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# How much an iPhone will really cost you

Look at this fascinating quote from this week’s Time Magazine: “…as of last week, the income segment with the highest percentage of visitors to the iPhone site was 18 to 24 years of age, earning less than \$30,000 per year.”

For decades, personal-finance “experts” have told young people not to buy lattes, fancy electronics, and expensive clothes. To which I always reply: How has that been working, grandpa?

I try to take a different approach. Instead of lecturing young people who will simply press ctrl-w and go back to Facebook, how about showing how everyday decisions impact us?

Let’s take buying a relatively large purchase, like an iPhone or a Balenciaga handbag. If you’re going to buy something big, that’s fine — but consciously know how much it’s actually costing you. Not just how much money it costs today, but the total cost of ownership. One eye-opening way to consider a large purchase is the % of your income.

What percentage of income would an iPhone cost you?
Income — After taxes — % of income
\$30,000 — \$24,905 — 1.6%

\$40,000 — \$31,044 — 1.3%

\$50,000 — \$37,439 — 1.1%

\$60,000 — \$43,774 — 0.9%

\$70,000 — \$50,109 — 0.8%

I want everyone to pay close attention because, in the above table, something magical happened: I created the most ghetto HTML table ever constructed. Thank you, thank you.

(Jeff Kuo pulled those numbers here using the following assumptions: single, no children, standard deduction, no adjustments, 7.65% FICA, average state income tax roughly 4%.)

If you’re making \$30,000/year, then, a \$399 iPhone is roughly 1.6% of your salary. Also consider the opportunity cost of investing \$399, and remember that the impact of large purchases is mitigated by holding onto something for a long period of time. For example, you save vast amounts of money if you drive your car for 15 years.

Bottom line: Look behind the numbers when you make a large purchase. It’s not just \$399. And while this might seem to complicate things, ignorance really isn’t bliss. Just go to a mall and watch the people shopping. Can they afford their purchases? The sad thing is, most people don’t know if they can or not. But you can.

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1. ##### Nicole

BUT!!! And iPhone is NOT just \$399! You have to pay AT&T for service on it and I read that full service on an iPhone will run you about \$170 a month. That’s the part of the iPhone rush that floors me. We make well, well more than \$30,000 per year and there is no way that we’d pay \$170/month for phone service.

But then again I’m clearly not in the iPhone demographic ๐

2. ##### Dave

@ Nicole.

iPhone plans are \$60 a month. Obviously, if you’re using a boatload of minutes, the iPhone plan is going to cost more, but the plan prices are very very comparable, and often cheaper than comparable rate plans from other carriers. Think before you post.

@Ramit

I commend you for actually looking at the actual cost of the phone, and not playing the sensationalist “It’ll cost you over a thousand over two years!” card. Presumably everyone has a cellphone, so the cost of the rate plan is just replacing a cost you already had.

3. ##### Ramit Sethi

Nicole, thanks. Dave, no need to be a bully to Nicole — but your point is also great. Thanks to both of you.

4. ##### Presh Talwalkar

Ramit, good analysis. It is amazing how people buy things they can’t afford. It reinforces my idea that people decide what they can afford largely based on their friends.

One of my friends wastes money all the time, and his excuse is that his other friends spend even worse. I remind him that his other friends also have lots of credit card debt and he should instead compare himself to good role models.

This discussion reminds me of a recent study that correlated obesity with fat friends. When did it become acceptable to use bad role models?

http://www.cbc.ca/news/yourview/2007/07/your_friends_can_make_you_fat.html

5. ##### Elizabeth

To add to what Dave said, *do* look at the actual cost of the phone compared with what you pay now. If I decided to purchase the iphone right now, the only cost I would realize is the cost of the phone – I already pay the same amount per month for a plan.

Also consider the fact that the iphone can replace similarly priced phones that have been around for a while (e.g., treo, blackberry, sidekick). Furthermore, if you need mobile internet access, the iphone’s practically a steal.

I also like to think in terms of the monthly cost.

If I am like most people and replace my cell phone every 2 years (and let’s be realistic; how good do even top-end cell phones from 2 or 3 years ago look know?) then I am paying about \$17 a month for the phone (\$399/24 months) — probably more like \$17.75 if you add in the sales tax — in addition to the \$60/month service plan (and again, being realistic, after adding in taxes, fees, etc., this is probably more like \$70/month). So an iPhone costs about \$90/month — a whopping 4.3% of the take-home pay of someone earning \$30k!

