Paying Money To Reduce Stress

A Case Study in Paying Upfront vs. Instalments

A $3600 bill came in the mail. Ouch.

I knew it was coming. I was expecting it. I had saved up for it. I’m a saver. The “ouch” added in the section above was largely just to build on the literary drama …sorry.

There was something I didn’t expect with this bill though, an option to pay in monthly instalments.

No discount was offered on paying upfront, so surely the better option would be to choose instalments, right?

Maybe there is more to it.

The question: Is it better to pay upfront, or in instalments? It’s time for Profit Pants to crunch the numbers.

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The payment options were somewhat limited. A direct deposit to a bank account, or payment via cheque (that’s how we spell “check” in some parts of the world).

Importantly there was no discount for paying upfront. If there was an upfront discount, then you would simply perform the other calculations we will discuss below, then reduce this by the upfront discount.

We’ll break this into two sections, firstly the financials and then secondly the non-financial considerations which also feed into our decision making process. It’s often those non-financial considerations that we gloss over.

Running The Financials

Interest rates on savings accounts were sitting at around 2%, an all time low.

I hear the critics sitting in the back row launching a verbal tirade. I’ll address that noise. Yes, you can normally beat 2% returns investing elsewhere, but this is money that needs to be returned within the next 12 months, it’s short term. But sure, go ahead and stake your meme coins for a claimed 20% return and see how that plays out for you. This is my article, and I am using 2%.

Money sitting in the bank will grow at 2% per annum. We also need to remember that we have to make those monthly payments, starting from the first payment at day 0. Every month over the year you will be earning slightly less interest. It’s not just a case of calculating 2% of $3600 ($72) and calling it a day.

Here’s how our monthly interest breaks down:

• January: $5.50 ($3300 x 0.02 / 12)
• February: $5.00 ($3000 x 0.02 / 12)
• March: $4.50 ($2700 x 0.02 / 12)
• April: $4.00 ($2400 x 0.02 / 12)
• May: $3.50 ($2100 x 0.02 / 12)
• June: $3.00 ($1800 x 0.02 / 12)
• July: $2.50 ($1500 x 0.02 / 12)
• August: $2.00 ($1200 x 0.02 / 12)
• September: $1.50 ($900 x 0.02 / 12)
• October: $1.00 ($600 x 0.02 / 12)
• November: $0.50 ($300 x 0.02 / 12)
• December: $0.00 ($0 x 0.02 / 12)

Total Interest Earned: $33.00.

Also remember that interest earned is income, it is taxable. So take off another 10-50% for taxes, depending on your tax rate. We aren’t talking one billion dollars, but it all adds up.

The Shadow Non-Financial Considerations

At this point we know that on paper we will be $33 better off (minus taxes) for selecting the monthly payment option. So that’s what you should choose, right? There is a bit more to it that many forget.

1) My payment options forced me to send either a direct deposit or a cheque. Every month for those 12 months I need to log in to my net banking and make a payment, or pull out a chequebook and write a cheque, then post it, paying for the pleasure of postage. The monthly instalments multiply my payment effort considerably, as they are not automatic. I would have had to have gone through the pain once anyway, so this is an additional 11 actions that are required over the year. For the pleasure I am being rewarded $3 each time.

2) Every month I receive an email notification, stating that my payment is due. There are a couple of costs that can be associated. Firstly the fact that I need to open up the email, read it, then take the action from step #1. But secondly, and more importantly, the mental stress that goes along with receiving a bill of any type. Sure, it is a much smaller and manageable amount, but it is still a demand for money. Nobody likes receiving bills. It takes down your mood a few notches. It gets you thinking about your bank balance, mentally calculating that you have enough sitting there. I’m the kind of person who will probably leave that email in my inbox for a day or two before I pay it. I’ll see it there multiple times. Each time slowly grinding away at the back of my mind. Sometimes it is easier to rip the bandaid off once, rather than get 11 additional reminders throughout the year that you owe money.

3) Feeding off the back of item #2, I need to keep it in my mind, and my budgeting, that the money will be coming out each month.

4) Just knowing that you have fully paid a bill can take off a big mental stress. It feels like achieving a goal.

Those 11 repayments for a $33 return come with quite a few strings attached.

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Other Factors Which Can Vary The Calculations

• The accepted payment methods: If there was a scheduled automatic debit from a credit card or bank account, then much of the hassle is taken out of the instalment option. You’ll still need to ensure that you have money in your account, you also may receive a monthly reminder email, however there is no direct effort required to make the payment.
• The accepted payment frequencies: Payment every 6 months, or quarterly, instead of monthly, would significantly reduce the effort required, but would of course also impact the returns.
• Interest rates: This is a big factor. We’re sitting at close to record all time low interest rates. If this same choice was being made with 10% interest rates then things would have quite possibly swung the other direction, fast, 5x’ing the returns. $15 per monthly payment instead of $3.
• The size of the payment: $3600 is already a big amount. But if it were even bigger, say with another zero at the end, and I just happened to have $36,000 sitting around doing nothing, we could also add a zero onto the back of the returns.
• Any discount offered for paying up front: Even without any upfront payment discount the $33 saving for monthly instalments wasn’t too enticing in this case. But many companies will sweeten the payment up front deal by offering a discount of 5% or more. 5% of $3600 is $180, that would have swung the pendulum completely over to the “pay up front” option for me. $180 – $33 = $147. That’s $147 plus all the mental stress benefits of not having to think about the payment again. Also consider that you have already paid tax on the $180, unlike the $33 in interest earned. Not all money is equal.
• Do you have the money?: I was in the very fortunate situation where I had the money ready in the bank for this payment, as it was an expected bill, I had been saving. Sometimes we aren’t fortunate to find ourselves in this ideal situation, and that choice is removed.
• How much do you need money right now?: If you are completely strapped for cash, or want every single dollar to count, then the non-financial considerations may not be weighted heavily at all. And that’s OK too.

So, What Should You Do?

The intention of this article isn’t to tell you what to do. There is no one correct answer.

Even my own answers have varied during different times in my life.

The intention of this article is to share with you the basic thought process that I use.

I’m giving you the tools, teaching you, so that you can run your own numbers …or don’t use my method, come up with something even better!

Money choices are not always as simple as pulling out a calculator.

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