Are You Really Saving Money with a Cell Phone Contract?

by Jamie Simmerman · 13 comments

With the new iPhones rolling out this month, many consumers are considering upgrading their cell phones. But what does upgrading really cost you? Is signing a contract worth it? Here’s a detailed look at the true cost of smartphones.

How Much Money Do Contracts Save?

I recently spent some time asking cell phone owners about their opinions on cell phone contracts. Most consumers in my area seem to despise the idea of being locked into a new contract every two years, but also see it as a necessary evil.

“Most phones are outdated in two year’s time, so you’ll need something new by then anyways,” stated one shopper looking at a Samsung Galaxy. When I mentioned the option of buying a phone outright, without a contract, I was greeted by blank “are you serious?” stares that suggested I had a few marbles missing.

The thought of paying full retail price for a cell phone when you can get one discounted with a contract renewal seems to be an absurd option — but is it? Let’s look at the price breakdown.

Retail price of a new iPhone 5c: $549

Price of a new iPhone 5c with two-year contract: $99

Savings by renewing a contract: $450 over 2 years, or $9.38 per month

Oh, wait… you mean I save less than $10 bucks per month by locking myself into another contract? That’s right.

What’s Your Contract Worth?

In order to determine the “worth” of your cell phone contract, we’ll need to look at specifically what you’re paying for every month. Your monthly cell phone charges pay for:

1. Calling service coverage area

2. Customer service

3. Data bandwidth

4. Speed and call quality

As technology advances, which it continues to do every year, your equipment (cell phone) becomes outdated and incompatible with the current network. For example, people stuck with flip phones purchased three years ago are finding it hard to use 4G or LTE services today.

Also take into consideration that speed and coverage area “should” continue to improve over time as carriers update systems and more people require cell signal usage. That leaves customer service and data bandwidth as the only truly independent variables for our example.

Let’s look at Verizon Wireless service. Three years ago, you could get unlimited data for $30/ month. Today, that same $30 won’t even get you 500MB of data on a Share Everything plan. That’s some serious depreciation over three years’ time. $60 now gets you 2 GB of data. That’s in addition to the fact that the new 4G network eats up more data bandwidth than the previous 3G version, according to the sales rep who was trying to talk me into an upgrade.

Customer service then is the only variable left to offset the “cost” of your depreciating Value Proposition of a new two-year contract. Add in the “early termination fee” possibility (up to $350) if you want to change carriers, and your “savings” no longer look so appealing.

The Bottom Line

Consumers tend to approach cell phone purchases as a short-term investment, rather than the long-term investment it truly is. You wouldn’t buy a new car without examining the payment details, so why blindly sign a cell phone contract for the next two years?

Contract-free or prepaid plans provide you the freedom to take your cell phone number and spend your hard earned money where you get the best service to value proposition — which may or may not be your with your current carrier.

Do you have a contract for your cell phone service? Would you consider going with a prepaid plan?

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{ read the comments below or add one }

  • Anna Collins says:

    Thank you for mentioning how it’s better to treat cell phone purchases as a short-term investment rather than long-term, so contract-free plans will be better at providing you that freedom with the best service. I bought a new phone recently, and I was contemplating whether I should get another contract plan again like last time, before deciding it would be best for me to switch. I’ll have to look into where I can find affordable contract-free cell phone plans to avail.

  • phoneminimalist says:

    I am on a small biz account grandfathered in many years prior to all these new plans. The plan is approximately 23 years old (and the old rates remain in tact). I was paying $41 inclusive of taxes for unlimited data for roughly 2.5 years of 4 years when I was initially added on which I never utilized data. Then in 2017, I downgraded the data to 1GB for my line which suits me just fine. Now, I am paying only $25/mo plus a 7% sales tax which equals $26.75.I am almost never by my phone anyways until I arrive home and am always on Wi-Fi. I am only on my phone for an hour or less then hit the hay. I use the all in one instead. My phone has been paid off for slightly over a year (and I only paid $200 plus tax) when I renewed my contract. My phone is a Samsung Galaxy S6. I only utilize my phone in emergencies, transportation, and to communicate to my colleague. If I did not require the camera for what I do, I can easily go with a pay as you go for $29.99 plus tax for a flip phone as long as I can remain texting as I text over 1000x more than I talk. I always have my friends call tge landline (which my mother refuses to rid even though I have suggested it). Any other tips?

