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Apple releases the second iteration of its iPhone today. The product ostensibly carries a lower price than the previous version. But how much does it really cost? Matt and Marnie both pointed me to the latest comic from The Joy of Tech, which explores this very subject.
Would you forego an iPhone for a million dollars?
Be sure to read the math behind the comic. Some of the assumptions are a little loose — 10% market return, no inflation — but the point is still valid: the extraordinary power of compound interest is a wonderful thing, and always worth considering before you make a big purchase.
(By the way, I’m not saying you shouldn’t buy an iPhone — and neither is The Joy of Tech. Just make an informed decision, and don’t get caught up in tech lust and gadget envy. Personally, I own a first generation iPhone and have no plans to upgrade.)
This article is about Choices, Funny Money, Retirement Friday, 11th July 2008 (by J.D. Roth)
July 11th, 2008 at 5:24 am
JD–A good reminder, but it got me thinking about a column I just read in the WSJ: Ten Investing Rules to Throw Away. The author puts in writing some of the worried thoughts I’ve had floating around my head over the past couple years (even before the market started sinking…I guess I’m paranoid like that). Among them:
“Think of all the rules and beliefs that worked reliably for decades, and which have been trashed in the last year.
“Rule #1: You can safely trust the stock market to outperform over a decade.
“Reality: Anyone who invested in Wall Street in the summer of 1998 and held on has earned just 9%. That’s the total return on the Standard & Poor’s 500 index, and includes reinvested dividends. And that’s before inflation. Bonds, and savings accounts, did far better. If you held your cash in an account earning an average of just 3%, for example, today you’d be up 34%.”
–
Because I think that the US is never, ever going to see the kind of growth in the next century that it saw in the past century, I’m not the unwavering believer in the “magic of compound interest” that I used to be. I’ve decided to continue maxing out my Roth IRA and I have a goal of maxing out my 401k (both in index funds), but those will be my only investments. Any additional money, I’m saving in my Emigrant account or maybe CDs. I used to plan to start a regular investment account, but no more (or maybe when I have $100k in my emergency fund).
Still, I’m definitely not getting an iPhone. No way I’m spending that much on an ongoing basis. Plus, I’m already on the internet too much!
Here’s that story, if you’re interested:
http://online.wsj.com/article/SB121561982539839543.html?mod=2_1581_leftbox
July 11th, 2008 at 5:54 am
Yeah, even after looking for corporate discounts (none for iPhone), there is no way I’d spring for an iPhone. I wouldn’t be able to get one without DH getting one, too, and that would quadruple our monthly wireless bills, not including the cost of the phones. Our friends wouldn’t be impressed for more than a few seconds anyway.
I came upon an old Palm Pilot while we were moving. Loved it while I used it, but I haven’t missed it in several years. It went the way of all old electronics that were cool and new and expensive once upon a time.
I’m not sure an iPhone is a tradeoff with $1M, but it would increase our monthly fixed expenses, and for a phone? — that’s a bad thing.
July 11th, 2008 at 6:04 am
For the record, corporate discounts apply to the 3g iphone. part of the reconciliation of charging more.
July 11th, 2008 at 6:09 am
jeffeb3: Our corp. website for AT&T discounts explicitly excludes iPhone service. The phone cost is the least of my concerns in this case.
July 11th, 2008 at 6:20 am
Hmm, my $50 phone that is 3 years old is still serving me just fine. It makes perfect phone calls. I’ll just use my iPod when I want to listen to music, and to be honest, it is nice to not have the internet in my pocket of every moment of every day.
July 11th, 2008 at 6:28 am
@AC:
You have to understand one thing about financial journalists - they have to write to make their money and that often involves writing financial porn to catch your eye. Often, they won’t discuss the real fundamentals of investing because it’s really, really, really boring and their papers wouldn’t sell.
When we’re talking about long-term market rates of return, we don’t mean over any 10 year period. Long-term is more like 20-30+ years. When you look over that kind of period 10% seems more reasonable.
And I’m not talking about just the S&P 500 but a diversified portfolio of many asset classes. Over that same 10 year period the author is citing in WSJ, you would have had about an annualized return of 8.25% (which translates into a cumulative return of almost 121%) if you used a very well diversified portfolio of Vanguard index funds. I believe the author is citing a cumulative return, which are frankly quite useless. But it does illustrate one very important point - the importance of diversification! If you had used a diversified portfolio instead of just the S&P 500, your cumulative return would have been more than 13 times greater. That’s a great case for diversification right there.
