Your utility bills likely make up a significant part of your monthly budget, so itâs important to keep a close eye on them. But while your rent or mortgage stays the same month to month, your utilities donât.
Sweltering summer days and icy winter nights can lead to budget-blowing spikes in your utility bills, and no matter how hard you try to budget and plan, you canât predict the total each month. Or can you?
Budget billing may offer the consistency you crave. Here, personal finance experts describe how budget billing works and explain who may benefit from it, empowering you to answer this question for yourself: Does budget billing save money?
What is budget billing and how does it work?
As you consider this option, your first question might be: What is budget billing? Budget billing is a service offered by some utility companies that provides a set monthly bill for services like gas or electricity.
How does budget billing work? To calculate your monthly budget billing amount, a utility company will look at your past usage, typically over the last year, and average it to determine your monthly charge, says Sara Rathner, financial author and credit cards expert at NerdWallet. This will give you a predictable bill to pay each month, rather than one that fluctuates.
Keep in mind that if you recently moved into your home, the charges used to calculate your budget billing amount may be based on the previous ownersâ or rentersâ usage, says Rathner. Your actual usage may end up being more or less than theirs.
Another point to remember on how budget billing works: While budget billing gives you a steady amount to pay each month, this amount can, and likely will, change over time. Some providers update bill amounts quarterly, some annually. Thereâs no universal timeline for these updates, so be sure to ask your utility provider about its specific process, says Lance Cothern, CPA and founder of personal finance blog Money Manifesto.
These changes are made to capture your actual usage, whether that usage has decreased (a mild summer allowed you to keep the AC off more often) or increased (a brutally cold winter forced you to blast the heat). Typically, you will be notified in advance of the change.
Now that you know how budget billing works, you may be wondering: Could it save me cash?
Does budget billing save money?
âBudget billing won’t save you money; it just evens your bill out over time,â Cothern says.
How does budget billing work if you end up using less energy and overpay? You may be reimbursed for the amount you paid above your actual energy usage, or the amount overpaid will be applied to next year.
âAnyone who sticks to a strict, detailed monthly budget may prefer the predictability of budget billing.â
How does budget billing work if you underpay? Youâll have to pay the extra amount to make up the difference. These payments or credits happen in addition to any adjustments your provider makes to your monthly bill if your usage changes over time, Cothern says.
What are the benefits of budget billing?
Overall, thereâs a fairly straightforward answer to what budget billing is, and the benefits are clear, too. While it doesnât save you money per se, it may allow you to more easily manage your monthly budget.
For example, if you know your monthly electricity bill will be $100, you can account for this expense in your budget and more precisely allocate funds into other expenses or savings.
âAnyone who sticks to a strict, detailed monthly budget may prefer the predictability of budget billing,â Rathner says. âYou know exactly how much your utility bill will be each month and can plan your other spending around it.â
Combine budget billing with autopay and you can set and forget your utility bills, ensuring theyâre paid on time and in full, making money management a lot simpler. This could also help you deal with financial stress.
While budget billing has its pros, it also comes with cons. Does budget billing save you money? To help answer that question, consider the following:
You may face extra fees. Some utility companies charge a fee for budget billing. In Cothernâs view, this negates the benefit since thereâs no reason to pay tacked-on fees for this service. Itâs important to find out whether there are fees before signing up when youâre researching how budget billing works.
You may ignore your utility usage. Budget billing puts your monthly utility charges, as well as your actual usage, out of sight and out of mind. Without the threat of a higher bill or the reward of a lower one based on your energy habits, some people get complacent, Rathner says. They leave lights on or turn up the heat instead of grabbing a blanket. If this sounds like you, budget billing may actually cost you money in the long run.
âAlways keep an eye on your monthly bill even though you pay a level amount for months at a time,â Cothern says. Most utility companies provide your usage information right on your bill.
If you can financially handle the seasonal swings of each bill, budget billing may not be much of a benefit for you, Cothern says. Paying the full amount also means youâre paying attention to the full amount, he says, which may motivate you to reduce your energy consumption. And thatâs where the real opportunity to save money lies.
By considering potential fees and the impact on your energy usage, youâll have a good sense of whether budget billing saves you money in the long run.
Make the most of how budget billing works with this hack
After scrutinizing how budget billing works, the potential downsides have led some financial pros, Cothern among them, to develop a new hack for paying utility bills.
You earned it. Now earn more withÂ it.
Online savings with no minimum balance.
Discover Bank, Member FDIC
Instead of signing up for budget billing, open a savings account online specifically for utilities, Cothern suggests. Youâll also want to sign up for a rewards credit card, if you donât have one already.
Next, grab your last 12 months of utility bills, total them up and divide by 12 to get your monthly average. Youâll then want to set up an automatic transfer of that amount from your checking account into the utility savings account each month.
When the utility bill comes, pay it with your rewards credit card and then pay that bill with the money in your savings. You reap the benefits of maintaining a consistent amount coming out of your budget, as well as credit card rewards and any interest earned on that money from your savings account.
Do your homework before signing up for budget billing
After weighing your options and considering your personal budgeting style, you may decide that budget billing is right for you.
If thatâs the case, itâs important to read your utilityâs program rules in detail. Yes, that means digging into the fine print to understand how budget billing works at the specific company, Cothern says, because budget billing is a general term for a wide variety of utility company programs. Budget billing may be called something else, like flat billing or balanced billing, and it may carry different nuances and terms.
Before signing up for budget billing, Rathner suggests calling your provider and asking the following questions:
Are there startup or maintenance fees?
How is the monthly amount calculated? How often is it updated?
What happens if you overpay or underpay?
What happens when you move or end service?