7. ##### Nicole

Dave: point taken, it is only \$60 per month

No, not everyone does have a cell phone, although cell phone companies would like you to believe that they do so you’ll buy their often over-priced product and increase their bottom line. Our culture is so caught up in the “must haves” that we forget that cell phones, cable and internet are choices. If you have the money and make those choices, more power to you. But we are not victims of the modern era who must buy these things. We can make other choices and save our money/let our money work for us.

Even if you HAD to have a cell phone there are much cheaper options. If you have the money to spend – more power to you. But the point of the demographics is to say that it is the people with the least amount of free cash spending it on iPhones. It is indeed interesting. It does speak to me of both a lack of financial education and a sense of entitlement. Go America ๐

8. ##### Tim

I like cmadler’s response, as it factors in the phone and the monthly cost. Now how does that compare to having a land-line? I honestly don’t know, having never had a land-line to pay for, but I think if someone uses the cellphone as their primary and have no land line it may be more stomach-able.

9. ##### Idea

I would say that if you want an iphone, then go get it…but cut down on something. I do this to balance what I like to love, can have with must have. Eventually you get into the right spending habits. Sometimes experience teaches us more than reading or being told.

10. ##### Sara

Before we go on another iPhone-hating discussion, this is just as applicable (if not more so) about the iPod. They are ubiquitous, especially in the under-25 crowd, regardless of income level, and they are basically in the same price range (and as some other commenters said, the monthly service agreement isn’t really applicable because it’s in line with the price most people pay already for their monthly cell phone bills).

11. ##### rstlne

Wait, am I missing something here? \$399 looks like a bigger number than 1.6%. If you tell a twentysomething that the iPhone will cost 1.6% of his salary, he’ll say “Eh, it’s only 1.6%” and he’ll just go and buy it.

12. ##### jim

If you would have planned to buy an iphone when the rumors started. You could have invested \$300 in Apple about a year ago @ \$60/share and made enough money out of the deal to fund an 4GB iPhone purchase after the price drop and still gotten about a 20% return.

I’ve never seen an 18-24 year old with an iPhone but I’ve seen plenty of 30-40 year olds, myself included. But I followed plan A at a much higher rate and lower share price than the example.

Visitors to a website doesn’t necessarily translate to sales. A lot of people dream about being able to own something. I bet if you looked at the stats for the Ferrari website, it’s not that much different by percentage.

And as far as the more wealthier people using the deal sites from the Time article, That gets back to my theory of, why you see so many Cadillacs in Wal-Mart or Target parking lots instead of the high end stores.

13. ##### Craig

One other thing to take into consideration is whether or not the iPhone will be replacing an existing iPod. If so, deduct the amount you can get for that iPod on eBay.

14. ##### SavingWithMe.com

iPods and Mp3 players have become almost a necessity among 18-24 year olds. At the very least the iPhone provides the opportunity to consolidate electronics. Now they do not have to buy a \$300 cell phone (Treo) and a \$300 iPod.

15. ##### Mike

Yes, I just love the idea of losing my cell phone, PDA and media player all at the same time. ๐ That’s why I still use an old Palm for my PDA, and a Samsung phone, and my Sandisk MP3 player cost

16. ##### Rafael

I am removing the RSS feed from my Google homepage. The articles seem to get worse over time.

17. ##### links for 2007-09-14 | The Frugal Law Student

[…] I Will Teach You To Be Rich ยป How much an iPhone will really cost you The iPhone is on my list gadgets I would love to have, but this post is making me think twice about it. […]

18. ##### Fabulously Broke

You forgot to mention the recurring costs.

Data plans with the iPhone may be more expensive than what you had before

Accessories – a pouch to carry it in, or a cute skin for it

… etc

19. ##### Anon

“It does speak to me of both a lack of financial education and a sense of entitlement. Go America ;)”
Every country has its issues. I get a little tired of the digs on America.

For me, a cell is not a must-have, but it is a safety issue. I like knowing I can reach someone if needed. So my cell came with the plan, and I just knocked down my minutes to the lowest number they offer because I hardly use my cell.

Anyway, all of that is beside the point. The iPhone statistic makes sense…I can see that age group buying up these phones. Look at who the Apple ads target, not that it’s an excuse for being financially irresponsible. I have a friend who bought the 4gig, and now the 8gigs are \$100 less than his discontinued model. Oh, and he can’t pay the minimums on his cards and is considering bankruptcy (if he even qualifies). I used to feel somewhat sorry for him, even though he created the mess. But when he bought the iPhone, my sympathy ended.

