A back-of-the-envelope calculation on an LJ Permanent Account.

[randomness]

LJ permanent accounts are now on sale. I'm thinking aloud: does it make any sense for me?

My paid account costs me $19.95, charged to my credit card annually. A permanent account costs $150.

Assuming I can earn 3% interest on my $150--a rate I can easily get from a money market fund--that $150 grows to $195.72 over 10 years. (Today's average yield for a money market account in Massachusetts is 3.46%, according to bankrate.com.)

Ten years of a paid account works out to be $199.50.

Assuming that LJ doesn't raise its prices, and assuming that I can continue to earn 3% on my money, it will be 2017 before I come out ahead on my permanent account. (Of course, these assumptions may not hold.)

So the question is, will I still be using LJ in 2017? Will LJ even still exist?

Worth thinking about, anyway.

If there's something seriously haywire about my assumptions or my calculations, please let me know; I'm not an accountant, nor do I play one on TV. I'm sure there's someone on my flist who probably knows more about this than I do and can point out where I've screwed up.

Comments

[(Anonymous)]

I think 3% is way pessimistic for what you could get with that money. Yes, you could put it in a money market account, but there are other, better options. However, I'm also not sure you're doing the present value calculation correctly, but I don't have time to think about it more and to check whether your way is the same as my way. (I would do the calculation for ten years by summing $19.95 + PV (19.95, 1) + ... PV (19.95, 9) where PV (x, t) is the present value of x paid at time t (with an implied rate of growth term). I don't recall if that's an equivalent comparison to the direction you went-- I sorta think not, but I'd have to do some math to check.) That said, I think you're basic point is sound: in order for lifetime memberships to be wins, you have to have a high enough implied rate of return to cover the risk that the entity will be dead (or dead to you), as well as a high enough rate of return to justify the substantial opportunity cost. This is very frequently not the case.

However, if you expect the costs of paid memberships to go up sufficiently, then it may make sense. (If Livejournal raises its rates 3%/year, then with 3% as your implied interest rate the present value of the future costs, not discounted for risk, would be the same as their price in today's dollars.)

Also, your economic prospects make a difference. If you expect to have lots more money in the future, the marginal value of those future dollars may be less than the marginal value of spending the extra money now. Conversely, if you expect to have less buying power in the future (and would not actually invest the extra money now if you don't buy the life membership), then your actual discount rate may be higher than suggested by the discount rate of the market as a whole.

--Adam

[r-ness.livejournal.com]

I think 3% is way pessimistic for what you could get with that money.

Oh, absolutely. I started out with a significantly higher estimated annual return, but I figured I'd use an exceptionally conservative yield estimate. (Safer to have you saying "You can do a lot better than that!" instead of someone else saying, "That's an absurdly high yield! Unfair!", because your comment strengthens my argument.)