Reserved Instances and Savings Plans in AWS - Deep Dive

Overview - Reserved Instances and Savings Plans

What is it?

Reserved Instances and Savings Plans are ways to save money when using cloud computing resources by committing to use them for a longer time. Reserved Instances let you reserve specific virtual machines or services in advance, while Savings Plans offer flexible discounts based on your overall usage. Both help reduce costs compared to paying for resources only when you use them.

Why it matters

Without these options, cloud users pay the full price for resources every hour or second they run, which can add up quickly. By committing to use resources over time, users get significant discounts, making cloud computing more affordable and predictable. This helps businesses save money and plan budgets better.

Where it fits

Before learning this, you should understand basic cloud computing concepts like virtual machines and on-demand pricing. After this, you can explore advanced cost management, budgeting tools, and automated scaling strategies.

Mental Model

Core Idea

You pay less by promising to use cloud resources over time, either by reserving specific ones or by committing to spend a certain amount, gaining discounts in return.

Think of it like...

It's like buying a gym membership versus paying for each visit: a membership (Reserved Instances or Savings Plans) costs less per visit if you go regularly, while paying each time (on-demand) is more expensive if you visit often.

┌───────────────────────────────┐
│          Cloud Usage          │
├─────────────┬─────────────────┤
│ On-Demand   │ Pay full price   │
├─────────────┼─────────────────┤
│ Reserved    │ Reserve specific │
│ Instances   │ resources ahead  │
├─────────────┼─────────────────┤
│ Savings     │ Commit to spend  │
│ Plans       │ certain amount   │
└─────────────┴─────────────────┘

Build-Up - 6 Steps

1

Foundation

Understanding On-Demand Pricing

Concept: Learn how cloud resources are billed when used without any commitment.

Cloud providers charge for resources like virtual machines by the time you use them, usually per hour or per second. This is called on-demand pricing. You start and stop resources anytime and pay only for what you use, but the price per unit is the highest.

Result

You pay full price for every hour or second your resource runs, with no discounts.

Understanding on-demand pricing sets the baseline for why reserved options exist to save money.

2

Foundation

What Are Reserved Instances?

Concept: Reserved Instances let you book specific cloud resources in advance for a lower price.

You choose a resource type, region, and term length (usually 1 or 3 years) and pay upfront or monthly. In return, you get a discount compared to on-demand prices. This reservation guarantees capacity and lower cost for that resource.

Result

You pay less per hour for the reserved resource, but you commit to using it for the term.

Knowing reserved instances means understanding commitment leads to cost savings and capacity guarantees.

3

Intermediate

How Savings Plans Differ

🤔Before reading on: do you think Savings Plans require reserving specific resources like Reserved Instances? Commit to your answer.

Concept: Savings Plans offer flexible discounts based on your total spend, not tied to specific resources.

Instead of reserving a specific machine, you commit to spend a fixed amount per hour for 1 or 3 years. This discount applies to any eligible usage, across instance types, regions, or even services, giving more flexibility than Reserved Instances.

Result

You get discounts on a wide range of resources without locking into one type or region.

Understanding Savings Plans shows how flexibility can coexist with cost savings.

4

Intermediate

Types of Reserved Instances and Savings Plans

🤔Before reading on: do you think all Reserved Instances and Savings Plans require full upfront payment? Commit to your answer.

Concept: There are different payment options and types for both Reserved Instances and Savings Plans.

Reserved Instances can be Standard (fixed) or Convertible (changeable), with payment options: All Upfront, Partial Upfront, or No Upfront. Savings Plans come as Compute Savings Plans (flexible across compute services) and EC2 Instance Savings Plans (more specific but cheaper).

Result

You can choose payment and commitment types that fit your budget and flexibility needs.

Knowing these types helps tailor cost-saving strategies to real business needs.

5

Advanced

How AWS Applies Discounts Automatically

🤔Before reading on: do you think you must manually assign Reserved Instances or Savings Plans to each resource? Commit to your answer.

