Why Switch to a Prepaid Phone Plan?

First, I’m not trying to sell you anything. I’m here to educate. I’m just one guy on the internet who’s come about this knowledge of prepaid phone plans from various sources and become empassioned enough about it that I feel like it should be shared with everyone in one easy to find place. It is my goal to provide you with the information and the tools you need to make an informed decision in the easiest way possible. IF you find my information helpful and you make the switch to a prepaid phone plan, I do have referral links which throw a monetary kickback in my direction if you sign up, and I’d appreciate if you use them – but if you don’t, that’s fine too. My goal is education, not monetization. There are no lies, no marketing spin, no abstractions of the truth, and no fine print to be found here.

Why Prepaid?

What if I told you that your current postpaid (i.e., on-contract, usually 2-year term lengths) carrier doesn’t care about minimizing your bill? I mean, obviously, they’re in the business of business, and it’s in their best interest to maximize their profits, right?

What if I told you that they act as a drug dealer, giving you your first hit for free, so that you become addicted and keep coming back for more? It’s true, and there’s a bunch of math involved (I’ll get to that later) that serves to keep the numbers looking like good deals (they aren’t), that you’re “saving money” (you aren’t), and that the price on that brand new phone is a steal (it is, but not in your favor).

Verizon, AT&T, Sprint, T-Mobile — they’re all guilty of the same business practices. Some of them stuff their pillows with more of your cash than others, but they all do it. Of the big four, T-Mobile has the most aggressive campaign to break down the marketing wall of numbers, but at the end of the day, their left hand is still fighting with the right.

Prepaid phone plans keep more money where it belongs – in your hands.

The Catch

More money in your wallet sounds great, right? “There’s always a catch,” you say. And you’d be right. There is a catch: No phone subsidies. Phones must be purchased at their full retail price. Hold on though, is that so bad? Let’s think this through.

The Release

The mobile service providers in the United States have, for the most part, successfully disillusioned the public into thinking high-end phones are cheap by “discounting” them to you when you sign a new service contract or contract extension. In truth, they aren’t discounted at all. The cost of the phone is embedded as a hidden fee in your monthly service rate over the course of your contract, which is precisely why Early Termination Fees (ETFs) exist. Like casinos, the mobile service provider plays the long game, giving you a lower rate (“promotional value”, i.e., a phone subsidy) while making that money back over the course of the contract term. If you terminate that contract early, the service provider hasn’t yet recovered the entirety of the subsidy (plus additional precalculated expected profits) they offered when you signed the contract, so the remainder of the subsidy is charged to you as a one-time cost to break the contract, and the service provider completes its return on investment (ROI) earlier than expected.

It’s not really so much a “catch” as it is aligning yourself with most of the rest of the world in terms of cellular phone plans and phones. In most of Europe, for example, you don’t buy your cell phone from the mobile service provider at all. The mobile service provider exists to provide you the service with which to use your cell phone, and because there’s no contract, you’re free to switch from provider to provider in search of the best deal of the time.

Prepaid phone plans have no hidden fee to recover phone subsidies, because there is no phone subsidy to recover. With a prepaid phone plan, you bring your own device, and you only pay for the cellular service plan. Some prepaid providers offer phones for sale alongside their service plans, but these phones – like any phone you’ll be bringing to their network – are sold at full retail value. To avoid sticker shock – a side effect of the commercial conditioning imposed on us by the on-contract, postpaid plans traditionally offered by carriers – most prepaid providers who offer phones for sale only offer lower and middle grade phones.

“But wait!” you exclaim, “I can’t afford a new phone at full cost!” But why not? Look at all the money you saved by switching to your new prepaid phone plan, and if you’re lucky (i.e., coming from a GSM carrier like T-Mobile or AT&T and not CDMA like Sprint or Verizon), you were even able to keep your existing phone. Now, instead of spending that money every month on your cell phone bill, put it aside into savings for a new phone in two years, or one year, or six months. That’s money in your savings account – not your carrier’s – accruing interest. That’s another beauty of switching to a prepaid phone plan: you can upgrade whenever you please, whether it’s every month or every 5 years, because you’re always paying the same price. No more waiting for “full upgrade eligibility” to lock you into a two-year contract extension.

When you realize the cost of your new smartphone is $499 and not $99 (the remaining $400 of which you pay as a hidden fee over the course of two years), you’ll also think twice about how much phone you really need. How much is that extra half inch of screen worth to you? How about that additional 8 GB storage space? You’ll appreciate what you have more. You’ll take more pride in it. You’ll take better care of it. You’ll be less reckless, because who wants to replace a $500 piece of equipment?

Don’t believe me? Let’s take a look at the math to show how much you’ll save with a prepaid phone plan versus a postpaid plan.

Watch Out – Math Ahead!

Short version: More money in your wallet with a prepaid phone plan.

