You've seen them all: Zero percent interest. Cell phone finance plans. 24 Months Same as Cash. Here's why these financing options are all a terrible idea.

Financial Realities vs. Wishful Thinking: Why Financing Your Smartphone is a Terrible Idea

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A few days ago, I got sucked into the ultimate rabbit hole of conversations – an argument over whether buying one of the new $1,000+ iPhones is a smart financial move. Ugh.

I have to admit, I’m clearly not an electronics person. If my phone even works half the time, I’m pretty happy. So, I was obviously on Team I-Don’t-Give-AF about phones. In the other corner were people who are more enthusiastic about phones in general.

While enjoying electronics isn’t itself a bad thing, here’s the part of the conversation that rubbed me the wrong way: One person tried a little too hard to justify financing an iPhone. Since practically nobody has any meaningful savings, this is obviously the path most people take. And, let’s face it; it’s easier to get the phone you want if you just finance it for 12-24 months.

Their basic argument was this: Financing an iPhone isn’t that bad because you’re not paying interest on the purchase. You’re simply spreading the payments out over 12-24 months. You know the phone will be outdated shortly and you’ll want to upgrade next year anyway, so why not?

Of course, the conversation didn’t end there.

Digging In My Heels

When I voiced my displeasure over that general mindset, other stuff came up. What about people who finance furniture for 24 months to take advantage of 0 percent APR for a few years? What about people who buy new cars to take advantage of special financing deals?

And, how about people who take out HELOCs to remodel their house instead of saving up the money in cash?

Here’s what I think: Most of the time, these things happen because someone with a debtor’s mentality wants something they can’t afford. They can’t wait to save up the money – and they can’t go without, either. So, what do they do? They find a way to finance their splurge and make monthly payments for as long as it takes.

And that’s exactly why the majority of people will finance their new $1,000+ smartphone. They can’t afford it, they know it’s ridiculously expensive, but they’re willing to bury their heads in the sand and pay $30 per month anyway.

Because – what the heck Negative Nancy (that would be me) – it’s only 30 bucks.

Wishful Thinking and the Debtor’s Mentality

But, it gets worse… and I’m about to bring up one of my BIGGEST PET PEEVES.

A few people in the comments championed the concept of “using other people’s money” to build wealth. Or something like that.

The idea is this: If you borrow money at 0 percent interest for a smartphone or a car or whatever, you free up cash to invest and end up with even more money!

If I had a dollar every time I heard someone rationalize a ridiculous car or furniture purchase with this excuse, I would be rich!

You've seen them all: Zero percent interest. Cell phone finance plans. 24 Months Same as Cash. Here's why these financing options are all a terrible idea.Somehow, people convince themselves that spending $30,000+ on a new car or $5,000 on new furniture is a good deal because they’re not paying interest. It probably never crossed their mind that they probably spent more than they can reasonably afford to get that 0 percent offer in the first place!!!

And when it comes to cars in particular, the idea of buying new just irks me. Never mind the fact that new cars mean bigger insurance payments, pricier plates, and higher taxes. They’re not paying interest on their overpriced 8-person SUV, so they totally scored!

And, oh-my-gosh you guys, it gets better. Their sales guy told them they would end up ahead because they can totally take the lump sum they would have spent and invest slowly instead. How many times have you heard that line?

Here’s a question for you: How many people who finance iPhones do it so they can invest more this year? And how many people finance a sectional sofa because they’re hell-bent on maxing out their Roth IRA?

One final question: How many people who finance a new car have the cash in the bank to pay for it?

The answer to all of those questions is the same – almost no one.

Stop Making Financial Decisions Based On Wishful Thinking

In a perfect world, people would finance big purchases at 0 percent APR so they could save for college, max out their 401(k)s, and keep prepaying their mortgage. They would use other people’s money to buy things they need, while using their own money to further their financial goals.

But, in the real world, almost none of that happens.