  • eddie says:

    Haven’t been on a contract for years now. For family/sharing plans some contracts still make sense, but if you’re just paying for one or two people prepaid is the way to go anymore. I was with Straight Talk for years, found out I don’t use much data, so switched to Page Plus where I am now for $28.00 a month. I might be moving to Cricket for their $35 flat (no additional taxes or other fees) for unlimited calling and test and 2.5 GB a month. Can’t beat that. I go through less than 500MB a month so not sure if makes sense for me to switch, but for an extra $7 and a better or bigger choice (Cricket is now GSM) of phones, I might.

  • Samuel P says:

    My T-mobile flip phone works just fine thank you. Pay as you go is great. I only pay for the minutes that I use. I have an Android tablet with WIFI with apps and games.

    My cousin uses Virgin Mobile and has 500 MB of 3G data per month. He hardly uses 50 MB per month. Not sure what this obsession is with 4G cell phone service? Why do people use more than 100 MB of data per month? Am I missing something?

  • Phil says:

    Currently on StraightTalk with Nexus 4. $45 per month, unlimited everything. May go to the Republic Wireless Motorola Moto X in November when it comes out. Phone is $300 and plan is $25 per month. Unbelievable deal, but the phone becomes a “dumb” phone should you ever decide to quit Republic Wireless. In other words, I can’t take it to T Mobile or Straight Talk.

  • KM says:

    When I bought my first smartphone almost 3 years ago, I ended up paying for it right there and not getting on a contract because with my carrier, the contract monthly plan would actually be more expensive and I would save in the long run by not signing up for a contract. Now they have done away with contracts and the cost of the phone is just rolled into the monthly plans (actual amounts this time), but when my husband switched to my plan and got a new phone, we still paid for it so we could have a lower monthly plan.

    For me, it’s important making your phone last as long as you can. Switching it every two years just because you want something better is a little stuck up. Technology changes quickly, but support is not dropped that quickly, so it won’t be useless for a long time. Just get something that is good value and has good support for the future. For example, I got my phone with 4G support just when the network was first being rolled out, so it won’t be obsolete for a while.

  • Steve says:

    Unless you can get a phone that gives you the services you want for a much cheaper price, you are much better off getting the phone at the cheaper price. Savings $450 over two years is real. I don’t think there much difference between the major carriers if you use their data plans as well as talking plans.

  • Nate says:

    Nice article, and I myself am on a no contract plan cause I like having choices, but had to point out that $450 over 2 years (24 months) is $18.75 a month.

  • Julie says:

    We have Verizon and are on a family plan. We have “dumb phones” and do not even pay for texting. Weird, I know. We pay just $50-60 a month for two phones and don’t even talk that much on them. We have had a HORRIBLE time with Verizon customer service and would like to look into prepaid options. I’d love to read a post on prepaid options and hear people’s experiences on various services. We live in the Boston area….

    • Alexis says:

      I, too, use a “dumb” phone. The justifications for acquiring a smart phone just don’t add up for me. I prepay $100 at a time for minutes and spend less than $300/year for my dinosaur phone. I can text and call and use the more hidden features like conversion abilities during foreign travel. I supplement these features with an older iPod Touch, which enables me to use the internet and check email wherever I find free wi-fi. My colleagues no longer laugh at me now that they understand how much money I save. I also find that rather than being obnoxiously attached to a phone, I am able to have conversations with others and enjoy the view around me.

  • Meghan says:

    I’m really hoping to make my iPhone 4S last for longer than 2 years. I’m 1.5 in now, and am grandfathered in to the unlimited data plan. I use a lot of data, so the longer I can keep it, the better. If my screen cracks, I’ll replace it. Once it’s time to switch, I’m definitely shopping around. My little brother is on my plan and I feel like I’m overpaying, even with him contributing $60 a month. I’m paying $120 and talk maybe 120 minutes a month!

  • Special Ed says:

    Switched from ATT to Consumer Cellular in April. This cut my bill from $130/mo for two phones to $60/mo. Basically the same service with less data so I use lots of wi-fi. And no contract. I just bought a used iphone 4s off of ebay for couple hundred. This should cost around $900 this year where the ATT contract was costing $ 1800+ with the cost of new phones.

  • John S @ Frugal Rules says:

    Good post. We’re with Verizon and I do hate the contract, though we’ve had terrible experiences with prepaid plans in terms of coverage and customer service. That said, it has been a few years since we moved to Verizon and have heard there have been some good changes in the prepaid arena. We’re planning on taking a more serious look at changing next year when our contract is up.

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