Will the historical market returns hold up over the coming century? I don’t know, and neither does anyone else. Sure, they’ll talk about it all over the newspapers, Internet, and television, but that’s because they get paid to talk - not to actually give good answers. The best you can do is use the information we do have - historical information - to prepare for whatever the future may hold. And if you really think the US market can’t continue to grow but you don’t actually have a crystal ball, then that should push you even further for more global diversification. Most US investors allocate way too much of their portfolio to US companies when the US only makes up about 40% of the global stock market (based on market capitalization).
So diversify and include international companies. Spend less than you earn, find legitimate ways to earn more, and save what you can. You’re better off spending your time doing those things than reading the WSJ.
July 11th, 2008 at 6:51 am
a few of those expensive new gadgets per year and you may really miss out.
when our friends insisted on showing us their new iphones, new xbox, new flat screen tv, new washer and dryer, 3 new laptops, (and on and on), i should have asked about their kids’ 529 plans and their retirement funding.
they’re working so much to pay for the stuff, they don’t even have time to enjoy it. and i know they’re not socking away money. i wonder if they took all those thousands of $$$ and saved it, what they would have in the future.
July 11th, 2008 at 7:02 am
I am sure that I am doing the math wrong, however, if you look at the Dow today, using 11,230 as the starting point, in order to get 8% year over year for 43 years the Dow will be over 307,000. At 10% at is 676K. The S&P would be 75K at 8%.
Do we really see that happening?
If I have the math wrong someone please correct me.
July 11th, 2008 at 7:14 am
I’m a Mac geek. Always have been, always will. I survived a year without the first iPhone, but this year, I decided to go for it, after careful budgeting and planning. This sounds cliche, but if you properly budget, I’m of the mindset that you can make what you really want work. We don’t own a TV, we hardly run our AC, we hang all our clothes on a rack… We fully fund our IRAs, contributing the max to 401(k), have a 529… But I have my iPhone. It’s all about personal choices and doing the math.
July 11th, 2008 at 7:18 am
Please don’t complain!
Here in Italy the new iPhone 3G costs two to three times more than in America. I outguess
that many thousand people will go into debt in order to buy and maintain it!
I’ll remain with my old mobile till mobile companies halve the price (maybe never).
July 11th, 2008 at 7:33 am
Amanda wrote: But I have my iPhone. It’s all about personal choices and doing the math.
Exactly.
When I was younger, I didn’t understand this. I just bought anything I wanted (on credit) indiscriminately. Now I weigh the choices. There are times I choose the Now (the iPhone), but most of the time I choose the future!
July 11th, 2008 at 7:42 am
A million dollars? Sure. I am forgoing one for free right now.
July 11th, 2008 at 7:54 am
I don’t understand the obsession with the iPhone. I’ve seen one in use a couple times and thought to myself, “Well, I have a laptop and a regular cell phone - why would I need a handheld computer that makes phone calls?” I’m sure I’m missing something because I go out of my way not to keep up with all the new gadgets.
July 11th, 2008 at 8:07 am
North of the border, in Canada, the iPhone service plans are the most expensive in the world, second only to Italy. No thanks, I’ll keep my money.
July 11th, 2008 at 8:12 am
Compound Interest Calculator at Moneychimp…I used that to illustrate what an astounding amount of money I’ll save by not having cable for the next 40 years. Hundreds of thousands of dollars.
July 11th, 2008 at 8:12 am
if the iphone was something that i would use to all beaten h-e double toothpicks, then i probably would. as it stands, i can’t count how many pda’s etc that i bought for over $400 at the time from the earlier 1990s until i got smart a decade later after realizing that i only used them as an expensive alarm clock. the same thing for my mobile phone: i rarely use them to talk (i have no friends except my wife and people just contact via email), and use them pretty much as an alarm clock.
July 11th, 2008 at 8:31 am
If only I had 45 years until retirement.
July 11th, 2008 at 8:39 am
I currently have no desire to buy one of these and it’s not just about saving the purchase price.
I have an 80 GB video iPod that is full of music, videos, and audio books for the bus commute to and from work.
My video iPod also doubles as a backup hard drive when I need to transfer larges file between home and work.
Read my 6 reasons for NOT buying one:
http://www.nickstraffictricks.com/6-reasons-i-am-not-buying-the-new-iphone-3g/
July 11th, 2008 at 8:44 am
Great comment Amanda. It is all about personal choice and if you budget for it then you should be able to have the joy of owning one.
Keep budgeting.
