Should you upgrade or pay full price for a new smartphone?

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smartphoneMany, if not most, people wait until their current cell phone contract is up so they can take advantage of the “upgrade” reduced-price offer from their carrier to get a new phone. And those same people seem to accept that they will have to agree to a new contract of one or two years in order to get the “upgrade price” on their new phone.

The upgrade price on a new cell phone is lower than the retail price of the same phone because the carrier is subsidizing the cost of the phone. For example, as July 4, 2014, the full price of a 16-gigabyte Apple iPhone 5s was $649, while the upgrade price at Verizon with a new two-year contract was just $199.99. By subsidizing the cost of the phone, Verizon absorbs the $450 difference and expects to recoup the cost through your monthly payments according to your contract plan.

But the upgrade price isn’t necessarily always the better choice. While an unlocked phone may cost more initially, you may save money in the long run. Thus, in deciding whether you should take advantage of an upgrade price, you’ll need to decide if the subsidy is worth the amount you would pay under the new contract.

Here’s a real life example: For the last several years, I’ve been grandfathered into an unlimited data plan at $30 per month. My cell phone carrier (and most others) don’t even offer unlimited data plans anymore, and the lowest-priced data plan at my carrier is for 2 gigabytes, also at $30 per month. I needed a new iPhone because my old one was on its last legs, but to upgrade, my carrier insisted that I give up my unlimited data plan and pick one of their current plans. I routinely exceed 10 gigabytes of data each month, and all of the data plans for 10 gigabytes or more are over $100 per month. So I’d be paying $70 more per month for less data if I signed a new contract.

I wanted a 32-gigabyte iPhone 5c, which cost $649 at the Apple Store. The same phone was $199 at my carrier if I agreed to a new two-year contract, or $450 less for a new phone. But, over the course of two years, $70 per month equals $1,680 – so if I continued to using 10 or more gigabytes per month, it was a no-brainer to buy a full-price iPhone. It would take less than 7 months to recoup the $450 difference, and after that, I’d save money and get to keep my unlimited $30-per-month data plan.

In addition to keeping an old data plan, buying a new full-price smartphone means you can choose when you want to upgrade again. That means you can choose to sell your phone when you can get a good price for it, and buy your new phone when you’re ready. You also won’t have to pay any expensive termination fees (usually several hundred dollars!) if you decide to switch carriers.