Note: While I think this is a good idea, it’s clear that many readers strongly disagree. Before deciding whether to try this, please read the arguments in opposition.
Earlier this year, on a whim, I did something a little odd: instead of just paying my monthly cable and internet bills, I wrote large checks, pre-paying for several months of service. I didn’t have a reason for doing it at the time. I had a momentary surplus of cash, and it seemed like a good way to use it. Maybe I ought to have tucked it into a high-yield savings account, but it seemed just as good to me to pay five or six months ahead on these bills.
As it turns out, I love this. I know I’m not paying any less money than I normally would, but by pre-paying my bills, I feel as if I don’t have them. I feel as if I’m getting my cable and internet for free. In fact, I’m probably going to write checks at the end of December to cover each of these bills for all of 2008.
Some of you will shake your heads and decry the absurdity of this notion. That’s fine. This sort of money mind game isn’t for you. But if you’re the sort who gets tense from a stack of bills, consider giving this a shot. The next time you have a small cash surplus, prepay three or six months on your phone bill. See if it makes things easier.
(In a way, this is a low-tech path toward paperless personal finance. It’s not actually paperless, but it has the same effect — it decreases the number of things I have to bother with each month.)
This article is about Money Hacks, Planning, Psychology
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On another note, I actually enjoy sitting down to pay my bills. After so many years of struggling to pay them, I take joy in having more than enough. Now that I’m almost debt-free, paying bills is a way for me to celebrate prosperity.
(But I do have auto-pay for free, so I guess I’m not actually writing checks and using stamps for too many bills most months!)
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I also prepay my bills but not the same way you do.
I get paid every 2 weeks. Knowing that my monthly phone bill is in the $55-$60 range, every two weeks (on payday) I give the phone company $30. I pay it online through my bank. Splitting the bill amount in half and paying it in “installments” allow me to be sure I’m not spending my bill money on something else. When I get the actual bill, I normally have a small credit that gets rolled over to the next billing period, or a very small amount owing, which I pay immediately.
This is especially useful with larger less frequents bills that do not offer equal payments, such as hydro. The billing period is for 60 days and I’ve had several instances when a bill was not received at all. Bills range from $100 to $350 depending on the time of the year. Not something you want to open and realize you’ll have to be creative to come up with funds. So I gave them $50 per pay, building a credit over the summer and seeing the credit disappear over the winter. At least I know this way I’m not going to wake up to a $350 bill.
I’ve recently switched to a green energy provider and you have no choice but to pay by automatic withdrawal (you can also opt out of the paper bill, yay!). So I’ve been moving the $50 a pay to a seldom used saving account, moving the cash back to my everyday account the day the withdrawal is scheduled. I guess I could have done that all along but I get service fees if I use the savings account too often.
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I too prepay my bills to some extent. Because my husband’s income is seasonal, in the months that we have more money I pay the bills for the months that we have less.
I check my statements every month to see what my balance is and when the next payment is due, I try to pay something every month even if it is a partial payment, that way I can save my prepayment for when there is only money enough for food or when one of us can’t work for some reason.
I have been doing this for over 3 years and we have a much stronger credit rating and have saved thousands over that time in late and overdue fees.
I try to stay about three months ahead. That way we don’t risk losing the house or cars, should we lose our job or can’t work. There is a trick to prepaying loans like this, you first have to call the loan company and make sure they accept prepayments then on all you payments should be written “APPLY TO NEXT PAYMENT”, otherwise with home loans and some car loans they will apply it as a principle only payment and you still have to make a payment next month.
I also add $10 to each car loan or house loan to pay it off faster. It isn’t much but it has helped me save thousand in interest on car loans and I have paid them off much faster, of the three cars we have only one still has a balance and it will payoff in the next few months.
I find that the stress that it saves us and the security of knowing that the power or phone won’t be shut off is so empowering.
I have also managed with this plan to prepay (save) about 1 semester’s worth of my son’s university tuition & housing into a money market account. So I don’t have to use the college’s payment plan that cost us in added interest.
