My driver’s permit is coming due. They last for five years.
I’ve got two payment options.
I can pay $100 right now, and the permit is good for five years.
Or, I can pay $25 each year, for a total of $125 after five years.
I can do either option without personal financial crisis.
Which makes more sense?
Even assuming you just pay $125 in a single sum after 5 years, that’s an annual interest rate of 4.56 %. It’s hard to imagine consumer prices keeping up with that.
$100 right now sounds like a far better deal to me. As a comparison, cumulative inflation between 2013-2018 was 7.79%, so significantly less than the $25 extra for the payment plan.
You have to consider the actuarial data here. What are your odds of dying in the next five years? I also assume if you were to become unable to drive for some reason there would be no return of prorated money. It has to factor in your calculations.
Disregarding the possibility of early death/impairment that makes the permit useless, and assuming a yield of about 3% for a CD to hold against your future payments, and continued inflation at about 2% your nett benefit in paying the $100 up front would be about $12.86. Each week you will be able to look at one of the nickels in your pocket and congratulate yourself on your financial acumen.
Now if only you can work out a way to save a dime.
I’d even pay $150 now rather than $25 a year for five years just to avoid the hassle of dealing with it yearly.
I’d say this is a negligible factor for most people - certainly for those under age 65 and in decent health: The chance of driving for another 5 years is very high, and in the rare circumstance that would prevent this (e.g. accidental death), you’d probably care little about the money lost.
The answer to the OP is of course that it depends on your assumption about the future value of money. If inflation is high, deferring payments to future years becomes attractive because they will be made with dollars of lower value. (But this assumes that the price will not change - perhaps dubious.) I think most people would conclude that $100 covering 5 years is the better bet, both from financial and convenience perspectives. I would.
What Kayaker said. Who wants the aggravation every year?
First, I’m assuming that when you say “after five years,” you really mean four years, because I assume you pay the $25 before the year starts. So if your first payment is due now, your last payment is due four years from now. The internal rate of return on the single versus the five payments is 12.59%. That’s a great rate of return in any event.
I’m not exactly sure what a “driver’s permit” is, but how likely is it that you won’t need it for the full 5 years? You might move into a city and stop driving, move to another state/country, etc.
Is there even the most remote chance that you would actually invest the 75 bucks ( paying 25 instead of 100) for one year, then 50 bucks for one year, then 25 bucks for one year? If not, and I wager not, the whole present value of 25x5 years vs 100 presently, is moot. Even if you argue the spending power differential (I.e calculate the effect of inflation) the actual impact on quality of life is so minimal, it is not worth the effort to do the math.
But if you do the math, and it tells you to do 25x5, you need to check either your math or your assumptions on inflation, ‘cause one of them be wrong.
The cash value of the annuity ($25 annually for 5 year) at 3% interest is about $114.50. Your current situation is equivalent to you buying their annuity for only $100. Since this is less than the cash value it is to your benefit to pay the $100.
Depends on your circumstances. They wouldn’t do that around here because people would pay $25 today and never pay the rest. Odds are they won’t get pulled over for a license check. As it is now we’re lucky anybody bothers to get a license to drive.
Pay the $100. The time you save sending $25 to the DMV every year is worth the net risk of loss.
That is my thinking as well.
This, plus who’s to say they won’t bounce the price on the back end.
As you would learn in an introductory finance class, a dollar today is worth more than a dollar tomorrow, and not just because of inflation. To find out by how much, you can use a calculation called “present value”. If you have access to Microsoft Excel, it’s easy to find the value if you know how to enter the formula. The formula is
=PV (rate, number_of_terms, payment_amount, future value, beginning_or_end)
In your case you can use the risk-free rate on 5-year Canadian bonds (roughly 1.6%, which can be entered in Excel as “1.6%” or “0.016”). The number of terms is 5, the payment amount is 25, future value is zero (because you have nothing to show for it after the five years is over), beginning_or_end is presumably beginning (entered as 1 in Excel, meaning the payments are due at the beginning of each term).
The result is that with the five-payment plan you’re out the equivalent of C$121.12 (in today’s money) but with the one-payment plan, you’re out only C$100.00 (also in today’s money). All this assumes that you’ll actually get 5 years’ worth of use out of the license.
I’ve reached the age where buying green bananas is an exercise in actuarial calculations, and don’t even get me started on avocados.
The situation I can think of where paying $25 a year is good is if you are planning to win the lottery next year, so that the value of the $125 over the five years much less than the value of $100 now. I’m ignoring net present value calculations since they don’t change things much.
Given that the OP’s statement makes this unlikely, $100 now is better.
Even if you stopped driving, most people use a driver’s license for Identification.
The licence issuer also offers simple ID. It’s much cheaper, since you’re not buying insurance with it.