Saving $1400 With a Prepaid Phone Plan

This post will show you how I will save roughly $1400 over the next two years by buying a new unlocked phone and getting a prepaid phone plan instead of a standard contract.

Why I Switched

I put my last phone through the washing machine (and dryer), and while it still somehow works, it ain’t pretty. It now can serve as an ugly alarm clock or workout MP3 player.

My jacked up phone

So, I was in the market for a new phone.

New phones under contract are not often expensive to obtain, but the costs add up over time due to high monthly subscription fees. According to one article, the total cost of ownership (TCO) of a brand new iPhone 5s with mobile hotspot is roughly $2200 - $2700. That is $1225 a year on average. This does not count the new accessories Apple will probably make you buy to connect it to your computer or charge it. :)

Realizing this, I set about finding a cheaper option.

The prepaid option

The last I had heard of prepaid phone plans (PPP) was when I was in college and you used it for either a throwaway number, calling abroad, or you didn’t have good enough credit to pay for a “real” plan. Probably a misinformed bias on my part.

When I looked into them again, a few things appealed to me:

  1. PPP are contract-free, which means no cost to stop service or switch carriers (besides any small setup fees, like SIM cards)
  2. PPP can be much cheaper than standard contract plans, maybe as low as $30 a month
  3. I am not much of a phone talker. My average minutes per month for the last year were below 100 minutes a month

These aspects led me to do a little research and get creative with my phone plan. Even if you are a big phone talker, I still think there are plans out there that would be better than a standard contract plan.

My prepaid plan

There are a few options out there that might be appealing based on your usage. Most of the low (30 MB a month!?) or slow data plans out there did not seem useful for a smart phone. I also wanted a carrier that would get reasonable service throughout the US. Side note: some PPP carriers will work across multiple networks, so you can get pretty decent coverage.

I ended up going with one of the following T-Mobile plans:

  • $30/month
  • 100 phone minutes (extra minutes: $0.10 each)
  • unlimited text
  • unlimited data, first 5 GB at up to 4G speeds

Pretty solid. About the only thing I give up compared to my previous plan is some phone time (100 vs 400 minutes) and it is $30 a month instead of close to $80. But I can use Skype or Google Voice pretty easily, and that should take care of most high minute usages.

I needed to order a SIM card from them, which took a little longer than expected to get. I would order this before you order your phone if you are serious about it.

My new phone

Most high-end unlocked phones in the recent past were pretty expensive to buy. You could be looking at maybe $600 or so for a non-carrier-subsidized phone.

When I purchased my new phone back in June, it was $299 unlocked for an 8 GB version. It would have been nice to get the 16 GB version, but it was $349, which was a bit more than I wanted to pay. Recently, the phone prices dropped to $199 and $249, so you could get the 16 GB version now for cheaper than I bought my phone for (if it is still available.)

Not all phones are unlocked. I think you generally have to buy them unlocked in order to use a PPP. I am not an expert, so there may be ways around this.

I’m sure unlocked phones will be getting better and cheaper, and the nice thing is that I can upgrade at any time just by paying the up-front cost. I’d like to keep this one for several years to amortize the up-front cost, but knowing there is an option is nice.

This phone has free Wi-Fi and Bluetooth tethering (why I focused the iPhone price on the plans with tethering.)

Really, I think of my “phone” as just a small tablet computer that I happen to sometimes use as a device to connect to telephones. In that sense, it gets the job done pretty well.

New total cost of ownership

At $300 phone cost, plus $10 for prepaid-compatible SIM card from T-Mobile, plus $30 a month the plan for 24 months, I’m looking at $1030 total cost over the course of two years. Already this is cheaper than a new contract iPhone would be for one year. Total savings: ~$1400.

Any minute overages just cost $0.10 a minute, so I can double my 100 monthly minutes for just $10. If I keep my phone for three years instead of two, the economics look good ($50 savings a month for a year is $600.)

Cancelling my old plan

I still had a Verizon contract on my old phone and it would cost money to break the contract. I wondered: should I keep my old plan? My old phone still had a $80 a month plan, with six months on it. The cost to cancel was about $150. Crap.

Well wait a minute, maybe I should do the math.

Keeping old plan: $80/month * 6 months = $480

Going to new plan: $150 to cancel + 6 months * $30/month = $330

Clearly I should go to the new plan! (Endowment effect almost got me.) The old contract was a sunk cost.

Transferring my number

I was able to transfer my old number to my new phone without too much hassle. This was probably the hardest part about the whole thing. One important thing is to ensure that you do not cancel your current plan before you active your SIM card and port the number to that SIM card. Otherwise you lose the ability to transfer the number. In my case, the last 7 digits of my phone number are a palindrome, so I was loathe to lose it.

Bill automation

When I transferred the number, I needed to make the first month’s payment on the phone to get it activated. When the next month rolled around, I had something on my calendar to remind me to put more money on the card. I figured this was going to be a pain.

But, I didn’t need that reminder! T-Mobile helpfully sent me a text reminder to let me know when there were a few days left to put money on my account to pre-pay the next month. And there is a way to set it up so you can link a credit card or bank account to it to. I now have it automated, and don’t have to worry about it. If you are worried about minute overages, you can always just put $10 more on there and be covered for a lot of extra minutes.

Was it worth it?

So all told, probably took me a couple of hours to research this and get everything set up. I think it was worth it, from a financial standpoint ($500 an hour?) and a “sticking it to the phone carriers” perspective. Plus, I got a blog post out of it. :)

I think that things like this will only become more common and with better options as time goes on, so if you are looking for a good phone plan for not a lot of money, I recommend checking out unlocked phones and prepaid plans.

I’ve been using it happily for over three months, and I have no serious complaints.

What did I miss or get horribly wrong about the phone system? Are my numbers on iPhone TCO too low or too high? Anyone else using a prepaid phone plan? Thanks!

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