Long version: Let’s do some basic math showing the long-term savings with a common postpaid, on-contract phone plan. We’ll make the following assumptions:

Example

  • Lines: 1
  • Monthly Rate: $100, including unlimited talk and text and 2 GB of high-speed mobile data (real monthly rate on Verizon as of 09/26/2012)
  • Contract Term: 2 years (24 months)
  • Device Retail Value: $500
  • Device Subsidized Price with Contract: $100 (i.e., $400 device subsidy)

Total Cost of Ownership (TCO) over Contract Term (Simple):

$100 for Device + ($100 per month * 24 months) = $2,500

But wait! There’s more! When you pay your mobile phone bill which includes a $100 monthly rate including add-on packages, the total amount due is never $100. Postpaid phone plans include several taxes and fees.

TCO with a Prepaid Phone Plan:

$500 for Device + ($45 per month * 24 months) = $1,580

Total Savings:

$2,500 – $1,580 = $920 savings over two years! Calculating the monthly rate savings alone adds up to $55 per month ($100 – $45 = $55). The $400 device subsidy is paid for in just over 7 months! And yet the carrier continues to receive that additional $55 for another 17 months – that’s $920 that could be in your wallet, in your savings account, spent when and how you want.

The savings are remarkable under the prepaid plan. Your savings increase even further when you consider one-time fees imposed by a postpaid plan such as an “activation fee” (usually around $35) or an “upgrade fee” (usually around $25). Depending on the prepaid phone provider you choose, some don’t even have activation fees!

“But wait!” you say, “I’m still under contract!”

No problem. Early Termination Fees commonly range from $50-400, depending on your current mobile phone service provider and the duration left in your contract term. Notice a familiar number? Early Termination Fees exist to recover phone subsidies. You keep your device after terminating your contract; you simply lose the mobile phone service attached to it. If your device is supported by a prepaid service provider (most GSM devices – sorry Verizon and Sprint customers), you can use the same device with no additional fee.

So why wait any longer? Switch to prepaid today and start reclaiming your money.

 

12 Responses to Why Switch to a Prepaid Phone Plan?

  1. Lucas says:

    I did a little writeup about this myself, and posted it to my Facebook page for my friends. Only, I showed what happened when you took that $55/month and put it in your retirement account. Assuming typical return rates (about 6% annual), it ended up building to about $80-90,000 between the ages of 25 and 65. If you held out till you were 85, it generated about a quarter of a million dollars. A quarter of a million. Just from switching to prepaid. And that was assuming you bought a new $650 phone every other year, on credit at 20% interest, and made payments just big enough to pay the phone off every two years. In other words, the worst way imaginable. And it still added up to $250,000 in accumulated savings. The interest alone is about $17,000/year at that point. Boggles the mind.

  2. Ravi Kaushika. says:

    I am using a similar plan with t-mobile. an android phone to be paid off in 20 months, no data plan, 2000 anytime family mins/70$ + 10/phone ($20)/month. so i pay90+taxes, use android on wifi, get all benefits of goog/androids – kids get their games downloaded using wifi and i talk away to use up my minutes. 90$ (as good as unlimited talk for 2 + 2 android phones) with no data plan. will never sign up with att or veriz.

    • Aaron Burke says:

      That’s the T-Mobile Value Plan, yes? T-Mobile was first to really push the marketing on what are sort of like prepaid phone plans. There IS a two-year agreement involved however, but that’s just to keep you legally bound to paying off your device(s).

  3. nubwaxer says:

    thank all of you contract suckers for paying the excessive rates to the carriers that have allowed them to expand their networks. prepaid can take it from here, thanks.

  4. alex says:

    Someone help me right now please

  5. Jay Fuller says:

    FYI – CMDA carriers are not exempt from bringing your own device, either. There are at least two prepaid providers on CMDA that allow you to bring your own device – i use (and sell) one of them.

    • Aaron Burke says:

      Hi Jay,

      That’s absolutely true. CDMA providers are not exempt from bringing your own device, though it is uncommon. However, in many cases, while a CDMA provider may allow a BYOD policy, the nature of CDMA technology generally makes a device tied to a given backing network. In other words (and this probably isn’t news to you since you resell for a CDMA carrier, but for anyone else reading:), you can’t bring that same device to another backing CDMA network.

      With GSM providers, it’s not uncommon to find devices which support both AT&T and T-Mobile bands and can easily operate on both networks (not simultaneously, of course – though from a radio standpoint, there’s no technical reason they couldn’t if a mythical dual-network SIM were available – or if an MVNO abstracted the pairing away somehow). With CDMA devices, that’s far less common – if you have a device which is compatible with the Verizon network, it’s not likely to be compatible with the Sprint network and vice versa.

      However, I have heard from a few readers who say they would love to switch to prepaid, but neither AT&T nor T-Mobile have the necessary coverage in their area. If you would like to weigh in on reputable CDMA prepaid service, I’d love to hear more. I’ve just reread what I wrote regarding CDMA networks, and I see how it could be misleading. I’ll be sure to edit the article in the near future to be a little more clear.

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