Have you ever heard of budget billing for your utility bills?
Your utility may call it something different. For instance, National Grid calls it balanced billing.
I may be the only one, but I had never heard of budget billing until I saw it on my electric company’s website.
Basically, budget billing smooths out your bills over a period, normally twelve months.
The reasoning is you will no longer have high bills in the high usage months of summer and winter or low bills in the lower usage months of spring and fall.
Instead, you have one steady bill that is occasionally adjusted if your yearly average bill changes.
I Was Skeptical About Budget Billing
Initially, I thought budget billing was just a way for my electric company to charge me an extra fee for smoothing my payments out of the course of the year. I figured they wouldn’t be offering a service that creates more work for them for free.
However, the more I looked into my utility company’s budget billing offering, it looked like the electric company was offering a valuable service at no extra cost. It almost sounded too good to be true.
So, I did some further investigation to see if I was missing anything. Here’s what I found out.
Budget Billing Really Can Be Free
My electric company really does offer budget billing completely free. Unfortunately, I can’t say that all companies that offer budget billing will offer it for free. Make sure you check with your particular company before enrolling.
If your company doesn’t offer budget billing for free, or you’d prefer to earn interest on the cash your utility may hold hostage, keep reading for an easy budget billing alternative.
However, after a bit more thought it does make sense why utility companies would offer this service for free.
According to a survey by the National Foundation for Credit Counseling 64% of Americans didn’t have enough cash on hand to cover a $1,000 emergency. Hopefully you have an emergency fund of at least $1,000, but most Americans don’t even have that.
So what does this have to do with utility bills?
If someone can’t come up with $1,000 in a pinch, what makes you think people can handle an unexpectedly high power bill for a hot summer month where the air conditioning ran almost non-stop or a freezing cold winter month in Minnesota?
Budget billing helps these people smooth out their utility bills so they know how much money to expect to pay every month. This helps the utility company out because it means there is a higher chance of people paying their bills on time.
Utility companies can spend less time chasing people in an effort to collect the money owed to them. Additionally, they can quit wasting time and manpower required to turn customers’ utilities off.
It benefits both the utility companies and the customers to offer this service.
How Does Budget Billing Work?
My utility company monitors my twelve-month rolling average bill and, as long as the average doesn’t vary drastically, they keep my bill the same.
Whenever the company needs to make a change to my budget billing amount, either up or down, they let me know a month in advance so I can prepare for the change.
If I ever need to close my account, I’ll either have to pay the small amount I may owe the company or the electric company will send me a check for what they owe me.
I’ve actually closed out an account I used budget billing on once. It was in the spring, so the electric company actually owed me money. Thankfully, the sent a check quickly and I had the cash deposited in my bank account within a month.
Is Budget Billing A Good Option For You?
I’ve thought about budget billing for a while because I was determined there was a catch.
I don’t see any huge reasons why anyone wouldn’t like budget billing, but I have found one minor disadvantage that could turn into a big disadvantage in the years to come.
Budget billing is an awesome idea when you want an easy, predictable monthly payment for your bills. If you have trouble paying the larger utility bills during high usage months, I highly suggest you sign up.
Why? There aren’t any surprises during high use months which is great. Yes, they still happen. However, you pay for those months throughout the year making your monthly budget a bit easier to balance.
Even if you don’t have trouble paying your monthly bill, I still suggest you give budget billing a shot. I even gave budget billing a shot and loved the ease of knowing what my monthly payment would be each and every month.
The Negatives Of Budget Billing
There was only one bigger negative and four smaller negatives I could think of when it comes to budget billing.
The bigger negative about budget billing is what happens when you pay more than you owe with a budget billing amount.
During the low energy usage periods of the year, usually the spring and fall, you’ll be paying more for your monthly bill than you’ll be using.
During these months, the utility company will hold on to that extra money for you so you can pay the bills in the higher energy usage months to come. Unfortunately, while the utility company is holding that money, you get nothing.
Normally, when you leave money in a bank account, the bank pays you interest, but utility companies won’t do this. While you might not think this is such a big deal with the low interest rates many banks are paying, it can become a big deal quickly.
For instance, many online banks pay interest rates of 1.5% or more on their savings accounts. It gets even worse when you realize interest rates on savings accounts were 4% to 6% in the mid 2000’s and could return there in the near future.