20. ##### Falcone

On the topic of opportunity cost it’s good to take a look at the iPhones overall functionality. It’s a phone, it’s an internet browser, and a media player. The goal is to integrate all these devices. While flashy and fashionable the iPhone lacks in overall functionality. The phone itself can be replaced by any phone (if you simply want to talk to someone) which can be found for a much lower total cost of ownership. If you want to listen to music or watch videos there are many lower cost alternatives to apple products but if you must the 8gb ipod nano is small and is \$199. AT&Ts EDGE network is not by any means the fastest and the usability of the browser while “neat” is not up to par with a laptop. So whiile it’s enticing to think that \$399 is a small price to pay to have all those goodies in one device you may find that your money is better spent on seperate devices that perform equally or more.

21. ##### Stuart

That is a really cool way of seeing things. I hope that I’ll be able to convince my kids of this in a few years time.
Best wishes.

22. ##### Lazy Man and Money

Contrary to what Dave says, it isn’t a simple swap from your old service plan to the iPhone one for some people. I’m an outlier example, but I’ve got a tremendous deal grandfathered in from Sprint. For just \$30 I get everything (including unlimited data and text messaging) in the \$60 AT&T plan including more minutes on my Treo 700P.

By the nature of the iPhone not working with all carriers, such a purchase would really have a yearly impact of an addition \$360 a year for me.

@SavingWithMe.com – The Treo is an MP3 player. You simply need a very cheap SD card to store the music on.

23. ##### will

Nice article Ramit! Too many people in our country think in terms affording something based on just the monthly payment. They will buy something based only on…” can I afford X amount a month” and never take the TCO into account or % of wages.

Will

24. ##### Geoff’s Place » 200K Miles or more on a car can save \$31K in the bank in the long term.

[…] via [I Will Teach You To Be Rich blog] […]

25. ##### Blair

It is true that an iPhone plus service plan may seem like a large investment and when put into reference this way seems even more frivolous. However, some valid points were made already in this discussion.

1. Tech consolidation. If you are a fan of 43folders (how I found you Ramit) and/or GTD, then you are already scoring points with simplifying and consolidating your “stuff”.

2. For some, the iPhone is a perfect replacement for what they would usually buy a laptop for (checking email, surfing the web, etc).

I bought Apple stock at \$23 and have enjoyed the benefits of the successful campaigns of the iPod and the iPhone. I also own an iPod and will hopefully be getting an iPhone soon enough. I like to think of it as “giving back”.

Ramit, unlike Rafael from above, I’ll be checking in more often because I think this was a very well thought out article that doesn’t tell us youngsters what to do with our money, but reminds us to put our financial investments in perspective.

Actually, if you look at all the peripherals and accessories you end up buying along with your iPhone – i.e. Screen Protector, Case, beltclips, Matching BT Headset, etc – you end up spending loads on stuff you would have never considered if you never got an iPhone.

27. ##### j&w

I know about a dozen or so people who have purchased iPhones (and all seem really happy with them, by the way) and exactly none of them have ditched their laptops, iPods/mp3 players, or digital cameras. Yes, you could eBay all your other gadgets but in reality early adopters love having lots of tech crap around.

28. ##### Are you Young and Penniless? Get an iPhone! :: Wise & Young: The nuances of Gen-Y marketing, branding, advertising, trends, & more

[…] Ramit of I Will Teach You to Be Rich pointed out a great stat from a recent Time Magazine article: Yet as of last week, the income segment with the highest percentage of visitors to the iPhone site was 18 to 24 years of age, earning less than \$30,000 per year. Could Steve Jobs have been aware of that when he lowered the price of the 8GB iPhone to \$399 on Wednesday? We can only guess. […]

29. ##### Dara

I think more like, “Will I actually use it?”, & “Will it really hurt to wait until the next iPhone comes out and the price of this one drops?”.

Anyway, I decided that I probably will not use an iPhone except for making calls, which would be a waste. I actually wish there was a cellphone that had no Internet/music/video whatsoever (never use ’em) and just focused on having amazing reception & sound quality of your calls.

I’m all for the iPhone for people whose lives/careers will be helped by it. I think people should spend according to their priorities in life, whether that means investing in an iPhone or not.

30. ##### Sri

But….wait a sec…..

it is a digital camera, mp3 player, phone, pda, chick magnet.

assuming the digital camera is worth \$50, mp3 player + video worth \$150, pda is worth \$100. There…..so iphone might be a good investment after all.

I think its a great deal!

