Earlier today I wrote that I like to prepay my monthly bills. I acknowledged that some people might think this was dumb, but that I liked to do it anyhow. It’s not often that I share something with which GRS readers vehemently disagree. This is one of those rare cases.
Because there’s so much opposition to this idea, and because each of these points is valid, I’ve combed the comments to compile a list of reasons you should not prepay your monthly bills:
- When you pay your bills monthly, you’re more likely to review your statements to be sure there’s nothing amiss. If you prepay your bills, you may not even bother to open the statements.
- Some companies refuse to accept prepayment, and may even charge a processing fee to issue a refund check.
- It’s up to you to keep track of when the prepayment is up. As I mentioned in the comments on the previous post, I have a co-worker who often forgets when the prepayment period is over (because he doesn’t check his statements), and he ends up with late fees.
- By prepaying, a person may be tempted to spend the money on other things. For example, if you prepay your cable bill, you may be tempted to purchase a pay-per-view show that you otherwise would ignore.
- What happens if you prepay a bill and suddenly discover you need the money for some other obligation? Or what happens if you are forced to move? Or your house burns down? You’ve already prepaid, so there’s no way to get your money back.
- By prepaying bills, you create an artificial cost-of-living. Because you’re not dealing with monthly cable or phone bills, it’s easy to forget that they need to be accounted for.
- Setting up automatic billpay from your checking account would accomplish the same thing, but you’d get to keep the money in an interest-bearing account before it was needed.
- And the most popular reason to avoid prepaying your bills: When you do so, you’re essentially providing an interest-free loan to the company you’ve paid.
These are all excellent points. But are these arguments strong enough to make me change my mind? Only one. Before I next prepay my monthly bills, I’m going to do more research into automatic billpay. The last time I checked, my credit union wanted $5/month to do this.
While these arguments aren’t strong enough to dissuade me from prepaying my bills, they’re strong enough for me to regret having posted the money hack this morning.
This article is about Basics, Choices, Hints and Tips
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I find it hilarious that each of this pair of posts currently sports a 2.58 star rating. They’re exactly tied.
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I just did a quick Yahoo search (http://search.yahoo.com/) for “free bill pay bank” and it came back with million’s of hits. The interesting thing is my bank (http://www.usaa.com) who I have been using for years and provide free bill pay, actually came up as advertising link on the top of the page. Anyway, like many have said, most banks offer it free because it saves them money too, especially when they can electronically transfer the money – no checks to process. In fact, USAA even has a Deposit@Home feature so I can sign then scan in any checks I receive and they are deposited.
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You all have great points, Fantastic idea to prepay your bills. im not quite sure about the post on gaining high yield if you don’t prepay. You wont’ see much of a return anyway since your paying your bills. What if your house burns down? or you spend your money on something else? Well there is a slim chance your house will burn down unless you like fire. Good money management will keep you from spending your money anyway.
interest free loan? Your gonna pay it anyway. you really can’t look at bills as a loan, unless its a loan lol…..
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It’s interesting the mind games that we play to help us handle money, isn’t it?
Personally, I wouldn’t prepay bills. I feel the company is already getting enough of my money, so why should they get even more of it for free? However, with that said, I truly understand the warm, fuzzy feeling that you’re going after here. It feels like an accomplishment! Here’s another way of getting that feeling: I used to round up my payment to the nearest $5 amount. For example, the check for a bill for $35.42 would be $40.00. When the next bill comes, you then see a “credit” for $4.58. Almost makes you feel like you got some free money somehow. Your checking account didn’t miss the measly $4.58 and your next bill is smaller. If you want, you could round that up even more and pay $45.
Like someone else mentioned, I use a “Quarterly account” to pay bills that don’t occur every month: car insurance, sewer bill, homeowner’s, etc. I divide each bill by 12 and then by the number of paychecks I get each month (which has changed as I change jobs: 4, 2, 1, etc.). This amount religiously goes into that Quarterly Account. That way, the money will be there when the bill occurs. Hopefully, you can stagger the payments so they don’t all come within the same one to two months. When I set this up with my first job (about 22 years ago!), it was a checking account as there was no easy way to transfer money from account to account without having to go into the bank. Remember, that was back when ATM banking was brand-spanking new! Over time, I’ve transferred the money to a savings account so it earns a tiny bit of interest.
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I do a sort of prepay. I just pay about $5 to $10 extra on each bill and by the end of the year, I’m usually a month or so ahead. If a person starts this in January, they can basically skip bills in December and voila! Christmas money!
I know you got a lot of flack from “financial experts” on the boards, but this tip is really good for beginners or people who are trying to go from “paycheck-to-paycheck” living into something savings-based.
It’s also a “beginner’s emergency fund”. Why do we need emergency funds? So we can pay our bills in case of job loss or other financial emergencies. If your bills are already paid, it’s the same thing. Some people don’t have the discipline to save thousands of dollars in a bank account (again, some people are beginners at this), and this helps accomplish an ad-hoc emergency fund that can’t be used for impulse purchases (instead of saved) because the money has already been spent on the bills.
I think it was an excellent idea and I’m glad you wrote it!
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That’s a great idea Kay! I’m going to give it a try.
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I think you should prepay only if you have a large bank roll set aside and can afford it. I like to spend lots of money when an item goes on sale. For example, I am a huge Pepsi drinker. If it goes on sale for a ridiculous price, I will stock up and spend $50 or more on Pepsi. If I prepaid too many bills, I wouldn’t be able to do that. I also have my own business where I can double or triple my money. I just prepaid my car insurance off for six months, which I realize now wasn’t the best idea because my money could have been invested in my business making 100% profit or more.
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Mindy, I’ve thought about doing the monthly account thing as well. One question I have about that though – how would you best account for the yearly increase that usually happens?
What I’m actually trying to figure out is to divide all my bills for the year by my number of pay periods, and put that amount into a “bills” account, and pay all my bills from that account, not just the quarterlies. That would make it easier to have a more simplified monthly budget, since my electric and gas bills vary widely from month to month.
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There is one time when it is financially savvy to prepay bills. This is any BUSINESS EXPENSE BILLS which should be paid just before Jan. 1. I prepay the heat bills and electric bills for a rental propery in advance, making sure the check is DATED a day before Jan 1. THIS MEANS THE UTILITES MAY BE DEDUCTED IN THE CURRENT YEAR, GIVING YOU THE TAX DEDUCTION A YEAR EARLIER. If you pay the same amount and date the check Jan. 2, YOU MUST WAIT AN ENTIRE YEAR TO GET THE BENEFIT OF THE TAX DEDUCTION. Always prepay these BUSINESS BILLS IN ADVANCE OF JAN. 1 TO GET THE EARLY TAX DEDUCTION. Ditto with any business bills at all, PAY THEM WITH A CHECK DATED BEFORE JAN. 1. It’s not finacially advantageous to prepay personal bills as you are making a loan to a company at 0 % interest.
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I normally have automatic payments set up at the utilities that I do business with. However, most of the time, I am paying a payment due in march, in the middle of february. So I guess I’ve been following this premise.
I also try to pay all of my bills at the website for that particular bill. They then pull the money from my account. No stamps, no checks, I have a record of withdrawal. This also improves your credit score, as you are never late to pay a payment.
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Another idea is to have minimum payments for monthly bills set up as automatic bill pay. Each month you have to go over your bill and “correct” the automatic amount, but you are protected from late fees in case you forget.
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