Concept: AWS automatically applies your Reserved Instances or Savings Plans discounts to matching usage.

When you run resources, AWS checks your reservations or plans and applies discounts to matching usage first. If you have unused reservations, they can sometimes apply to similar resources in the same region. This automatic matching maximizes your savings without manual effort.

Result

You get the best possible discount applied automatically to your usage.

Understanding automatic discount application prevents confusion about billing and ensures you optimize your commitments.

6

Expert

Optimizing Commitments for Cost and Flexibility

🤔Before reading on: do you think committing to more Reserved Instances or Savings Plans always saves more money? Commit to your answer.

Concept: Balancing commitment size, term length, and flexibility is key to maximizing savings without waste.

Experts analyze usage patterns to decide how many Reserved Instances or Savings Plans to buy. Overcommitting wastes money if usage drops; undercommitting misses savings. They also mix Standard and Convertible Reserved Instances or different Savings Plans types to balance cost and flexibility. Tools and reports help track and adjust commitments over time.

Result

You achieve the lowest cost with the right balance of commitment and flexibility.

Knowing how to optimize commitments avoids common costly mistakes and adapts to changing needs.

Under the Hood

Behind the scenes, AWS tracks your usage and matches it against your Reserved Instances or Savings Plans commitments. Reserved Instances are recorded as capacity reservations tied to specific instance attributes, while Savings Plans track your committed spend amount. When you launch resources, AWS billing applies discounts by comparing usage to these commitments, prioritizing the best match to maximize savings.

Why designed this way?

AWS designed Reserved Instances and Savings Plans to encourage longer-term commitments, which help AWS plan capacity and revenue predictably. Reserved Instances offer capacity guarantees, important for steady workloads, while Savings Plans provide flexibility for changing needs. This dual approach balances customer cost savings with AWS operational efficiency.

┌───────────────┐       ┌─────────────────────┐
│ User Usage   │──────▶│ AWS Billing System   │
└───────────────┘       ├─────────────────────┤
                        │ Matches usage with  │
┌───────────────────┐   │ Reserved Instances  │
│ Reserved Instances│◀──│ and Savings Plans   │
│ & Savings Plans   │   └─────────────────────┘
└───────────────────┘

Myth Busters - 4 Common Misconceptions

Quick: Do Reserved Instances guarantee you always pay less than on-demand? Commit yes or no.

Common Belief: Reserved Instances always cost less than on-demand pricing.

Reality: Reserved Instances cost less only if you use the reserved resource as planned; unused reservations still incur charges without usage benefit.

Why it matters: Failing to use reserved capacity leads to wasted money, negating expected savings.

Quick: Do Savings Plans require you to use the same instance type or region? Commit yes or no.

Common Belief: Savings Plans discounts apply only to specific instance types or regions.

Reality: Compute Savings Plans apply discounts broadly across instance types, sizes, and regions, offering more flexibility than Reserved Instances.

Why it matters: Misunderstanding this limits your ability to optimize costs with flexible usage.

Quick: Can you manually assign Reserved Instances discounts to any resource? Commit yes or no.

Common Belief: You must manually assign Reserved Instances discounts to each resource you run.

Reality: AWS automatically applies Reserved Instances discounts to matching usage; manual assignment is not needed.

Why it matters: Thinking manual assignment is required causes unnecessary management overhead and confusion.

Quick: Does buying more Reserved Instances or Savings Plans always save more money? Commit yes or no.

Common Belief: The more Reserved Instances or Savings Plans you buy, the more money you save, no matter what.

Reality: Overcommitting beyond your actual usage wastes money because you pay for unused capacity or spend commitments.

Why it matters: Overcommitting leads to higher costs, defeating the purpose of savings plans.

Expert Zone

1

Reserved Instances can sometimes be sold on a marketplace if no longer needed, recovering some costs.

2

Convertible Reserved Instances allow changing instance types during the term, but usually at a smaller discount than Standard ones.