Ramit, dont u own an expensive iron?
One man’s meat is another’s poison ๐

31. ##### Arvind

Well actually, I always thought buying a nice phone with a camera and an mp3 player was such a waste of money, often because they never had the capability of wither of them individually bought. But again, I tell you the number of times I’ve seen a great shot and wished I had the most basic camera(Not too basic though, maybe in excess of 2mp). The truth is that Camera phones work because the best things happen when you least expect it to, and well you can put your price on that and figure whether its really worth it. I for one find my camera a pain to carry everywhere. This phones got a good mp3 player too… The only problem is Ramit, that tech stuff usually get obsolete in months if not a year or so. And suddenly you get this feeling that you’ve been terribly ripped off!

32. ##### Minimum Wage

I certainly can’t afford an iPhone!

33. ##### Naz

I agree with Rafael, this is not your best work. Although, I will hold off on removing the RSS feed from my iGoogle homepage.

34. ##### EA

What I like about this article is that it talks about the personal aspect of buying stuff. There have been a couple of interesting articles about things that people would never buy (like on golbguru’s money matter and more musings site). For me, the iphone holds zero attraction/temptation value. I wouldn’t even be tempted to buy it. I’m one of the people who sees the hype about it and has a hard time understanding/believing it. But I am trying to learn the lesson that it is easy to say no to other people’s desires.

This article does bring back memories of being in the DC area constantly feeling like I couldn’t afford what my friends had. Everyone had a cellphone, a car and an ipod. Not me! And I couldn’t understand how it was that they could afford these things, and felt really frustrated that I couldn’t have them. Now I realize that it is all part of the rat race. You work a lot of hours for those items, and I am lucky not to have bought them on credit, because I wouldn’t have had the ability to go back to school and study something I love on a small but full scholarship. But I don’t think that my friends who have those things are less happy than me, either. It’s all personal : )

35. ##### Pax

Nicole: iPhone plans come in a lot of varieties, and you certainly needn’t pay \$170/mo.

Dave: Probably should have encouraged Nicole to read facts before posting, because I do feel certain she thought; perhaps she just didn’t confirm?

I personally don’t buy accessories other than headphones and one \$50 investment back in 2003 is still with me there, so I don’t think iPhone CAUSES accessory spending, it’s just another example of people frivolously spending. To me, covers and cases take AWAY from the device.

I would also appreciate a no-frills phone that didn’t try to be everything, because I prefer diminutive iPod nanos to the larger options (including iPod Classic, iPod Touch, and iPhone), but no one makes those. That said, the iPhone is overkill for me – if they made an iPhone nano, I’d sure pluck one up, sell my current nano, worry about one device, and enjoy my simpler life.

36. ##### Carlin

“One man’ meat is another’s poison.” That sounds odd. I’m thinking food might sound better than meat, but then again I’ve got a dirty mind.

37. ##### Josh Haynes

Hey, you didn’t use a table. You just used lines with spaces!

38. ##### Instead of an iPhone :: So the iPhone Price dropped but… :: September :: 2007

[…] http://www.iwillteachyoutoberich.com/blog/how-much-an-iphone-will-really-cost-you […]

39. ##### J.R.

It’s very interesting to see the amount of rationalization here, I believe it belies something very telling about our consumer mentality. The article talks about how people don’t take serious consideration of the cost of an iphone in conjuntion with their yearly income.

But most of the posts on this board say “yes, that article is correct But….. if you look at it THIS way, it’s really not too much of an increase and is therefore affordable…”

It’s this kind of rationalization that people could get into trouble with.

40. ##### matt

well said JR, but some of the posts here have been thoughtful ones which some people may take something away from. I have to say, (being 23, married, homeowner, independently employed, and paid for almost everything for myself since i was 15), I really appreciate that my dad never bought me the stuff I “wanted” when I was younger. He never gave me an allowance, but he said “I’ll drive you around the neighborhood on saturdays with the mower if you want to make money, and you can do ANYTHING you please with your money.” He didn’t try to put a lecture in there, he just let me figure it out, and on a small scale. I think that is lacking in this “gimme everything” society. The parents are the first stage of the problem, and the lack of integrity in the credit industry is the second and enabling stage. As a financial services rep that tries to teach people to stay out of the traps of society and thereby be ahead of their peers, I want them all to read things like this site. This is my first visit here, but it will certainly not be my last, because I want to know what is up here and be able to send clients to an easy and transparent source for information that they may actually be able to identify with. Thanks Ramit

41. ##### Thom Fox

I have developed curriculum for high schools and authored a few books on personal finance and appreciate your take on the matter.