  • Fact: More than half of Americans have less than $1,000 in savings in 2017. (Source: GoBankingRates)
  • Fact: The average American household with debt owes over $16,000 on their credit cards. (Source: U.S. Census Bureau and the Federal Reserve)
  • Fact: In 2017, the average new car loan was for over $30,000 and nearly 70 months long. (Source: Experian)
  • Fact: The average college graduate left school with over $37,000 in student loans in 2016. (Source: Student Loan Hero)
  • Fact: In 2017, 49 percent of Americans are living paycheck-to-paycheck. (Source: CNBC)

Like it or not, most Americans aren’t financing iPhones because they’re saving their cash for something more important. They’re financing these items because it’s the only way they can afford to buy something they want.

Instead of saving up the cash for their new kitchen or iPhone 8 or 65-inch curved flat screen (those are awesome BTW), they just finance it and let their future self worry about how to pay.

Normal Equals Broke

0 percent APR offers. Monthly payments. Cell phone finance plans. 24 Months Same as Cash.

These things seem totally normal if you are perfectly okay with making #paymentsforlife. But please, do me a favor. Don’t try to convince me that financing a $1,000 smartphone is an acceptable way to manage your money. It only seems normal because everyone is doing it.

Most people would be better off without the stress of juggling monthly payments for everything from their smartphones to their furniture. And nobody needs a $1,000 phone… ever. Anyone who tells you otherwise is lying or trying to sell you something.

Finally, let me finish with something I usually say about Disney vacations:

If your phone costs so much it takes you years to pay for it, it’s too %!$#@#@!$@! expensive.

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  1. We’ve paid cash for almost everything because we’ve been in the position of “not being able to afford interest”. Our foray into debt was a $6000 school loan upon marriage, (that ballooned into 10), and a very poorly paying job for the next however years. Then we had our son. He was a preemie, with medical issues. Sure, insurance covers “reasonable and customary charges”. We were liable for the deductible and anything insurance wouldn’t cover. Then our car died. We had nothing much saved towards a new one, so we took out a loan. Apart from interest, we found much to our dismay, even on a used car, the bank wanted us to take out full replacement cost insurance. That tripled our normal premiums. So, as you noted, debt has consequences, and some you may not expect. Cash is king.

    1. Debt does have so many consequences, and many times you don’t know what they are until it’s too late. You’re right; cash is king.

  2. I aaaaalmost fell for this whole phone-financing thing several years ago. But once I did the math, I realized it was a terrible deal. Plus, I’m clumsy, and I was terrified of owing money on a phone that I’ve destroyed. I instead kept using my ultra-crappy phone and saved up enough cash to buy a new-yet-not-cutting-edge phone in cash. I even did price-checking to figure out where I could get the best deal. For $200 in cash, I was set.

    Nowadays I use Google Fi for my service, which has been awesome. I don’t miss having my contract with Verizon at all, as well as all their weird phone-financing schemes.

    1. I don’t miss it, either! I do have a newer phone now, but we use T-Mobile and it works great. It’s $50 per month per person and includes international data and text in most countries we travel to.

  3. I’ve actually financed a phone before. I won’t make that mistake again! It’s such a waste, especially when some phones (cough cough Apple) are now looking at upwards of $1,000+. If I can’t afford it outright, I don’t need it!

  4. The way the carriers market this is super sneaky. I feel like most people do this but they don’t even realize they are financing it. They are like “Oh yeah I’m on the month to month plan.”

    I have to admit I do miss the “renew every two” and the way the bills are now is confusing. I was used to paying $200-$300 out of pocket now it’s $800 and my phone bill will be less each month.

    So yeah, it’s a chunk of change but pay cash and don’t finance your phone. Add the phone to your budget so that in 2 years you have money set aside for a new phone again.

  5. And baam! Tomorrow you are fired and you’d wish you had the 30 bucks every month and a cheap phone. Nobody admires you for your phone in the homeless-shelter.

  6. Finance guy says:

    What you’re really saying, and I think the core message of the site, is “if you’re pretty house/car/debt/life poor, can’t manage your finances and have zero reserves/savings to handle usual, let alone extraordinary, expenses that you didn’t plan for you shouldn’t finance things.”

