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Financial Feud: Buy iPhone outright vs. Make monthly payments

Financial Feud

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In Dispute:

$825

The Argument:

Evelyn

Our teenage son recently asked if he could upgrade to a smartphone, but my husband and I said he would have to shoulder some of the cost. At the time, we were only paying for his basic cell phone plan, so we insisted he pay for the phone (an iPhone4s) and the 2-year contract cost, a total of $825. He thought he should be able to pay the contract month-by-month, but because he has a history of being a spendthrift and probably wouldn't have the money for future months, we said he should pay the entire $825 up front. AM I RIGHT?

Expert Opinion:

Financial Feud

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Evelyn

The Argument:

We've always given each of our kids a monthly allowance and told them that they had to pay for extras themselves (games and equipment, movies, non-essential expensive clothes, birthday gifts for friends, etc.). This helps them learn about setting their own spending limits (budgeting) and thinking carefully about spending options.

Our oldest son usually spent most of his allowance and sometimes tried to sell items to his siblings to come up with more cash (not bad, if the siblings wanted or needed the item). Our middle child, on the other hand, is a real saver. When he wants something, he always has plenty of cash. Their relationship has helped our second son learn to not give in easily to financial pressure but also be generous when giving gifts. It's helped our oldest son learn that you can get fun stuff ... if you have the money for it. If money is short, you have to make choices.

In this case, we told our son he had to choose between short-term spending and the iPhone. He recently dropped out of college and thought he would be able to find a job in time to make future phone payments, but we told him he couldn't count on that.

Evelyn, I think your decision to have your son shoulder the entire cost of the phone, including the contract, is an excellent one: we need to understand the real cost of these items, and that’s often obscured by complex financing and contract plans. So this is a good opening lesson for your son. But making him pay the whole amount up front seems a little harsh. For one thing, you say he has a history of being a spendthrift, but he has somehow managed to save up $825 and has it readily available? That seems a little contradictory. And then, by making him pay up early, you’re missing the opportunity to teach him a valuable lesson about the way this kind of business works, as well as about managing money generally.

Why not agree to let him pay month-to-month, on the understanding that if he defaults on the agreement by failing to make a payment, he loses the phone? You could write a clause that allows him to get it back my making you whole and paying a penalty. If he refused to give it up, you could just cut the service off. That would teach him to respect contracts and read small print!

So, in my judgment, bearing in mind the opportunity for teaching your son some good personal finance lessons, I’d say you are NOT right!

About the author

Paddy Hirsch is a Senior Editor at Marketplace and the creator and host of the Marketplace Whiteboard. Follow Paddy on Twitter @paddyhirsch and on facebook at www.facebook.com/paddyhirsch101
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Smartphone is a privilege. Get the money upfront. Because once he has it, if he's like most people, it won't be as attractive to him as the next upgrade, new feature, etc. and it will take a lower priority in his budget.

The other lesson you're teaching his is credit history. If he had a better credit history with you, you'd be willing to rely on his word. He doesn't so he has to pay up front.

Paddy, I think you're misreading the caller's situation. Nowhere in the transcript presented does it say the son has saved up $825.

I would take a middle position. Require the son to pay 1/3 of the device cost up front + 3 months of the plan. Lend him pay back the rest of the device cost at a competitive simple interest rate, with payments due every month until he repays the balance and interest. Also make him pay the monthly cost of the plan each month. The penalty for untimely payment is to surrender the phone until he comes up with the necessary payments.

I like the experiment with a refereed disputes. Money is such a proxy for deeply-held beliefs and desires that it's often impossible for two or more people to resolve a money dispute themselves. I could do, however, do without the hokey family feud game at the end.

If you repeat this format, please get outside L.A. and D.C. for people-on-the-street comments. Let's hear from Lenexa, KS, Pocatello, ID, and Muskogee, MS. Surely there are public radio stations in smaller cities.

I have been in this situation with my daughter many times. Frist, I want to say that I like to always establish that there is a distinct difference between want and need. Wants are something the kid should probably pay for himself. But, having said that, I would probably make the kid pay for the physical phone himself. That is money you can't recoup, and it's not small change. I have a cell phone account that I allow my daughter to share as long as she pays me her part (whatever is additional with her added on). That way the kid is not tied into a 2 year contract, and in my case, I established with the provider ahead of time that she or the smartphone aspect could be dropped from the account at any time. That's crucial. Then, if she doesn't pony up, I can take her off the account without losing much money.

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