How Subscription Services Can Ruin Your Budget
Subscription Services Aren't as Affordable as You Think
There are so many compelling subscription services out there these days, all with fairly reasonable monthly price tags.
You have your choice between meal delivery services, book or audiobook services, computer software, game subscriptions, music streaming services, clothing delivery, and the list goes on.
Subscription services are everywhere you look, and they usually advertise something of convenience. You don't need to go grocery shopping — just get a meal delivery service! You don't need to go to the library — just subscribe to a monthly unlimited ebook service! All for an affordable price each month...right?
Unfortunately, as compelling as these offers might sound, subscription services can wreck serious havoc on your budget if you're not careful.
"Subscription Creep" Happens Easily
The double-edged sword with subscription services is that they're convenient. Almost too convenient. Most automatically renew every month, so if you're not regularly tracking your expenses, you probably don't realize the impact they're having on your budget.
Other times, subscriptions can happen without us knowing. Maybe we thought we were opting into a one-time payment system, or maybe the terms changed at some point and we never noticed. Even worse, if you are subscribed to something, the price might change.
If you take nothing else away from this article, remember that your first defense to making sure you stay on track with your budget is tracking your expenses. If you are, then it's likely that you're not experiencing subscription creep, or at the very least, you're only subscribed to services that are providing more value than they cost.
With that out of the way, let's look at why these services probably aren't providing that value.
Subscription Services Aren't the Great Deal They're Made Out to Be
Which would you rather do: pay $120 upfront to have a year's worth of access to streaming music, or pay $10 each month for a year?
Most people would choose the $10 per month option because it seems cheaper. It's not as overwhelming. Maybe you don't have $120 to spend right now, but $10 is perfectly doable.
It's almost like using your credit card to buy things you can't afford in the moment. You don't have $200 for that new purse, but your credit card does, and you'll only have to make minimum payments every month to pay it off. What a deal!
That's the wrong way of looking at how to use a credit card, and along the same lines, recurring monthly payments can be the worst way to pay for things.
Unfortunately, monthly services are banking on this short-term thinking, and short-term thinking is never good for your finances.
So you keep signing up for these services — $10 a month here, $15 a month there, $50 a month here — because separately, it doesn't seem like a lot. But sooner or later, you find yourself paying way more than you thought. At this point, you might have actually been better off going with the "pay upfront" model.
Monthly subscriptions can easily get out of hand when you're presented with options like paying $600 upfront for a year versus a lower monthly price of $50. In that context, $50 seems like a great deal, but when you zoom out at the bigger picture, all the $50 deals you've subscribed to can cost you a ton in the long run.
Subscription Services Can Cost You More Than You Think
Let's forget there's a yearly payment option for a second. Some services, like Netflix, don't even offer one — they simply offer a monthly recurring charge on your card. If that's the case, you might not have even calculated how much money a service is costing you per year since it's not framed that way on your statements.
Say you stay subscribed to Netflix for 5 years at the standard $10/month price. That's $120/year, and in 5 years, you'll have paid $600. Not bad, considering cable bills can get into the hundreds of dollars each month, right?
Well...let's take a big-picture approach here. What if you kept that subscription going all the way into retirement? That's a $120/year expense you'll need to account for in your savings.
The rule of 25 is popular for estimating how much money you'll need to save in retirement: 25 x your annual spending. In this case, 25 * 120 = $3,000. That means you need to save $3,000 just to cover your Netflix subscription in retirement.
What if you're subscribed to several services that total $100 per month? 25 * 1,200 = $30,000 you need to save to cover those expenses in retirement. Looking at it from this perspective can give you a lot of insight into how much your expenses really cost you, especially in terms of your freedom.
Another Way of Looking at It — Opportunity Cost
Maybe you're not interested in saving for retirement, or the idea of having to save an extra $3,000 or $30,000 isn't a big deal to you.
There's another way to look at your spending: how much you could be earning if you invested the money instead. In other words, what's the opportunity cost of spending that $10 or $100 per month versus investing it in the market?
You might not think that investing $10 a month is worth it, but let's look at what would happen if you tried, using a monthly compound interest calculator. Assuming you start with a $10 balance and invest $10 each month for 30 years, if your money grew at a 7 percent interest rate, you'd have a total of $12,280.87 at the end of those 30 years. Doesn't that sound better than having to save an extra $3,000?
What would happen if you started with $100, and continued to contribute $100 per month under those same terms? You'd end up with $122,808.75 after 30 years. Most people would much rather have that kind of growth than spend $1,200 each year.
What to Do Instead
After reading those examples, you should realize how horrible subscription services can be to both your current budget and spending, and to your future growth.
The good news is that most services don't have contracts, which means you're free to cancel at any time you wish. Yes, you might have spent hundreds of dollars already, but don't let a sunk cost get in the way of improving your financial future.
Cancel any and all subscriptions that don't fit into your budget or that you don't use often, and critically examine the ones you enjoy.
Ask yourself if the price is justified by your use. For example, if you're paying $100 per month for a meal delivery service, does it stop you from dining out at restaurants? Would you actually be spending more on food without the service? If so, think about keeping it.
Additionally, if you have the option, paying upfront is usually cheaper because discounts are offered for paying in full as it's more favorable to the service provider. They'd rather receive a full payment than a smaller monthly payment. This is common in the case of auto insurance.
So if you happen to see a service you're interested in, or if you can change over to a one-time payment, strongly consider budgeting for it and paying the larger amount, especially if it will save you money in the long run.
Lastly, it's a good idea to make sure you can't get the same or similar service for free elsewhere. If you've been struggling to save money or pay off debt and need the extra wiggle room in your budget, it may be worth making a temporary cut by unsubscribing and going for a free option.
For example, maybe you have Netflix, Audible, Spotify, or a gym membership. Free alternatives would be renting seasons of TV shows and movies at your library, borrowing books from the library, listening to the radio online or subscribing to music podcasts, and walking, running, or doing body weight exercises that don't require equipment.
Either way, any time you cut down on how much cash you have going out each month, you create more room in your budget for your goals, and you cut down how much money you'll need to support that spending in future years.