Money Hack #5: Beware of subscriptions
Subscriptions are getting more and more popular. There are the obvious TV streaming services like Netflix or Disney+, or the newspaper subscription (although digital now instead of a printed version). But they're becoming the norm in a lot of sectors where they weren't before. While it was once reserved for niche boxes like Japanese candy or cosmetics, you can now buy plenty of household products like coffee or pet food with a subscription. Retailers often even give a discount if you do. Apps that were once sold for a one-time fee are now available for a monthly subscription, like Photoshop, Office, even Tinder. And many merchants will even sell you a subscription to improve how you use their services: Amazon Prime, Uber Pass, or the original Costco.
Why is that happening? What these companies have realized, is that subscriptions are incredibly good business. Acquiring a customer is hard and can be costly, but once they're subscribed, they'll get billed every month without any work. Even with a little churn, they provide consistent and predictable revenue, whereas one-off purchases are exactly that: one time only.
Now, just because they're good for business doesn't mean they're bad for consumers like you and me. Indeed, it's great to be able to pay for a few months of a specialized software you need, without having to drop over $100 on it. It's also great to be able to watch shows on Netflix for a few months, cancel and come back later without being sucked into a costly cable contract for way too much money that you can't cancel before 2 years.
On top of that, for stuff you do want to be recurring, it's great not having to manually buy it every month. To come back to the Netflix example, if that's your entertainment budget and you plan on keeping it for a while, getting billed every month automatically is great. That's the good side of subscription! Good for the business, good for you. Everybody wins!
Now, you may be wondering why the title of the article isn't like anything you've read so far. Is this what clickbait is? No, of course not. While subscription can be great, it's important not to get complacent with it. It's far too easy to subscribe to a bunch of things you don't need or use anymore and keep paying them just because they're billing you automatically. By the way, this is where making a budget can help you uncover those blind spots.
To go back to the streaming services, what if you're subscribed to Netflix, Disney+, Hulu, Amazon Prime Video, YouTube Premium, and a couple of Twitch streamers? There are only so many hours in a day you know. But it's easy to add them one at a time and never cancel them.
Another example is with clothing. Let's say you want to buy a $30 shirt, but you get a 10% discount if you subscribe monthly instead of just buying one. Sounds like a good deal right! Well, the only problem is you just signed up for 12 shirts and on track to pay $324 this year for them. Do you really need those 12 shirts? Or rather, would you have bought those 12 shirts without the subscription? It's important to be real with yourself here.
Do you know what else subscription prevent? Money Hack #2: Sleep on it. That's because the payment is both recurring and automatic. That's bad. You don't get to decide on whether you would buy it every month, making it likely you'll buy stuff you don't really need, because there is friction anymore once you've subscribed.
A subscription's price may sound small at first, but you pay it monthly. If you have a total of $100 worth of monthly subscription, they're probably pretty cheap by themselves. But all combined, that's $1200 per year. $12,000 over 10 years. If you want to know how much $1200 per year is costing you, head over to the Compound interest calculator.
So what should you do? First, make sure you have a budget. This will ensure that you regularly review your subscription, long after you've subscribed. This is a financially good practise anyway, as it will help you catch all kinds of unnecessary expenses and allow you to plan your future. Second, make sure you actually want the subscription you're buying, and that it makes sense to subscribe rather than pay once when possible. Sometimes the answer will be yes, sometimes it'll be no. Finally, review your subscription regularly and cancel them once they stop being useful.