If you’re living on a tight budget, every penny of interest makes a difference.
Thankfully, there is a way to have the benefits of budget billing while still earning interest.
I’ll cover that after we cover the smaller negatives.
The Smaller Negatives of Budget Billing
First off, you may not qualify for budget billing for a number of reasons.
For instance, when my wife and I moved into our new construction home, there was no energy usage history so the electric company couldn’t set up budget billing until we had service for over a year.
Second, if I quit making payments my utility company can kick me off of the budget billing program.
In fact, they can end it for any reason they like. Personally, I’ll always make my payments, so this isn’t a big deal for me.
That said, if you do forget to make a payment and get kicked off in a high usage month, then your budget could be in for a shocker.
The third small negative is that I may no longer pay as much attention to how much electricity I use. Right now, I check our online portal a couple of times a month to monitor our usage to see how big our bill is so far.
If I quit paying all attention to my bills, I do see how my bill could creep up, but I always read all of my bills in full every month. I suggest you do the same.
Finally, if I reduce my usage I may end up overpaying my electric company for a few months. This wouldn’t be a problem if you use our budget billing alternative which I’ll cover next.
Yes, I’d eventually get the money back when the utility company lowers my budget billing amount, but it could take months to recover the over payment unless I cancel the budget billing program altogether.
Budget Billing Alternative – The Savings Account Trick For Your Own Budget Billing
If your utility company charges a fee for budget billing or you’ve decided against it for any reason, including the fact you won’t earn interest on the money the utility holds for you, here’s a trick to allow you to do budget billing yourself.
It’s not perfect, but if you monitor the alternative closely and make adjustments as needed, it could help you feel a bit better about your monthly budget.
How It Works
First, open a savings account you’ll only use for the utility bills you want to have budget billing for. We recommend CIT Bank.
Next, calculate each utility bill’s 12-month average bill amount. Once you have this information, you’re ready to get started.
Each month or paycheck, deposit your calculated budget billing amount into your budget billing savings account. Then, when your bill comes, transfer the necessary money into your checking account and pay your utility bill.
It Can Be Rough Getting Started
If you have the cash available, I suggest starting your budget billing savings account by depositing an amount equal to the highest monthly bill during the last 12 months for each utility you plan to use budget billing for.
This builds a buffer to make sure you’ll almost always be able to pay your monthly utility bills out of this account, even if you start during high usage months.
Unfortunately, getting started with budget billing on your own might be difficult if you’re strapped for cash.
If you can’t deposit the highest monthly bill in your budget billing savings account and you start your budget billing alternative during a high usage period, you’ll need to pay your bills in full each month.
Once you get to the lower usage season for your utility bills, you can start your budget billing account which should allow your savings account to start to grow.
However, keep in mind that during a particularly high usage month, you may have to pay additional money if your budget billing account can’t handle the unusual usage swing in your bill.
I recommend recalculating your 12 month average twice a year, once in the spring and once in the fall, to make sure you account for price increases or for any major usage changes you may have.
If you want to play it even safer, add 10% to your calculated budget billing amount to help cover unexpected swings.
Budget Billing Update
I started using budget billing back in April 2014 when I originally wrote this post and used it for my electric bill for about two years and didn’t have any problems at all.
My monthly payment changed three or four times over the two years, sometimes higher and sometimes lower. I really liked having a predictable bill every month but noticed the electric company normally owed me money, not the other way around.
When we moved, I never signed up for budget billing again because I wanted to keep that money in my bank account earning interest for me.
You may want to do the same if the extra cash from interest is more important to you than a predictable utility bill.
Overall, I think budget billing is a great option if it is free. Do you use budget billing? Is it even an option for you? I want to know about your thoughts on budget billing!
Lance Cothern, CPA holds a CPA license in Indiana. He’s a personal finance, debt and credit expert that writes professionally for top-tier publications including U.S. News & World Report, Forbes, Investopedia, Credit Karma, Business Insider and more.
Additionally, his expertise has been featured on Yahoo, MSN, USA Today, Reader’s Digest, The Huffington Post, Fast Company, Kiplinger, Reuters, CNBC and more.
Lance is the founder of Money Manifesto. He started writing about money and helping people solve their financial problems in 2012. You can read more about him and find links to his other work and media mentions here.