July 11th, 2008 at 9:14 am
I must be from another planet because I really don’t understand the obsession over cell phones. I understand why people would want a cell phone as it is a handy tool but I don’t understand why people need all of the bells and whistles and must upgrade their phone every two years. I saw a perfect example of this a couple of months ago when I was with my boyfriend in a Sprint Store (he was getting a new phone, not me). A woman walked in and said that her plan had been converted to the Sprint Everything plan that had just been launched. She said that GPS was included in that plan and wanted to know if her phone was compatible. The sales guy looked at her phone and said no. Being a sales person, he then tried to sell her a new phone. As she was looking at the new phones, she said “What exactly is GPS?” This blew me away, she didn’t even know what GPS was but she knew she wanted it.
July 11th, 2008 at 9:46 am
isn’t it possible to have the iphone and still strive to be a millionaire? =)
seriously though.. it’s funny how apple tries to get you.. they lowered the price (but up’d the data plan an extra $10 a month for the 3g) so in the end you’re still paying the original amount
i don’t plan on getting it.. i’m holding on to my 1st generation iphone as long as i can
July 11th, 2008 at 9:47 am
Nick and Jeremy are right on target. Even if you were able to get someone to take over your current cell phone contract with another provider, you still have to pay $75.00 per month for the service. I don’t understand the obsession with this thing. I have a 3G IPOD with video, 4GB that serves me fine. But, I’ve discovered that you can order a Slacker and download different radio stations for $250.00 for the device and only $7.50 per month. It then begins to remember your likes and dislikes and starts customizing those stations to the types of songs and artists you like. The device only holds 4,000 songs but to me that’s a bargain.
July 11th, 2008 at 9:50 am
I was getting very close to buying one until I saw how much more expensive this version is than the last. ATT is a bad company for Apple to have hooked up with. I’m happy I’m sticking with my sub $100 per year cell phone expenses.
July 11th, 2008 at 10:08 am
Apple makes good products indeed. Too bad they get hyped beyond belief. When I read the comic on Joy Of Tech, one of the first things I thought of was Get Rich Slowly, lol. I guess I could just put money aside in my ING account and plan until next year when the next iPhone is out.
July 11th, 2008 at 10:32 am
@Kevin on #8:
Let’s go back 43 years…
The DJIA was around 878 on July 11, 1968.
Right now it is around 11,022. Do you think people 43 years ago were imagining the DJIA would go from 878 to 11,022?
This is the power of compound interest. This is why we humans make stupid decisions about our finances every day. We live in the present - we don’t think in the future or in terms of compound interest.
And keep in mind the DJIA is just a handful of companies. It is not the entire stock market by any means.
July 11th, 2008 at 11:00 am
These kinds of “loose” calculations and wildly speculative ideas are what prevent so many people from “getting” the whole frugal thing. They see articles like that and say “Are you kidding me?”
July 11th, 2008 at 1:55 pm
The assumptions made in the comic are loose on both ends — both the market return at 10% and the price of the iPhone which is the top of line model with the most expensive service plan. I’m sure they did this for dramatic effect, but it is a little deceptive.
What they don’t take into account is the fact that an iPhone serves as a phone, iPod, GPS system, and mobile Internet device. The cost of purchasing all of these items individually could very well cost more than an iPhone. I explore these issues in my article Is the iPhone 3G Worth It?
July 11th, 2008 at 2:37 pm
iPhone or millionaire? I choose both!
July 11th, 2008 at 2:58 pm
1 Million dollars is the opportunity cost for having an iphone? Makes you think what else we could do without, to create more income. Let’s see if I get rid of cable, internet, and my current cell phone I wonder how much I would have in 30-40 years. Maybe 3-5 million?
I realize the article was just a generalization, but it makes you think.
July 11th, 2008 at 3:32 pm
thanx, this was a good kick in the butt. I was just reading how much I can trade my phone in for to get a new blackberry. truth is my treo is still working just fine and I do not need to keep up with everyone else and their fancy phones! hoooorah!
July 11th, 2008 at 4:40 pm
Don’t have an iphone. Don’t want an iphone.
I’ll gladly take the million though.
July 11th, 2008 at 5:39 pm
Am I the only one who saved up for an iphone? I wasn’t able to get one today, but I was able to put an order in. I got the smaller capacity one though, I just don’t see what I need the biggest baddest for.
Oh, also, luckily my work is going to subsidize $40/month of the plan, so my outlay for mobile plan isn’t changing month-to-month. If anything, it might be going down a little.