3

Savings Plans billing applies at the account level, so consolidated billing can maximize discount usage across multiple accounts.

When NOT to use

Avoid Reserved Instances or Savings Plans if your workload is highly unpredictable or short-term, as commitments can lead to wasted costs. Instead, use on-demand or spot instances for maximum flexibility and cost efficiency.

Production Patterns

Large organizations use a mix of Reserved Instances for steady baseline workloads and Savings Plans for variable or growing usage. They monitor usage with cost management tools and adjust commitments quarterly or annually to optimize savings.

Connections

Budgeting and Forecasting

Builds-on

Understanding Reserved Instances and Savings Plans helps create accurate cloud budgets and forecasts by predicting committed costs.

Subscription Models in Business

Same pattern

Both cloud savings plans and subscription services rely on upfront commitment for discounted pricing, balancing customer loyalty and predictable revenue.

Energy Utility Contracts

Similar concept

Just like reserving energy capacity or signing fixed-rate contracts reduces costs and ensures supply, cloud reserved options manage resource use and pricing predictably.

Common Pitfalls

#1 Buying Reserved Instances without analyzing actual usage patterns.

Wrong approach:

Purchase 10 Reserved Instances for a resource you only use 5 hours a week.

Correct approach:

Analyze usage data and buy Reserved Instances matching steady baseline usage, e.g., 2-3 instances for consistent hours.

Root cause:

Misunderstanding commitment means paying regardless of actual usage leads to wasted costs.

#2 Assuming Savings Plans cover all AWS services.

Wrong approach:

Expect Savings Plans discounts to apply to storage or database services.

Correct approach:

Use Savings Plans only for eligible compute services; manage other services with separate cost controls.

Root cause:

Confusing eligible services causes unexpected charges and budgeting errors.

#3 Trying to manually assign Reserved Instances discounts to resources.

Wrong approach:

Manually tagging instances to apply Reserved Instance discounts.

Correct approach:

Let AWS automatically apply discounts; focus on purchasing the right reservations.

Root cause:

Misunderstanding AWS billing automation leads to unnecessary manual work and errors.

Key Takeaways

Reserved Instances and Savings Plans reduce cloud costs by committing to use or spend over time.

Reserved Instances reserve specific resources and offer capacity guarantees, while Savings Plans provide flexible discounts across usage.

AWS automatically applies discounts to matching usage, so manual assignment is not needed.

Choosing the right type and amount of commitment requires analyzing usage patterns to avoid wasted costs.

These cost-saving options help businesses plan budgets and optimize cloud spending effectively.

Practice

1. What is the main benefit of using AWS Reserved Instances or Savings Plans?

easy

A. They provide free support from AWS

B. They increase the speed of your instances

C. They reduce cloud costs by committing to usage over time

D. They automatically scale your instances

Solution

1. Step 1: Understand the purpose of Reserved Instances and Savings Plans

   Both are pricing models that offer discounts in exchange for a commitment to use AWS resources for a period.

2. Step 2: Identify the main benefit

   The main benefit is cost savings by committing to usage, not performance or support features.

3. Final Answer:

   They reduce cloud costs by committing to usage over time -> Option C

4. Quick Check:

   Cost savings = C [OK]

Hint: Focus on cost savings through commitment [OK]

Common Mistakes:

• Thinking Reserved Instances improve instance speed
• Confusing cost savings with free support
• Assuming automatic scaling is included

2. Which of the following is the correct way to describe a Savings Plan in AWS?

easy

A. A flexible pricing model that applies to compute usage regardless of instance type

B. A commitment to use a specific instance type in a specific region

C. A one-time payment for on-demand instances

D. A free trial period for new AWS users

Solution

1. Step 1: Recall Savings Plan characteristics

   Savings Plans offer flexible discounts that apply to compute usage regardless of instance type or region.

2. Step 2: Match the correct description

   A flexible pricing model that applies to compute usage regardless of instance type correctly describes Savings Plans as flexible pricing models, unlike Reserved Instances which are specific.