If someone is committed to getting out of debt and to start saving money for a rainy day I defiantly believe that prepaying bills is the way to go.
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An Addition to my last post:
You don’t have to have a “cash surplus” to get started, when we started our house was on the brink of foreclosure and I was getting 7 to 8 collection call per day. So here are some of the basics:
1. Use a bank debt card that will not allow you to overdraw the account, some banks have check cards and you can overdraw your account and be subject to overdraft fees, you want one that will only allow up to the account balance. Use this account for everyday things like gas and food.
2. Use the online bill pay feature through your bank, lots of companies like power companies and car and house loans have websites where you can make payments, do not use these, they charge more to make a payment through them sometimes as much as $20. Your bank may charge a fee to use their online bill pay but is usually less about $10 per month.
3. Use a second account for just paying bills! Don’t mix the two accounts (every day and bill pay)!
4. Schedule your bill payments to auto pay the day after your paycheck is deposited. Use direct deposit of your paycheck into a savings account first. Then distribute the money to the bill pay and everyday account and leave something even if it is $10 in the savings account every paycheck.
5. NEVER, NEVER, NEVER, use payday loans or title loans or check cashing, use a bank, if you can’t make it on the check you are getting, then getting less from your next paycheck won’t make the situation better.
6. Lower your expectations, too may of us live like we have more than we do. When you look at other people that have new cars and big fancy houses, 9 times out of 10 they are swimming in a sea of debt. Live in a smaller place, eat out less (once a month for us), pay off your car and drive it for ten years, and pay off your debt, don’t use credit cards and you will be better off then those that LOOK like they have it all.
7. When you have a $500 balance in your savings account, then that is considered $0, don’t ever allow or be tempted to use that last $500, that always stay, keep adding to it and when you have enough to pay ahead a bill, like car insurance is a good one, do it. If you pay your car insurance once per year you can often save money, because there are monthly payment fees. After you have made that payment, then leave the amount of the monthly payment in the savings, for next year.
8. Use a accounting software, like quicken or money, if you want a free one there are lots of open source ones on the web, I use gnu cash. It helps you to see where you spend money and on what, when you enter your bills use the split transaction to denote late fees, overdue, and interest. You will be amazed how much money you spend on using other’s money. If you use quicken or money they have a calender, use it to see what bills are coming up and where short falls will occur, then adjust payment so that you can cover that time.
Anyone can do this and get out of debt, excuses don’t pay the bills.
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I tried this with the car insurance, and it worked well. I just have to make sure I am going to be able to cover the whole premium again in 6 months. The feeling of being ahead of the game is great, but like some people said it can backfire if you are not careful. It can work very well for some people, everyone is different… : )
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Years ago I prepaid by a few months until about 4 months into it I got burned. My internet company went out of business and my utility company became Reliant Energy, who decided my credit with the previous utility entity was not their concern. I never got my $ back, tho I tried like crazy.
But to compromise, now I changed all my due dates to after the 20th of each month. The ones that wouldn’t change the due date? I simply paid one month (only) in advance. Now all bills are paid by automatic bill pay on the 1st of each month. I check my bank statement and my bills’ statements online that night or in the next few days. I have absolutely no stress. I don’t feel like I live paycheck to paycheck.
My bank and bills’ websites are bookmarked in a folder and the passwords come up automatically when I open the pages. Firefox lets you open all bookmarks in a folder at the same time. So the entire “paying bills” process takes less than 10 minutes. (I do live in Houston, not a small town, so there’s pressure on companies to show online statements. I can access ALL of my bills online.)
I’m working on getting 3 month’s reserves in the savings account attached to my “bills” checking account. That seems to give me the same sense of peace as prepaying the bills by 3 months. I can be the biggest frugal person on the planet about saving $.30 at the grocery store, etc. But I’ve achieved a life balance and willingly give up the $250 (or whatever) I would have earned had I not “prepaid” my bills in such a way. There are very few things I give up my frugalness for. This is one of them.
