# Pay bill now or later?

Recently I was hit with some hospital bills. Here are some details:

1. Bill total is \$2260.93.
2. Discount if paid immediately: new bill total \$1695.70. This is a one time offer today; otherwise full amount due.
3. There is no interest on a hospital bill.
4. If not paid immediately, a payment plan is required which could be extended to 5 years with monthly payments.

My question is not just which option to choose, but what finance math gets me to that decision. I'd like to understand a bit of the dynamics for future decisions also. I have some understanding of time value of money.

If you've got the money to pay the bill today, do it. They are giving you a 25% discount if you do. You won't find an investment that will beat that.

Let's look at the details of your scheme. Instead of paying \$1696 today, you decide that you will pay \$2261 over 60 months, or \$37.68 per month. You also decide to invest \$1696 today, and expect to get 6% return each year.

Your investment gets you \$102 each year, but you have to pay taxes on that. If you are in the 25% tax bracket, you only keep \$76 (ignoring state taxes). In addition, the loan is costing you \$452 in payments each year.

At the end of the 5 years, you will have paid \$2261 to the hospital, and your \$1696 investment will be worth about \$2123 after taxes.

Instead, let's say that you paid the hospital \$1696 today, and invested the \$37.68 per month. At the end of 5 years, assuming the same 6% growth and 25% tax bracket, your investment will be worth \$2552.

In order for you to come out ahead by investing today and paying off the hospital over time, you would need to get at least a 17% growth on your investment. If you are ignoring taxes, then the number you need to hit is at least 13%.

Conclusion: You will come out ahead by paying the hospital today, and investing the monthly payment plan that you avoided.

(Note: Bankrate has a very handy investment calculator that makes it easy to calculate returns on a monthly investment.)

Now, let's look at the ethics of the situation. Assume that you were able somehow to find an investment with a guaranteed return high enough to come out ahead with your plan. Should you do it?

The hospital has provided you a service, and you owe the money. As a public service to people that cannot pay the bill, they allow people to pay off the bill over time at no interest. However, you are not one of these people. You have the money to pay. It is not ethical, in my opinion, to use the hospital's money to invest and try to profit.

• I understand the 25% discount today...but my question is really more about Present value calculation to determine if it's better to do it one way or the other. It appears that if I was to pay \$1690 into a 6% yielding investment, then I'd be at the \$2260 after 5 years. Excel equation is like PV(6%, 5, ,2260.93,0) – Piercy Nov 19 '15 at 21:21
• @Piercy Isn't that formula specifying no payments, while you said you would have to make monthly payments, what happens if you take those into account? Plus, please let us all know where you're getting a guaranteed 6% return! – blm Nov 19 '15 at 22:19
• @Piercy I've added some details about the math and the ethics of the situation. – Ben Miller - Remember Monica Nov 20 '15 at 3:15

Another, perhaps simpler approach to the same result as @BenMiller.

Firstly, if you can pay off the debt today, for 1695.70 cash, then that is the amount of your debt to the hospital. There is no such thing as a discount for cash; just extra money to pay if don't pay immediately. This extra money is called interest, and the hospital is indeed charging you interest.

Use any mortgage program to find the interest rate if you pay off a debt of 1695.70 with 60 monthly payments of 37.68. The program should tell you that you are paying 12.64% effective annual interest. If you can earn more than that, after taxes, with your money somewhere else, then invest the cash there and pay off the hospital over time. If you can't, then pay off the debt immediately, and avoid writing 60 cheques.

EDIT: Incorrect calculation revised as per @Ben Miller