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Monday, July 30, 2007

Monthly or Annual Payments?

Many different services offer the option of paying monthly or annually. This raises a question we have to consider of which is best for the given service. There are several factors which I believe ought to be considered.

Factor #1: Price
Generally, when you choose to pay annually, you are given some sort of discount. Sometimes this discount isn't very large, though it can add up to be significant when you pay for all of your services annually. My car/renter's insurance premiums incur an extra $1 service charge per month to be paid monthly - a cost of $12 per year (a fee of less than 1%). The Xbox Live gaming service is billed at $5 per month or $50 per year, so the cost of paying it by the month is $10 per year (a fee of 20%!). Consumer Reports Magazine is available through a one year subscription rate of $26, or cover price which would total $71.87 over the course of a year, so the cost of paying by the month is $45.87 (a fee of 176%!). Consider the extra cost which paying monthly will incur, and what percentage of the annual cost this fee is!

Factor #2: Convenience
When faced with annual or monthly payment options, which is more convenient may depend upon the service. When something is billed annually, you only have to concern yourself with paying for the service once a year. When it is paid monthly, it is much easier to budget as you don't have to put away money each month in preparation to pay the annual fee/premium, but instead you simply pay each month without the temptation of spending what ought to be saved for a future premium.

Factor #3: Satisfaction Guarantee
Sometimes when signing up for a new service it is a good idea to pay by the month at first, to ensure that you desire to continue the service before you put down the large cost of an annual payment. Within a few months you should know if you want to keep the service or discontinue the service. If you want to continue it, then you may wish to change to annual payment. The added security of being able to easily cancel without having to get a refund on your annual payment may be worth the extra cost at the beginning.

Conclusion
When considering paying for something by the month instead of paying annually, look at which option is cheaper, generally the annual payment option. Recognize that the service you are paying for costs that lower amount. Then consider the extra cost of paying for the service in the other option. Is the convenience or satisfaction guarantee given by that second payment option worth the extra cost? Because the extra cost you are considering to be able to pay for the service monthly is a fee for convenience! Many times we can cut convenience fees and save a significant amount of money in the long run and over many different services!