How buying an iPhone can help make you rich

I have an old Sony Ericsson phone that an unlucky mugger would throw back at me. It does the job, but it’s no boy’s toy.

I didn’t even pay for it! A friend gave it to me after a month because he only bought it to use while in Europe.

Its charger has a two-prong European plug. The adapter I use to power it in Britain costs £1.99. It’s my two-quid mobile phone.

Capping this cacophony of cheapness, I have an O2 Online Simplicity tariff that costs £19.57 a month.

I get 400 inclusive minutes, 1,000 text messages, and free calls to my girlfriend – the only person I speak to on the phone for more than five minutes anyway. (I’ll take a face-to-face meeting with a friend over ten mobile phone calls).

My tarriff also allows me to cancel with just one month’s notice. I wish I could have that deal with all the commitments in my life.

This phone then is the epitome of cheapness. Unfortunately, I want an iPhone!

A taste for the Apple iPhone

You know why I want an iPhone. But just in case you’ve been trapped underground for two years (or you’re over 70):

• It’s impossibly cool technology.
• It will update my five-year old iPod.
• It will enable me check email when I’m away from my desk (which for me wouldn’t mean over dinner at a restaurant, but more long weekends away).
• It will also enable me to browse the Internet.
• It’s made by Apple, whose products I’ve loved for two decades.

Just as importantly, smartphones are clearly where it’s all happening right now.

“The world belongs to those who are in love with the new” said a rich man who I forget. The iPhone is like the first Macs and PCs in showing us the shape of things to come, and my business – and perhaps even my investing – relies on being in touch with that.

So why haven’t I bought one? Because I’m being a cheapskate.

What does it cost to buy an iPhone?

I’ve avoided buying the previous generations of iPhones on cost grounds, but the current 3GS model is extremely well-priced.

The sweet spot purchase is the 24-month contract:

• 600 minutes and 500 texts
• Unlimited free data
• £87.11 for the 16GB handset
• £175.19 for the 32GB handset
• £34.26 a month

(The silly-looking numbers are due to the UK government’s dumb 12.5% VAT tax cut, incidentally. (I can confirm the 74 pence saving on the monthly tarriff until December is not making an iota of difference to my purchasing!)

So how much will that iPhone cost? Getting out the abacus and cranking the numbers for the 32GB handset:

• Total iPhone cost over next 24 months: £1,010.75

Over £1,000 – pretty steep! But it’s not as bad as that, since I’m paying for a mobile already, albeit with a (£2) sunk handset cost.

We need to work out ‘the delta’, as we geeks used to say in college.

• Sticking with embarrassing phone for 24 months: £469.68
• Difference: £541.07 more if I go for iPhone

Of course, the handsets are hardly compatible. I can do a lot more with the iPhone.

This factor, sometimes known as a hedonic model of inflation, is often forgotten by people considering deflation and technology. Your new PC isn’t only 50% cheaper than the one you bought five years ago – it’s also 4-6 times more powerful. In other words, it’s MUCH more than 50% cheaper.

But leaving aside iPhone’s extra capabilities and just thinking in terms of my budget devoted to mobile telephony, £541.07 is quite a hike. It will more than double my mobile phone costs.

What does it cost to NOT buy an iPhone?

Can I afford to pay the extra for an iPhone? Yes, absolutely.

Obviously, I’d try to ignore the compounded cost of not investing that £541.07 in a recovering stock market and seeing it multiply over 25 years. At 12% a year, it’d grow to over £9,000.

As ever, I wouldn’t want to touch my invested/saved funds for frivolity like an iPhone, but I can easily pay for it out of my monthly earnings.

The interesting question then: I’ve wanted an iPhone for two years, I’ve waited for the price to come down, and I can easily afford it, so why haven’t I bought one?

I think it’s because the recession and its affect on my monthly earnings has poured cold water over my capitalist ‘animal spirits’.

I’ve written before about how my freelance earnings have been falling this year, as well as about how my plunging portfolio has made me feel guilty about losing money.

My reaction has been to treat income as a precious commodity to be hoarded, rather than a tool to either save or spend in an appropriate balance.

Some of this was a sensible reaction to the realities of the recession, but I think I’ve gone too far. I’ve become like a shell-shocked Japanese consumer:

As recession-wary Americans adapt to a new frugality, Japan offers a peek at how thrift can take lasting hold of a consumer society, to disastrous effect.

The economic malaise that plagued Japan from the 1990s until the early 2000s brought stunted wages and depressed stock prices, turning free-spending consumers into misers and making them dead weight on Japan’s economy.

Today, years after the recovery, even well-off Japanese households use old bath water to do laundry, a popular way to save on utility bills. Sales of whiskey, the favorite drink among moneyed Tokyoites in the booming ’80s, have fallen to a fifth of their peak. And the nation is losing interest in cars; sales have fallen by half since 1990.

I’m turning Japanese! And that could bode very badly for my financial future.

There is a spectrum of earning and spending that has risk-taking, high-rolling entrepreneur at one end and Jesuit monk at the other.

I may think it’s too risky to start a business again – at least until I’m emotionally ready for it – but I’m too young to be capping my own income for decades with self-limiting beliefs that have crept up on me via the recession.

I’ve much more to say about this topic; I believe we all have a mental image of what we can earn that influences (not entirely, of course) the outcome.

Discovering where you got your mental image come from can be an interesting journey; mine was related to what others in my family earned.

To conclude for now though, the case is clear.

I can afford to buy an iPhone.

It would be far better for me to look to grow my income to earn an extra £50 a month (before tax) to pay for it rather than to become financially defeatist and hoard coupons for the rest of my life.

To discover in a few weeks if my iPhone is worth that lost £9,000 of portfolio value in 25 years, subscribe for free via email or RSS.