    That’s pretty smart advice. People who work to do the math behind loans, as well as the people who market these financed items to the public, are generally smarter than the average person who is buying them. Just a fact of life. So, they take advantage of the fact that Joe Q Public’s lack of financial education AND their inability to understand complex financial ideas and get them to buy things like $1000 phones with monthly payment plans.

    That’s not to say financing is always bad. If you’re a well above average earner you should absolutely take advantage of investment income versus interest paid and use debt. Average/below average earners simply don’t have the capital to handle unexpected or unplanned for events so debt payments become problems. In an ideal world, people would realize that the $10k they saved for a car in cash is probably too much and they should settle on a $6k car and use the $4k as an investment for expenses.

  7. yes holly 1000$ is lot of money. and for a phone? paying bills each month. .duh

  8. I actually agree with the concept of using OPM, for appreciating assets like rental properties. I disagree with abusing the concept by mentally lowering the cost with installed payments so that one feels better about the purchase and doesn’t have to deal with the cost up front. I have a friend who makes 1/3 of what I make, and love financing everything. She used to lease a new car every few years. About 3 years after she finally bought her last leased car, she traded it in to buy another brand new car. She called me for advice and I spent a couple of hours to talk (almost beg) her out of it as she still had 3 days to back out. She agreed that she would but the next day told me after talking to the car guy, she decided to go forward with it. It hurt me knowing she had put herself in a bad financial situation, but I try very hard not to be pushy. Every time she gets sick, she wipes out her few hundred dollars of emergency fund. She recently bought a brand new iphone and again justified that it was only $40 per month. I make a 6-figure salary, and I’m still driving a 15 year old Honda Civic. I have bought all my phones used. One would think that I’m the one making less money compare to my friend with the way I live. I also own 6 duplexes & 4 single family homes for investment, using OPM. I get cash flow from them and in 25 or so years, I’d have $2-$3 million of assets. And yet I still feel poor all the time. My best friend used to tease me about living like a college student because I have mismatched dishes and plastic cups for drinks and thought that was normal.

    1. Now that financing phones is normal, the sales people have become scum-bags just like the car sales people. I went this week to see what deals they had and here’s the lies I was told from several carrier sales people.

      Sprint told me, “If you decline the insurance on the phone you void the manufacturer’s warranty!” = B.S.
      AT&T told me, “All Samsung Galaxy phones are 5G compatible even the S9!” = B.S.
      Verizon told me, “Trade in your Galaxy S7 and you get $650!” I asked him to verify that with a co-worker and he replied, “I know what I’m talking about!” I later called and asked to speak with a supervisor and he told me it was only $500 trade in and the sales guy thought it was a Galaxy S9. = B.S.

      The only ones who didn’t lie to me about anything was T-Mobile, but I’m sure there may be some bad sales people out there.

  9. I personally pay for my phone on the 24 month payment plan. That being said:
    1) I buy the lower model so it was only $850
    2) I keep my phones for as long as possible (ideally for 4-5 years)
    3) I have the money on hand to pay the phone on in full

    Basically the situation is:
    1) My salary is 2500 a month
    2) My living expenses are 1350 a month
    3) I have $1000 + 1 month living expenses in my checking account
    4) I have 2 years of living expenses in I-Bonds (emergency fund)
    5) I max out my roth IRA every year ($6000)
    6) I invest whatever’s left over
    7) I get paid monthly

    The problem comes from 3 and 7. I have an extra $1150 of cash on hand on the first of every month. So I have $2150 in non-committed cash in my checking on the first. I like to preserve that $1000 surplus (which would take me 1 month to replenish), I also like to be in the habit of automatically transferring that $1150 into investments.

    In essence, I have A LOT of slack in my budget. But if an $800 phone + a $1200 unexpected car repair + 1 other unexpected expense hit me all at once it would require me touching my emergency fund (something I reserve as a LAST RESORT).

    Basically Im in a situation where I don’t want to have a ton a cash on hand. Overtime inflation eats through it and those 3 major unexpected expenses hitting me at once in 1 month is unlikely. But it could happen. So I finance the phone (interest free), just as a contingency.

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