How much does your peace of mind cost?
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My question is this: what’s your purpose in pre-paying?
I used to pre-pay bills. My purpose was simple. I worked at the time in a highly demanding job that kept me on the road a ton. It was tough to keep up with the mail. It wasn’t an issue of not having the money or budgeting, but a desire to avoid service interruption.
But I realized that it was a poor substitute. What I did instead was enroll all critical bills in an automatic electronic debit program. Now, in fact, I have a greater awareness of them. I know the bill isn’t going to not go unpaid and if I didn’t get to the bill envelope, I am reminded of it when I see the debit in my account online. Of course, I run the risk of errors being resolved with me having to seek refunds, but I’m okay with that. It’s a cheaper solution than me paying a company like PayTrust (although, I’d love the archive of all my bill records — man that would be nice).
So what’s your reason:
1) is it for cash-flow concerns?
2) is it to avoid service interruption?
Those are the main reasons I can think of for why to do it. A third, which is in essence a proxy for budgeting, strikes me as a really poor reason.
And it goes without saying that there are limits to when pre-paying is an option and alternatives to accomplishing the same goals you might be trying to do with pre-paying.
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Wow! It’s scary to see how many people are so close to broke that if they pre-pay some bills and have an emergency, they couldn’t come up with the cash!
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I have plenty of money in savings, so I’d be able to take care of bills for about a year before I really felt a pinch, but it’s a great idea for most people to pay a month ahead in case something comes up and they can’t afford to pay that month.
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Have to be careful with prepay. I have had a few problems with it. Once with a discount long distance company. Our bills were so low we prepaid a nice round number, turns out to have been about 4 months service. Each month we got a bill saying don’t pay you have a credit. At the fourth month we finally owed like $2, which they promptly sent to collections because we had not paid a bill in three months. Of course I didn’t pay, I had a credit. Ran into similar problems with the electric company. We switched
A/C units so our precomputed budget amount was way too much. The next year we didn’t owe anything for about 6 months. Caused problems with the electric company. Now if we are running a surplus (like to pay extra on electricity in winter to overcome the A/C ouch in summer) then if we find we don’t need to pay, we still make a token payment $5 to keep their accounting system happy. We also prepay our mortgage by at least on month. One month something got lost in the mail. Being ahead a month kept us from being behind. But we still have to watch the bank. Despite always including the mortgage coupon for the appropriate month we have to watch and make sure they don’t credit it all as this months payment.
By the way nice comment system. It’s hard to edit in the small scroll box but the large (as posted) windows allowed me to see some typos.
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[...] posted a tip under his Money Hacks section that I vehemently have to disagree with. His tip was to prepay your monthly bills and he is planning on prepaying all of his bills for 2008! Anyone can tell you that by prepaying he [...]
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Ideally, one would put any extra money into some high yield investment while they are not using it to keep for emergencies. However, I think that there comes a time where prepaying certain items makes sense. Insurance for example. If someone is on a monthly insurance plan and comes across more money than normal for a month, I think it is perfectly ok to use that money to “prepay” your insurance costs. While insurance is technically like an installment since you have a set amount that you are paying off for a specific period, it is still a monthly bill that can be prepaid without having to worry about getting a check back for the amount overpaid. I did this recently with my insurance and effectively saved myself from having to pay $250 a month for the next year. While this may seem ludicrous to some people, I don’t know what my financial situation or job situation will be like in the next year, so reducing the amount of monthly debts I have will allow me to use that extra $250 dollars for other debts that can’t be paid off as easily.
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[...] recently suggested that pre-paying your bills – i.e., writing big lump sum checks to the vendors you know you’re going to owe something [...]
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Justin: Prepaying your mortgage means that you pay the prinicple off faster than what was originally agreed to in your loan papers, which can save you bundles of money in interest you don’t have to pay. Depending on how much you prepay, you can cut the length of your mortgage in half or even less. So, yes, you continue to make your regular payment every month, but the end of your mortgage comes around much quicker. It’s not for everyone.