With the answers to these questions, youâll have a better idea of how budget billing works for your provider. Armed with that info, you can determine whether budget billing saves you money and make the call on whether enrolling is right for you.
Whether you opt for budget billing or not, small adjustments to your home can result in major savings on your energy bills. For starters, check out these four ways to save energy by going green.
Articles may contain information from third-parties. The inclusion of such information does not imply an affiliation with the bank or bank sponsorship, endorsement, or verification regarding the third-party or information.
The post What Is Budget Billing and Is It Right for You? appeared first on Discover Bank – Banking Topics Blog.
If you have an irregular income, you know how great the good times feelâand how difficult the lean times can be. While you can’t always control when you get paid or the size of each paycheck if you’re a freelancer, contractor or work in the gig economy, you can take control of your money by creating a budget that will help you manage these financial extremes.
Antowoine Winters, a financial planner and principal at Next Steps Financial Planning, LLC, says creating a budget with a variable income can require big-picture thinking. You may need to spend time testing out different methods when you first start budgeting, but, âif done correctly, it can really empower you to control your life,” Winters says.
How do you budget on an irregular income? Consider these four strategies to help you budget with a variable income and gain financial confidence:
1. Determine your average income and expenses
If you want to start budgeting on a fluctuating income, you need to know how much money you have coming in and how much you’re spending.
Of course, that’s the basis for any budget. But it can be particularly important if you’re trying to budget on an irregular income because you may have especially high- or low-income periods. You want to start tracking as soon as possible to build up accurate data on your average income and expenses.
For example, once you have six months’ worth of income and expenses documented, you can divide the total by six to determine your average income and expenses by month.
Many financial apps and websites can help with the tracking, including ones that can connect to your online bank and credit card accounts and automatically pull in your transactions. You may even be able to pull in previous months’ or years’ worth of data, which you can use to calculate your averages.
If you’re budgeting on a fluctuating income and apps aren’t your thing, you can use a spreadsheet or even a pen and notebook to track your cash flow. However, without automated tracking, it can be difficult to consistently keep your information up to date.
2. Try a zero-sum budget
“There are several strategies you can use to budget with an irregular income, but one of the easiest ones is the zero-sum budget,” says Holly Johnson. As a full-time freelance writer, she’s been budgeting with a variable income for over seven years and is the coauthor of the book Zero Down Your Debt.
With a zero-sum budget, your income and expenses should even out so there’s nothing left over at the end of the month. The trick is to treat your savings goals as expenses. For example, your “expenses” may include saving for an emergency, vacation or homeownership.
“There are several strategies you can use to budget with an irregular income, but one of the easiest ones is the zero-sum budget.”
Johnson says if you’re budgeting on a fluctuating income, you can adopt the zero-sum budget by creating a “salary” for yourself. Consider your average monthly expenses (shameless plug for tip 1) and use that number as your baseline.
For example, if your monthly household bills, groceries, business expenses, savings goals and other necessities add up to $4,000, that’s your salary for the month. During months when you make over $4,000, put the extra money into a separate savings account. During months when you make less than $4,000, draw from that account to bring your salary up to $4,000.
“We call this fund the ‘boom and bust’ fund,” Johnson says. “By building up an adequate amount of savings, you will create a situation where you can pay yourself the salary you need each month.”
3. Separate your saving and spending money
Physically separating your savings from your everyday spending money may be especially important when you’re creating a budget on an irregular income. You may be tempted to pull funds from your savings goals during low-income months, and stashing your savings in a separate, high-yield savings account can force you to pause and think twice before dipping in.
You earned it. Now earn more withÂ it.
Online savings with no minimum balance.
Discover Bank, Member FDIC
An easy way to put this tip into action when creating a budget with a variable income is to have all of your income deposited into one account, then disburse it into separate savings and spending accounts. “Transfer a set amount on the first of every month to a bill-paying account and a set amount to a spending account,” Winters, the financial planner, says.
“The bill pay account is used to pay for all of the regular expenses, like rent, insurance, car payments, student loans, etc.,” Winters says. These bills generally stay the same each month. The spending account can be used for your variable expenses, such as groceries and gas.
When considering your savings accounts, Winters also suggests funding a retirement account, such as an Individual Retirement Account (IRA).
If you’re budgeting on a fluctuating income as a contract worker or freelancer, you may also want to set money aside for taxes because the income and payroll taxes you’ll owe aren’t automatically taken out of your paychecks.
4. Build up your emergency fund
“The best way to weather low-income periods is to prepare with an adequate emergency fund,” freelancer Johnson says. An emergency fund is money you set aside for necessary expenses during an emergency, such as a medical issue or broken-down vehicle.
Generally, you’ll want to save up enough money to cover three to six months of your regular expenses. Once you build your fund, you can put extra savings toward other financial goals.
When you’re budgeting on a fluctuating income, having the emergency fund can help you feel more at ease knowing that you’ll be able to pay your necessary bills if the unexpected happens or when you’re stuck in a low-income period for longer than anticipated.
A budget can make living with a variable income easier
It can be challenging to budget on an irregular income, especially when you’re first starting. You might have to cut back on expenses for several months to start building up your savings and try multiple budgeting methods before finding the one that works best for you.
“Budgeting requires a mindset change regardless of which type of budget you try,” Johnson explains.
“The best way to weather low-income periods is to prepare with an adequate emergency fund.”
However, once in place, a budget on an irregular income can also help free you from worrying about the boom-and-bust cycle that many variable-income workers deal with throughout the year.
The goal is to get to the point where you can budget with a variable income and don’t have to worry about when you’ll get paid next because you set your budget based on your averages, planned ahead during the high times and have savings ready for your low times.
The post 4 Tricks for Budgeting on a Fluctuating Income appeared first on Discover Bank – Banking Topics Blog.