3. Final Answer:

   A flexible pricing model that applies to compute usage regardless of instance type -> Option A

4. Quick Check:

   Savings Plans = Flexible pricing = A [OK]

Hint: Savings Plans are flexible, not tied to instance type [OK]

Common Mistakes:

• Confusing Savings Plans with Reserved Instances
• Thinking Savings Plans are one-time payments
• Assuming Savings Plans are free trials

3. Given the following scenario: You purchase a 1-year Standard Reserved Instance for an m5.large instance in us-east-1. Later, you launch an m5.xlarge instance in the same region. How does the Reserved Instance discount apply?

medium

A. The discount applies partially, covering the m5.large portion of the m5.xlarge

B. The discount applies to any instance type in any region

C. The discount does not apply to the m5.xlarge instance

D. The discount applies fully to the m5.xlarge instance

Solution

1. Step 1: Understand Reserved Instance scope

   Standard Reserved Instances apply to specific instance types and regions. m5.large is different from m5.xlarge.

2. Step 2: Check discount application

   The discount partially applies because m5.xlarge is double the size of m5.large; the RI covers the equivalent of one m5.large unit.

3. Final Answer:

   The discount applies partially, covering the m5.large portion of the m5.xlarge -> Option A

4. Quick Check:

   RI discount partial for larger instance = D [OK]

Hint: RI discounts apply by instance size equivalence [OK]

Common Mistakes:

• Assuming full discount on different instance sizes
• Thinking discount applies across regions
• Believing discount applies to any instance type

4. You configured a Savings Plan but notice your billing does not reflect the expected discount. Which of the following is the most likely cause?

medium

A. You purchased a Reserved Instance instead of a Savings Plan

B. You purchased a Compute Savings Plan but launched instances outside supported services

C. You did not enable multi-region support in your Savings Plan

D. You launched instances only in the free tier

Solution

1. Step 1: Understand Savings Plan coverage

   Compute Savings Plans apply discounts to supported compute services like EC2, Fargate, and Lambda.

2. Step 2: Identify billing mismatch cause

   If instances run on unsupported services or outside the plan scope, discounts won't apply, causing billing to be higher than expected.

3. Final Answer:

   You purchased a Compute Savings Plan but launched instances outside supported services -> Option B

4. Quick Check:

   Discounts apply only to supported services = A [OK]

Hint: Check if instances use supported services for Savings Plans [OK]

Common Mistakes:

• Confusing Reserved Instances with Savings Plans
• Assuming multi-region must be enabled always
• Ignoring service eligibility for discounts

5. Your company has a steady workload running 10 m5.large instances in us-west-2 for 24/7 use. You want to minimize costs while keeping flexibility to change instance types later. Which option is best?

hard

A. Purchase 1-year Standard Reserved Instances for 10 m5.large instances

B. Use On-Demand instances only to keep flexibility

C. Purchase 3-year Convertible Reserved Instances for 10 m5.large instances

D. Purchase a 1-year Compute Savings Plan covering the equivalent usage

Solution

1. Step 1: Analyze workload and flexibility needs

   The workload is steady and predictable, so committing to usage saves money. Flexibility to change instance types is important.

2. Step 2: Compare options

   Standard RIs are less flexible; Convertible RIs allow changes but require longer commitment. Compute Savings Plans offer flexibility across instance types and families with 1-year commitment.

3. Step 3: Choose best option

   Compute Savings Plan balances cost savings and flexibility best for this scenario.

4. Final Answer:

   Purchase a 1-year Compute Savings Plan covering the equivalent usage -> Option D

5. Quick Check:

   Flexibility + cost savings = Compute Savings Plan = B [OK]

Hint: Choose Savings Plans for flexibility with steady workloads [OK]

Common Mistakes:

• Choosing Standard RIs despite flexibility needs
• Ignoring commitment length impact
• Assuming On-Demand is cheapest for steady workloads