PAYING ANNUAL VS MONTHLY
- Treavor Dodsworth CFP®, CPA, CKA®
- Dec 6, 2024
- 2 min read
One of the added benefits to having a small amount of money in checking/savings is it allows you to pay for expenses on an annual basis as opposed to monthly. These discounts seem small but do add up over time.
Let's look at an example of auto insurance. For example your two options may be:
$200 per month ($2,400 for the year)
$2,160 for the year upfront
Paying upfront saves you $240.
If you do that for 2-3 cars as well as on other insurance/subscriptions, all those discounts really start adding up.
There is a time value of money cost to this since you are paying out money now that you would have paid out over time. If you would have otherwise had the money in a high yield savings account (earning 4%) this 10% discount is actually closer to 8%-9% but a discount nonetheless.
If we take this a step further, let's say you have no cash on hand and are paying for the bill using a credit card each month. Now you are paying interest on the credit card and missing out on the positive discount you would have gotten.
It is also worth noting that it doesn't always make sense to take advantage of the discount. For example, maybe the discount is only 1% or for example, let's say you have $2,400 extra cash and you are deciding between paying your auto insurance in full or in paying down a 25% interest credit card. You would save more in interest by paying down the credit card then you would earn on the discount on the auto insurance (in the above example).
This is not meant to shame but to motivate. Having cash on hand not only allows you to avoid credit card interest but also to earn discounts. It is compounding in the right direction.