While I am no grandpa, keeping away from the Starbucks can help your wallet, although recent studies show coffee drinkers in their 20’s prefer to go retail and forgo the home brew. If an individual purchased a latte each day for a year, they would spend \$1,332.25. If they were to invest that money in the stock market for 30 years, they would have built an approximate wealth of \$30,498.26 – that’s just if they stopped buying lattes for one year.

Every little bit helps, and your pragmatic approach is refreshing. Much luck to you and those you assist.

42. ##### JayChristopher

The data plan I currently hold for my AT&T phone is actually \$10 MORE than the exact same plan with the special iPhone plans. So in reality, after 40 months, it pays for itself, and then after that – saves money.
Although, that \$400 could be used to generate profit in that 40 month period, so I have chosen not to buy – I’m trying to trade my current phone for one, and if I don’t get it, then oh well.

43. ##### julia

okay so i have a question. I’m about 13 years old and i really want to buy an iphone for myself with my own money. I already belong to at&t will that change the price of my bill? Also, i was looking at the plan prices on apple.com and it said already excicting costumers: \$20 for unlimited web, unlimited voicemail, and 200 text messages per month. \$30 for unlimited web, voicemail, and 1500 text messages. Lastly, \$40 for unlimited text, web, and voicemail. Am i considered a already exsisting costumer because i alread have at&t? Also do those plans include my mintues for talking? and last but not least will the price of the iphone drop after christmas? please answer!!!

44. ##### ayanna

@ julia

Honey, take a bit of advice… at 13, please consider saving “your own money”, keeping your current cell phone/ using the equipment protection plan to replace your phone, and not spend so much money on a gadget.

When I was your age, the big “to have” was a two-way pager. In less than three years, two-way pagers went from retail \$600 to about \$100. Five years later you could find them in thrift stores two for a dollar.

Good luck hun!

45. ##### SKIM OR DIE

ayanna how bout u let julia make up her own mind n stead of crushing her plans by talking down to her

46. ##### fraternal

I guess we are better off in my demographic…u can buy an iphone cheap off d blackmarket, hack it to accept any GSM sim. Hype it amongst ur friends and all….so dat wen u want to sell it you make about 180/200 percent gain…Its platinum baby.

47. ##### Walter Paul Bebirian

Aside from the cost of purchase and the monthly charges I am thinking that the time spent or invested in working this tool in places and at times when one might have an opportunity to talk with the person or persons tight in front of them might also be calculated into the mix as well – I see that people are spending a great deal of time attempting to make social contacts (social networking) via the Internet and at the same time ignoring people who they might otherwise be able to network with – face to face – from a certain perspective that does not make any sense whatsoever – does it?

48. ##### Michael

so how are you enjoying your new 3g iphone?

49. ##### Chris

Ramit,

I would guess that most 18-24 year olds who make \$30,000 a year and are buying an iPhone are probably dependents in school with a part time job. In many cases, their parents are paying for at least the service charges and probably the phone too.

50. ##### Save \$1,000 in 30 days challenge! « Serenely the Swan Glides Upon Dreams

[…] things based on personal finance, one of my favorites was about the real cost of owning an iphone, http://www.iwillteachyoutoberich.com/blog/how-much-an-iphone-will-really-cost-you […]

51. ##### 20 questions that financially unprepared people fear | I Will Teach You To Be Rich

[…] 3. Where do you want it to go? 4. Are you rich? 5. What does rich mean to you? 6. Hey, howโd you pay for that iPhone? 7. How much do you automatically save each month? 8. Why’d you pull your money out of the […]

52. ##### Ryan

My cell phone plan is up for renewal next month, and I’ve been considering an iPhone or Blackberry to assist with my freelance consulting business. Your point on the actual cost of the iPhone is well taken. The large cost of any item could also be mitigated by its value in increasing business value and income. I’m still deciding.

53. ##### Pam

I’ve had an iPhone for about 8 months now and recently I’ve regretted the purchase. I’m not so disappointed with the phone itself but with how much it is costing me a month. My plan is \$59.99/month but after taxes it’s just about \$70. At the time I thought \$60-70/month wouldn’t be hard to come up with, but working a part-time retail job and going to school it’s seems like I’m wasting a lot of money on a cell phone. Before owning this phone I was using a pre-paid phone and only spending about \$20/month for service and I’d really love to go back to that. I think come August I just might pay the early termination fee and finding a cheaper phone and plan to go with. It may cost me more up front but in the long run I will be saving more money.

54. ##### A Short Guide to Making Smart Shopping Decisions | Divas With A Purpose

[…] get the full picture. There are other expenses that you should think about, which could alter the total cost. For example, you might have to pay for shipping, maintenance, and repairs. If you buy a cheaper […]