Regardless, the lad in the comic is likely going to have to have a mobile anyway, so I think it will end up being more or less a wash.
July 12th, 2008 at 12:30 am
My husband bought himself an iPhone when it first came out (as a business expense). He swears by it and says he’s been much more efficient and productive since he’s had it. I don’t know how it’s any different from a blackberry or notebook plus cell phone, but I guess he likes it all in one thin, slick, easy-to-carry package.
I personally would take the $1 million, but for the sake of peace at home, I have avoided an argument with the mister about this. Peace in one’s household may probably be worth more than $1 million when you think about it!
July 14th, 2008 at 10:46 am
If other people didn’t buy iPhones and such we wouldn’t get the returns we’re hoping for by investing. I think we should encourage their purchase and mock people without them. Also new cars and riding mowers.
July 14th, 2008 at 11:15 am
I for one am saving money on my plan with ATT and the iPhone. I was with Sprint for a decade and use my cell phone as my primary line. By adding a family plan to my ATT/iphone account, the two lines are $15 cheaper per month per line than what we were paying with Sprint - and Sprint couldn’t offer any retention offer to compete with my iPhone plan.
The iphone hardware cost of $199 each plus activation is under $250 per line. So if I can somehow take that $500 and invest it somewhere else with the rest of my regular savings and investments, and turn the $500 into $1M, I’d like to see how that’s possible.
Frankly, the journalists who latch on to tech and other buzz and exploit it with bogus headlines to get their page views up are just as much scumbags as the paparazzi in Hollywood.
And we’re all tools for not being able to look away.
I love my iPhone. It’s the best phone I’ve ever owned. And the internet and bells and whistles over what I would get through purchasing another handset just add to that value.
Here’s the real math - over the next 12 months, my 2 iPhones and plan will have cost me $2540 and then $2040 per year after that (although the plan price will most likely drop).
In the end, I would take $1M over the $2040/year my 2 iPhones are going to cost me. Who wouldn’t? I suppose the author is saying go without any phone at all and invest an extra $2000 bucks per year to become a millionaire?
If you stop driving your car, you’ll save more money on gas than it costs to have an iphone.
Bogus bogus bogus.
July 15th, 2008 at 10:54 am
For phones, I think one must weight in advantages, too. For my phone (not an iPhone but a pretty new and expensive Nokia) I can list these advantages for myself:
1) A camera making resonable photos. I won’t always carry along a digital camera but the phone I always have with me. This is especially valuable when having kids as otherwise some photos won’t exist.
2) Navigation in my car. Makes trips less stressful and finds shorter routes. The latter saves gas and thus money.
3) Using it for timetables for public transport. Really handy when using it instead of ones own car to get to places one wasn’t before. Especially if it is extremly easy to create your personal ones w/o any need for using a PC.
4) Also replaces the PC for part of my web browsing at home. As a phone uses far less energy than a full blown PC, this should save some money in the long run. Is also more comfortable and flexible than sitting at the desk.
5) Use it to listen to radio shows that I really like (available as podcasts) instead of only those broadcast on radio right now. Not possible with my cars radio and not as comfortable on a normal MP3 player.
6) Using the postcast feature to listen to English language podcasts. Helps me improve my English - important to me, as I don’t have the advantage of being a native speaker.
7) Can also get used to watch a TV show recorded on TV. That one will be useful in public transport. So one can better schedule ones time. For using while driving this is less advisable for obvious reasons.
9) Gives me the ability to have an Internet connection everywhere for a laptop. Instead of paying for hotel’s WLAN I just use my mobile phone. Works very well with UMTS.
10) Replaces the alarm clock. I don’t have a wrist watch, either. Why bother if the phone already does it.
11) Also sometimes handy is the abilty to take notes. It is not necessary to take pen and paper with me for this.
12) Allows me to have my own personal call handling. Who should normally not call me, gets straight to the voice mailbox. Is also extremly configurable (can be setup even with a complete menu system) and something my last phone couldn’t provide. Helps keep calls away where someone got your phone number previously but shouldn’t use it anymore.
To me all the things taken together make it worth the money even though I now need a data plan.
July 16th, 2008 at 8:01 am
I don’t get the hoopla about the price of the iPhone. People think this is NEW pricing? The iPhone is simply now in line with most other “smart phones” who cost around the same price. Crackberries, Windows Mobile Devices, etc. all use the same basic pricing. Cheaper cost on the phone, 2 year contracts, data plans, etc. I guess because it’s apple doing it it’s news though.