It seems the recession has left many of us with a fear of commitment — at least when it comes to our money.
Recently, consumers have been gravitating toward services that don’t require long-term contracts. So far this year, LeaseTrader.com has seen a 28 percent increase in people taking over short-term car leases — those with only 10 to 20 months remaining.
We’re not too keen on locking into smaller purchases, either: Customers who prepay for cell phone service made up 65 percent of all new cell phone subscribers in the fourth quarter of 2009, according to research firm IDC. It was the first time pre-paid has surpassed contract plans, and it’s a trend that IDC expects to see continue.
The key, of course, is to know when it makes sense to sign on the dotted line, and when to look for a short-term option instead. Here is some advice for the three most common scenarios:
∫ Rent or buy a place to live? This is always a tough one, but it’s even more difficult right now. On the one hand, you have a ton of inventory on the housing market — July home sales were down 27.2 percent — and much of it is priced to sell. On the other hand, you have a lot of people defaulting on their mortgages, and you definitely don’t want to be in the same boat. If you’ve run the numbers and you know you can afford to buy — meaning you have 15 to 20 percent for a down payment, or at least 3 percent if you’re planning to qualify for a FHA loan, you have a steady income that allows you to easily afford the payments, and you have an emergency fund of at least nine months in case of the unexpected — then how long you’re planning to stay in the home is the best way to draw a line in the sand, says Spencer Rascoff, chief operating officer at Zillow.com. “The old logic used to be three to five years, but the new logic is five to seven years, or more. You need a long enough time horizon to wait out any volatility, should you decide to sell. If you need to sell in 18 months, it’s still going to be a weak market.” In addition to that, there are a lot of fixed expenses that go into purchasing a home, like closing costs, points on the mortgage, repairs and taxes. You want to make these worthwhile.
If you’re worried you’re going to miss out on an opportunity, don’t be. Like housing prices, rental rates are low right now in many areas, which could allow you to spend another year or two saving more money for your down payment. Still, nothing is stopping you from looking into both options to see where you find the right fit.
The one caveat to these aforementioned guidelines? If you’re one of the few people trading up in this economy, you generally want to do that in a declining market, says Rascoff. “Let’s say you own a $300,000 home and you want to buy a $500,000 house. Maybe because of the weak market, you sell your home for 10 percent less, and you buy the new home for 10 percent less. That means you lost $30,000 on the house you sold, but you saved $50,000 on the house you’re purchasing.”
∫ Pre-paid or contract cell phone? This is all about analyzing your usage. Allan Keiter, president of MyRatePlan.com, which offers a few plan calculators, says that pre-paid cell phones generally offer savings to people at far ends of the spectrum — in other words, light or heavy users.
If you, like most people, tend to fall in the middle, you’re probably better off with a contract plan. But if you make only a few calls a week, or your Bluetooth is perennially strapped to your ear, you can find a plan that charges as little as $.10 a minute, or one with unlimited minutes for around $50 a month.
A couple things you want to watch out for, though: Many pay-as-you-go plans don’t offer bundles, so if you send a lot of texts, e-mails, or spend time on the web, that could negate your savings. Your phone choice will likely be unsubsidized and rather limited. You probably won’t get nights and weekends free. And Keiter says the airtime, which you purchase in advance by phone, online or on a pre-paid card, can expire.
Bottom line is to read the fine print, whether you’re signing a contract or not.
∫ Lease or buy your car? If you watch TV, you may have noticed that there are an awful lot of cheap lease offers out there right now. You can snag a luxury car for around $350 a month, and a nice sedan for $179. “We’re returning to the mid-’90s, which means it’s generally becoming more aggressive between auto companies.
The volume hasn’t been as high as they’d hoped for this year, and these offers are one way to get the monthly payment down to a level that people feel comfortable with,” says Art Spinella, president of CNW Marketing research. Dealers are also requiring little to nothing in terms of a security deposit — Spinella says that $2,000 or $3,000 worth of equity in your current car is often enough.
It’s a good opportunity, but the rules here remain the same: If you plan to keep the car for more than four or five years, log more than 15,000 miles a year.
If you’re particularly hard on your vehicles, you’re better off buying. If you do decide to lease, aim for 36 months or longer, and stay away from low-mileage leases. They cost less, but if you go over, you could owe as much as $.25 extra a mile.
With reporting by Arielle McGowen.
∫ Jean Chatzky is financial editor of NBC’s “Today” show and the best-selling author of eight books, including “Not Your Parent’s Money Book,” “Money 911” and “Pay It Down!” Visit www.jeanchatzky.com to follow her blog and learn more about her programs to help you manage your money, including The Debt Diet and Score Builder.