We pre-pay our mortgage and our gas bill. The gas compamy charges us $1 to use its online payment, so we make several months payment in advance and cut down on the number of times they ding us for the $1.
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[...] what about other bills? Are there any benefits in prepaying them? Well for J.D. at Get Rich Slowly, there *are* some benefits to prepaying his monthly bills, although they may not be in the financial [...]
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My lawn service company offers a 5% discount if we prepay for the entire year’s service in advance rather than paying for it on a visit by visit basis. Much more convenient for us anyway, so discount and peace of mind, here we come!
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I love this way of “savings”. right when my wife and i got married, we started pre paying our Mortgage, and other misc monthly bills. we save $5.00 a month by paying our car insurance in 6 month lumps. At one point we were about 7 months ahead on our bills, and mortgage, and then we had my oldest son, matthew. he was born missing half of his heart and for the next 5 months i flew out of state to other hospitals to see him, and my wife.
if it wasn’t for having our mortgage paid in advance, there would of been no way i could of afforded to visit him durning surgeries.
it was like i didn’t even have to worry about bills! it was great!
at this point we still have a savings, a 401k, a year supply of food storage, and water, and now have our bills about 2 months paid in advance.
granted this idea of a “savings” isn’t for all, but if you look at the emergency aspect of it. if something comes up, like a sick child, a huricicane, or some other natural distaster, do you really think bill collectors care why you didnt have power to turn on the computer to pay your bill?
this way something happens, you know you dont have to worry about not being able to make a payment!
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About a year and a half ago I started getting really sick of writing out a check or going online and paying off our utility and phone bills every month. At certain times of the year I get really busy and it makes it very difficult to keep up with all the bills coming in and whether or not I’ve paid them.
I started paying our bills in advance and now I just have to glance at the statements as they come in and file them away. It ended up saving me a ton of time, hassle, and postage. It also gives me peace of mind knowing that I don’t have to worry about it for a while.
Since I rent and have a contract that I signed for a year, I estimated about how much it would take to pay a bill in advance until a month before the lease is up. This way I don’t worry about having a big chunk of cash sitting at some company and them not knowing where to send it. It’s been nice. If I prepaid $1000/year on all of my bills and would only get 3% from my saving account, I think the $30 opportunity cost is worth the piece of mind and time that it saves me.
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I think this is great idea if you use it properly and can help you deal with transitions in your budget easily.
I live in Arizona and the elctric bill is outrageous during the summer, but usually sub-$100 come fall. I’m paying just $10-15 over my bill for the winter months and come summer I will have a little bit of offset at the beginning of summer to adjust my budget.
My cable and phone bills I usually only pay a few dollars more, just in case I have an unexpected expense and have to put off that bill until my next paycheck. My thought was that if you always have a few extra dollars in there it give you a good cushion for late fees in case you have to postpone payment. I could also imagine that this comes in handy in case you ever get hit with “unexpected” charges or rate hikes.
I don’t do it in large amounts, but I think small amount might be a better, more affordable strategy.
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We live in Las Vegas and our electric bills in the summer can be between $250 – $300 June-August, so every month we pay just a little extra to help with the next month! And the same as Robbie, in the winter they are less than $100 and that is exciting, but we still pay extra!
Another thing we’ve done is when cc bills come in I pay at least the minimum (unfortunately we are one of those sad families who carry balances on our cards) and then on the next pay day we make another payment, even if only $5 to help with the next month or even better to chop down the principal balance!
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I do this too! I thought I was the only one. But I pay 1-2 mos in advance. If I forget,am out of town, have receivables but little cash in a certain month, no problem, the bill is covered. And no late fees or interest. This works for me.
I,ve done this for credit cards too. I “increase” my credit limit by paying more than the total balance. Some I’ve called about this and they don’t really like it. But it insures no interest or fees. If everyone did this the banks would make less $.
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