If you know you're going to be using an EC2 instance for a long time, you can commit to a yearly contract to buy the instance at a huge discount when compared to the On-Demand price.

Price Depends on Term Length and Upfront Payment

Reserved Instances have two options---term length and how much you pay up front, with a longer term length and a larger upfront payment obviously costing less. You also have the option of convertible plans, which we discuss more soon.

You can view prices for any instance type yourself using AWS's Simple Monthly Calculator. Looking at the prices for the

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 instance type, the yearly cost for running an On-Demand instance is $2,986. Purchasing the lowest commitment RI, "1 Yr No Upfront," brings that cost down to just $1,874, a huge cost savings of 38%.

The deal doesn't stop here though---if you pay half upfront, you can save an extra $90 (40% savings over On-Demand), and if you pay all upfront, you save another $30 (41.2% savings over On-Demand).

If you're committing to a 3-year term, you pay $1,243 per year, a 58% cost savings over On-Demand. Half upfront is a 61% savings, and all upfront is a staggering 64% cost savings over On-Demand.

The obvious downside of reserved instances is that you're committed to paying for the instance for the length of the term. However, you likely running servers for a while anyway, and AWS offers a lot of options to suit anyone's needs. Even a 38% savings from a one-year no upfront contract makes EC2 much cheaper.

If you're looking to save money, but don't want to commit to a 3-year plan, you can choose the option of Spot Instances. Spot Instances enable you to purchase spare computing capacity at bargain rates, often as cheap as Reserved Instances. The downside is that AWS can reclaim the instance at any time, but such interruptions are fairly rare and can be mitigated quite easily in a multi-server Auto Scaling group.

Convertible RI Lets You Purchase Capacity Directly

With a standard reserved instance, you're purchasing exclusive rights to run the instance type that you reserved for the duration of your term. You can modify the instance size within the same family; for example, converting your contract for a

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 instance to a

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 instance. You can also sell you RI contract on the RI Marketplace.

However, needs can change over the course of a year, especially three years. You can only modify standard RIs. You can't exchange them for something else.

Convertible Reserved Instances are another option that enables you to convert your contract into a contract for a different instance type. It works like trading in a car---the value of your contract is subtracted from the value of the new contract. For example, say you have three  

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 instances ($29 per month on a 3-year convertible plan) and you want to convert to

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 instances ($48 per month on a 3-year convertible plan). Your three 

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 instances are worth $87 per month, so you're able to purchase two 

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 instances and only pay a small fee to cover the difference.

This makes Convertible Reserved Instances a great option for future proofing. If you want to convert your plan to take advantage of future discounts or new products, your money won't go to waste paying for an instance you no longer want. You're essentially buying the right to use an instance of a certain price, and it doesn't matter which instance you choose.

However, convertible Instances do come at a downside: they're a bit pricier than standard RIs. They're still much cheaper than On-Demand, but you pay a bit of a fee to be on a convertible plan. If you really know what you need and just want the lowest price possible, stick to standard reserved instances.