I written before about being prepared for personal financial downturns.  I think it’s always important to be prepared.  Part of being prepared is knowing what can be trimmed at moment’s notice.  This is one reason I think if you can avoid signing contract, do so.   Clearly companies give you financial benefits for commiting to a longer periord. This is true of Gym membership,  Cable and Sattelite service, Mobile Phone, etc.  But how do you value the tradeoff between a lower monthly fee vs. the flexibility of being able to quit whenever you want?

The simplest way to compare is to just compare the cash difference.  For example if a phone plan with a 2 year contract is $40/month, and without the contract is instead $50/month, we might be able to simply look at the difference in payments over that 2 year period. 40X24=960.  $50X24=1200.  The difference in payments if $340.  So the question is the option to exit at anytime over the next two years worth $340? Most likely it’s better to sign the contract, and get the lower monthly rate if you look any single item.   Still this tells us nothing about really how valuable being able to quit something is.  Sometimes it’s about the flexibility to switch to a cheaper or better service.   However, what I’m really concerned with is understanding if we can afford the commitment.
The real issue is not an single expense, but the ability to trim excess expenses to get down to the bare necessities.  If you’re contractually obligated to 10 different services, it could become very difficult to keep up with your bills if things turn south.  It might make sense for instance to sign contract to get lower rate as long as you can limit your expenses below a certain amount, but after you’ve already commited to spending X every month it might not make sense. Below is rough version of my expenditures for the last month including yearly items prorated for one month, and what I would do in the event of losing my job:

  • Real Estate Taxes: $250
  • Condo Fee: $515
  • Student Loan: $120
  • Rent: $1000
  • Mortgage: $1320
  • Balance Transfer: $100 (Move To Home Equity to lower monthly payment, reduce to $25)
  • Electricity: $50 (Cut down on electricity usage. Unplug electronics. Should be able to reduce to $40)
  • Auto: $130 (Cut down on driving, potentially sell car if things don’t look up, initial cut to $110, longer term $0)
  • Groceries: $250 (Stays the same as I shift to more but cheaper groceries)
  • Dining: $350 (Cut down drasticaly to about $100 a month)
  • NetFlix: $5 (Cancel)
  • Sattelite: $50 (Cancel)
  • Gym: $38 (Cancel)
  • Other: $400 (Cut to $100)

You’ll notice that I don’t have a phone plan of any kind - that’s because I’m on a mobile family plan with my brother and my parents.  I have no need for a landline, and avoid that completely.  The family plan saves my family collecitvely a boat load of money since none of us use very many minutes.  The incremental cost of another number given the discount my brother has through work is only $10/month which he has generously subsidized. 

Effectively I think I can cut my monthly outflows by about $750 within a month if need be, leaving me with an expected outflow of $3830 per month.  My expected inflow from unemployment (after taxes) and rent on my condo is $3510.  However if I were locked into contracts with my Gym, Netflix, or Sattellite, my flexibility would be limited by nearly $100 a month.  $100 a month is alot when you’re not getting paid.  Covering expenses by either dipping into savings or credit is never an ideal option.  Ideally you want to have budget that can be trimmed in such a way that unemployment and other non work related income sources are sufficient.  So when evaluating the next commitment to make, it’s best to make in the context of all your commitments, and your expectations of job security.  Job security runs both way.  It’s not just about your company laying you off, but you laying off your company off.  Don’t commit to too many expenses if you think you’re gonna hop on the next train out of town.