Challenge Orthodoxy
Beware the subscription-based economy
The idea of challenging orthodoxy has been central to my life philosophy.
So recently, I have been pondering the new lifestyle choice being foisted upon so many of us. That is, the subscription-based economy.
A subscription-based economy is a model in which consumers pay recurring fees. That is monthly, yearly, or usage-based access to a product or service instead of owning it outright.
This is another form of serfdom, and it is literally cropping up everywhere.
The subscription-based economy now covers nearly every major industry. In the digital and tech sector, examples include Netflix, Amazon Video, Youtube, Hulu, and Disney+ for streaming media; Microsoft 365 and Adobe Creative Cloud for software-as-a-service; Spotify and Apple Music for music access rather than ownership; and cloud storage services such as Google One and Dropbox as well as email storage service companies like ProtonMail and Google. In commerce, subscriptions are common in programs like Amazon Prime and curated boxes like Birchbox and HelloFresh. The automotive industry is also increasingly adopting this model, with companies like Tesla and BMW offering subscription-based features such as heated seats and advanced driving capabilities. Leasing cars, instead of buying, is a growing trend. And even EV battery leasing programs are being implemented. In health and fitness, subscription revenue is embedded in fitness apps, gym memberships, and Peloton’s membership requirements for classes. Lastly, in agriculture and equipment, companies such as John Deere and other AG equipment companies are moving toward subscription-based diagnostics, software licensing, and connected services tied to annual fees.
The subscription-based services in our lives seem never-ending.
In the housing market, Wall Street and institutional investors are buying up properties and have become significant players in the U.S. rental-housing market, especially single-family rentals. Many believe this is driving up the prices of single-family homes.
President Trump’s solution to high housing prices is to create fifty-year mortgages. Such mortgages would be worse than renting, and will offer little hope for true home ownership. If one were to buy a house for $100,000 at 7 percent interest, interest payments would dominate the payments until years 38–40 of home ownership, when payments become mostly principal. The interest alone would be almost three times the cost of the house, at 299%, with the total payments equaling 400,000 on a $100,000 loan.
During the first decades of homeownership, one would essentially still be renting. But these “homeowners” would still face all the liabilities and costs, such as insurance and repairs, that come with owning a home. Plus these “owners” cannot easily move, as they are tied to interest payments for 50 years. The data show that after 10 years of homeownership with one of these 50-year mortgages, approximately 89% of each payment would go toward interest. After 20 years, about 73% of each payment still goes to interest.
The house payment for a 100,000 house with a fifty-year mortgage would be $665.30/month.
A $100,000 loan at 5 years with 7% interest (fixed, monthly payments) works out to $1,980.60 a month.
A $100,000 loan at 10 years with 7% interest (fixed, monthly payments) works out to $1,161.08. THIS IS LESS THAN DOUBLE THE PAYMENT REQUIRED FOR A FIFTY-YEAR LOAN, BUT YOU WILL OWN THE HOUSE IN TEN YEARS!
The best housing advice one can get is buy a crappy house and pay it off as quickly as possible, - live in it until it is paid off, and then sell for the equity, take that equity and buy a slightly better house, with a small loan payment, and then pay it off in five years. Rinse and repeat until you own a decent house outright.
“You will own nothing and be happy”
But here is the dilemma that many find themselves in. All they do it pay money out to others. They pay rent for their furniture, their storage for photos, their heated car seats, their EV batteries, their music, their entertainment venues - it goes on and on.
Which all leads to having to work to pay for things they neither own nor will ever own.
No equity equals no wealth.
Furthermore, these companies make it difficult to get out of subscription and rental agreements; and they often ratchet up the prices.
There is a considerable risk to all these subscription-based plans. Because what happens to your data when you can’t pay or the company goes under? What happens to your photos, music library, data, emails, etc? Poof! Like magic, they can disappear overnight. And yes, this has happened.
There have even been incidents of accidental data deletion. This year, a data deletion at Amazon Web Services (AWS) was exposed by a senior software engineer, who revealed that AWS permanently wiped 10 years of personal and professional data after a verification misstep. Microsoft OneDrive has also lost client data.
Furthermore, these companies can and will exploit your data. Not to mention turn it over to the government agencies upon FISA request, and they don’t have to inform you when that happens.
Economists sometimes use the term “Subscription Economy Index (SEI)” to measure how fast subscription-based companies grow compared to the overall S&P 500. Over the past decade, subscription businesses have grown several times faster than traditional firms, especially in digital sectors.
Convenience is good, but be wary. There are alligators in them waters.
Why not go to redundant personal data storage systems? Do you really trust cloud services more than you trust yourself?
Do you really need a car that makes you rent to have heated seats?
Is your dream house a viable starter home?
How many subscriptions for streaming and gaming apps are enough?
Do you really need a new car?
Wealth building means saving. One step at a time. This includes building equity.
That starts with weaning yourself off of subscription-based services, and loans with high interest rates - stretched over many years.
It means eating at home and relying less on convenience foods.
Doing all the little things we know to do to save money, yet don’t do.
It means learning to do without and being proud of it.
Dr. Malone! Great advice! I paid my home off in 25 years rather than 30. I hope I did the math right. Give me Algebra anytime! I rechecked to be sure. My first husband passed away suddenly and I was left with the mortgage and the 2nd mortgage we used to do repairs. I paid both off 2009 and it has been wonderful! I do have a few subscriptions to keep out advertisements and make my life easier. You answered the question well about leasing cars or anything like that that. I’m so glad you addressed the 50 year house mortgage.
Oh! I also paid my recent car purchase off a year early. How? Pay on the principal a little each month. Young people you can do it!!!
I realize as I write this that I am responding to a post that I subscribe to, but even so, I have been increasingly annoyed by our growing subscription based society and I'm glad to see an article calling it out for the slavery it is. I still purchase older versions of Microsoft Office for our computers at work just to avoid the subscription fees. They haven't changed the basic features enough in new versions to justify the costs of subscriptions for us.