budgeting - Budgeting 101

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Questions and comments always welcome!

#Household math - Which is the better way to pay for an online school when dealing with referral credits?

Question

I'm looking at joining an online school website that has over 22,000 courses in all sorts of different topics (I'm interested in some portion of them that relate directly to my interests). The cost for joining this website is $15/month but if I join for a year, I pay $99. To make things more complicated, I have 2 coupons for 1 month off each (one is the usual offer from the website and the other is as a referral coupon - I got one and the person who referred me also got one). What's the best way to join the website?

Answer

It's best to subscribe for a year, unless you are going to receive 2 or more referrals every month. 

Analysis

This is an interesting question because of the twists and turns in what's available in terms of options. The key is going to be to put everything on equal terms so that we're comparing "apples to apples".

Let's look first at what happens if we look at the options without regard to the coupons. We're comparing the regular monthly cost of $15 vs the monthly cost of $99 over 12 months, which is $8.25 per month. Clearly it's better to pay less per month! But... what if you don't use the site for all 12 months? What's the number of months that'd you have to use the site on the yearly plan to have it cheaper than paying $15/month?

We can find that by dividing the yearly cost of $99 by the monthly cost of $15. This gives 6.6, or in other words, it's better to pay by the month if you'll use the site for 6 or less months. For 7 or more months, it's better to pay the yearly amount.

Now let's look at the coupons. When paying by month, the coupons give 2 free months (and so for the cost of 1 month for $15, you get 3 months). When paying by year, you get 14 months for the cost of 12. What that works out to be is, when paying monthly, $15 for 3 months is $5 per month. When paying yearly, $99 for 14 months, that's $7.07 per month. And so there appears to be a better financial result to pay for 1 month and pay $15, use the site for 3 months, then change over to a yearly plan. However, that ignores a couple of factors, and so the best way to calculate this is to calculate the monthly cost over the course of the annual plan, then look at the associated monthly cost.

Using the yearly plan, you get 14 months for $99. Using the monthly plan first and then paying for the year, you get 15 months for $15 + $99 = $114. To compare the two, we divide the $114 by 15 (to get the per month rate), then multiply by 14 to get to the same number of months under the yearly plan:

And so it's best to pay for the year and get the 2 free months added on.

The one exception to this would be if there is an expectation of receiving 2 or more referral codes per month. If that's the case, it'd be better to stay with the monthly plan until the likelihood falls off of getting those referral codes. At 1 referral code or less per month, it's better to pay yearly.

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As always, feel free to ask a question!