May 5, 2019
Subscription-based business models absolutely eclipse alternatives, such as one-time downloads or in-app purchases; thoroughly-researched psychological concepts drive this cross-industry curiosity. People are very prone to forgetting monthly payments. Once committed, they then face an internal inertia to cancel their “commitment,” which is, of course, exploited by businesses that make it slightly-ever more difficult to cancel said subscription:
Pricing & the Psychology of Consumption
Sneaky Subscriptions Are Plaguing the App Store
How Easy Is It To Cancel Netflix/HBO/Amazon/Hulu?
The icing on the cake here, the real irony, is that monthly payment plans are no phenomena — they’ve been around for decades.
From the gym down the street, to rapidly growing direct-to-consumer brands (Dollar Shave Club, Harrys), to the usual culprits in popular consumer products (Netflix, Spotify, Prime), to the old guard institutions like car & health insurance — everywhere you look another product or service is justifying a monthly take of your pocket.
From their point of view, it makes capitalistic sense.
From our point of view — you, me, & every other individual attempting to grow wealth, however, it’s worth re-analyzing subscriptions from another perspective.
In wealth-building, the name of the game is to accumulate enough assets that produce more monthly cash in-flow than monthly cash out-flow; in order to achieve true financial freedom, the monthly cash in-flow ideally comes from one of the rare-but-real, hands-off, passive income assets. So the question becomes:
How much money do I need to put away in a passive income asset, in order to remain cash-neural for any given subscription?
I’ll let the math speak for itself, but here’s the tl;dr: monthly subscriptions are really expensive if you ever plan on living purely off of capital invested. I’m not saying all subscriptions are bad or that in today’s consumer environment it’s even remotely possible to live subscription-free, I’m simply putting forth a fresh mental model for clarity’s sake.
People vastly underestimate the expense of a purely-passive income stream. Why does this matter? Because it’s a great gauge of what it’d cost you to remain cash-flow neutral, or break-even, on any given month. Beware, when I say passive income stream, I mean truly passive, not real-estate/rental, royalties, or side-businesses —completely hands-off cash-flow, true freedom. Very few assets fit this criterion, but they do exist. The investment asset that I’ve personally found most accessible & tax-friendly is the qualified dividend, so we’ll stick with that example; I don’t want to get too deep into the asset itself, so feel free to learn more about qualified dividends here, here or here.
Now that you know the why (remain breakeven with cash inflows), the when (any given month) & the how (qualified dividends), it’s time to address the what — the golden rule. A useful approximation for weighing monthly subscriptions against passive cash-flows is as follows:
Every $1 in a subscription requires a $300 budget
Re-read the sentence above & internalize it. This means that if you want to be one of the rare few that lives off of purely-passive income, in order to breakeven, you need to put away $300 in a qualified dividend stock for every $1 committed to a subscription.
I’ve made a pretty graph below that approximates the required budget for multiple subscriptions:
Right off the bat, I’ll caution that this, is in fact, an overly-optimistic epithet that doesn’t account for federal taxes. Yes, qualified dividends receive a few key tax breaks that I won’t get into here, but they’re still taxable — the number above is a memorable, but positive estimation since it doesn’t account for taxes.
For the financially advanced, I’ll disclose the logic here: $300 is the amount one needs to invest in a qualified dividend stock with a 4% dividend yield in order to start receiving an average of $1/month. Observe that I’m practically ignoring a time horizon — why? Because I want to reflect the true, immediate cost to consumers. Most, if not all of the literature surrounding the topic of passive income streams is accompanied by some lecture on the magic of compounding & how if you put money away for the next millennia you’ll be good. Examples dealing in decades are academic & theoretical at best, I’d rather reflect the true cost of an immediate, over-the-counter, passive cash-flow.
This isn’t the Latte Factor— I’m not highlighting the opportunity cost of daily (or monthly) expenditures on a decades-long timeline, instead, what I’m displaying is the price-tag of true, financial freedom, relative to common monthly subscriptions. Not advocating some mass exodus from subscription services, my aim with this article is simply to provide a memorable tool to help evaluate future financial commitments.
The next time you’re considering signing up for service X or Y, you can now roughly estimate the amount of funds you’ll need to put away in order to remain cash-neutral: $300 budgeted away for every $1 monthly subscription.