Yes, this stupid thing is real. |

Apple released their magical, amazing, stunning new iPhones this week. The world was left in awe as not one, but *two* new models were recently announced. First is the ZOMG SO COLORFULS! 5c, and the sheik, premiere model, the 5s.

I won’t deny that I kind of want a 5s. My aged iPhone 4 is feeling so very inadequate these days, although the new coat of paint that iOS 7 provided helps abate that new gadget lust. Of course, I am terminally unemployed, so upgrading to a fancy new phone seems a frivolous choice. But, let’s say I did decide to throw caution to the wind, what would be the most fiscally responsible means of doing so? That turns out to be a very controversial matter to delve into.

If one listens to podcasts or reads around online, there’s no shortage of people touting how the true cost of a discounted (or even “free”) phone from a carrier with a contract (typically two years) is up to 3x more than buying the phone outright. The problem is these are usually tech people as opposed to accountants or finance specialists. So while they’re very long on scary language about how you’re wasting your money, they’re somewhat short on providing numbers to support their claims or, if they do, they use incongruous scenarios to jumble figures together.

So let’s look at some examples. Let’s say you get an iPhone 5s on contract with AT&T. You’ll pay $200 for the phone (we’ll ignore taxes in all cases, and we’ll go with the 16GB version) + $35 activation fee + the cheapest plans they offer; 450 minutes/month for $40 and 300MB of data for $20. Wow. That actually really sucks. I have a grandfathered 2GB plan for $25, and I’ve rarely hit even 1GB (let alone two!) in the three years I’ve been with AT&T. Even then, 300MB is pretty weak. I also have 200 text messages for $5. But really, between iMessage and Facebook messaging, you don’t really need text messages, right? Although that is eating into your data … crap. Fine. Let’s go with the 3GB data plan for $30/month. So we’re at $235 up front, and $70 every month for two years. This comes out to a total of $1,915 for AT&T and a shiny new iPhone 5s.

Alternatively, you could pay the $650 up front for your contract-free iPhone 5s and then get a nice cheap plan through Straight Talk (although damned if I know whether it’ll work), say the $45/month one (the $30 option has effectively no data plan.) You also have to pay $7 for the SIM card. Over that same two years, you’re only paying a total of $1,737. You’ve saved a sum total of $178 over two years, or $7.42 a month! Congrats, you can buy a cup of coffee at Starbucks each month.

Here’s the catch, to save that $178 you spent an additional $422 up front ($657 – $235). This is where the finance aspect of all this comes into play. Are you familiar with the concept of time value of money? Basically, it’s that between inflation, interest, and other economic factors money today is worth more than money tomorrow (or further into the future.) You can arrive at an estimate of the future value of a present sum of money with the following formula:

Where FV is Future Value, PV is Present Value, i is the interest rate, and n is the number of periods |

So let’s plug in some numbers and see how this all works out. Our present value is the $422 difference between going with no contract versus being tied down with AT&T. Assuming a 1.4% annual inflation rate, that takes us from $422 to $410.27 (you subtract the rate from 1 since we’re calculating inflation rather than interest.) So that’s a cool $11.73 you can take off that $178 savings.

You know, the stock market has been doing well, maybe you’d like to consider the opportunity cost of that $422 …

- Should I Buy My Next Phone Off Contract @ Lifehacker
- When Does it Make Sense to Buy a Phone Off Contract @ eBay
- An Expensive Cup of Coffee @ Billfold
- The iPhone 5 Will Cost You at Least $1,800 @ Mashable (Well this is just silly.)