Why you SHOULDN’T prepay your monthly bills
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.
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JD: ING has free bill pay, you don’t need to pay that US$5! NO ONE does, as ING is free, no minimum, and no monthly fees.
and no, i do not work/get paid by ING. 😀
Allen, does ING have the ability to pull from another bank account? For example, could I set up my account to automatically pull $X from my credit union on the first day of the month? Also — is it just Electric Orange that offers free billpay, or is it the saving account, too?
Lots of CU’s have free bill pay. I’m shocked they are still charging for it. We went free years ago!
These are all well, but have you thought about your electric/heating bill. I’m not sure where you live, but in Texas, our electric bill is high in the summers, low in the winters. Converesly, heating high in winter, low in the summer. But for only two or three months. I have taken the last years worth of bills and calculated an average monthly bill for the year and pay that amount each month. This gets us ahead on the electric bill so that in the summer, I don’t have to budget for a high a/c bill. The budget doesn’t break.… Read more »
Why not go ahead and prepay when you’ve got the extra cash, but then from then on start making one monthly deposit to the high-yield account, in the amount that you would have paid? That way, 1.) you’re still earning SOME interest (and really, how much can the difference possibly be?), 2.) you get the low-hassle benefit of having your bills paid, and only making one transfer per month 3.) you can’t run the risk of false lifestyle inflation because that money is being whisked away into savings and 4.) if something comes up, you have your monthly “payments” in… Read more »
I think many banks offer free bill pay. I believe ING does and my Schwab brokerage/checking account does (both of these pay interest and were free to open).
It should just be the ING Electric Orange since making payments from a savings account would probably incur excessive withdrawl penalties.
I’m on the phone with them as i write this… Electric is the only way to do bill pay. [they wanted to have a media rep get back to me, but i told him it was for myself. ;)] You can have Their accounts pull money from another account, such as your CU, at specific times of the month. You could also have it transfer money between the ING savings to the Electric orange, if you wanted to maximize your savings. 😀 The key, is that they can only pull money from a CHECKING account into an ING account. That… Read more »
I just called my credit union. Billpay is free for the first six months, then $5/month thereafter. It’s also free on months when the average balance is greater than $10,000. (HA! I’m not to that point yet. My debt is almost paid off, then I can start accumulating cash.)
Thanks everyone for your tips and suggestions.
@Gwen:
Good idea, but to take it a step further, i encourage the readers to check with their local power company to see if they have free budgeting. It’s hard to estimate what the cost will be if you’re renting each year, but the power company can give you an estimate. Here, it’s free, and they readjust every 6months.
Tell your credit union that you’re going to switch accounts to another bank/C.U. because almost every other financial institution offers FREE BILL PAY. Tell them that you’ll stay if they waive the fee. (they obviously can because a temporary waive is manually done at the bank/credit union level) Talk to the manager. I’m sure they’d rather waive this then lose you as a customer. Customer acquisition costs in banking these days are really high! Also, the $10,000 balance thing is moot. You’re a loyal customer who’s balances are growing. Community Banks and Credit Unions can make exceptions left and right.… Read more »
I’ll join the chorus and say that your credit union charging for online bill pay is highway robbery. Bank of America’s online bill payment has been free for years. In fact, BoA used to do just the opposite: you could get a free account in WA state with no minimum monthly balance if you avoided using human teller services by relying on ATMs and online banking instead. (I’m in OK now, where I get a free account just for having direct deposit.)
Tell your CU to get with it. 🙂
I discovered about a year ago that E*Trade offers free automatic bill pay. No fees on their accounts either.
Adam
Most banks now have free online checking and bill paying. I have set up my cable tv, mortgage, and several other fixed expense bills to be paid monthly. I had to time them; e.g., my mortgage gets paid 2 weeks from the other bills so I know I’m covered.
And like Allen says above, some companies will do a checking account withdrawal.
I like setting up automatic payments for the year instead of doing a year’s pre-pay. Unless you can talk the companies to give you a discount for a year’s pre-payment.
While I think for a number of reasons this particular idea wasn’t a terrific one, I completely agree with the spirit of your previous post. That is, I think that in many cases it is worth simplifying your finances, even if you give up a small amount of money by doing so.
JD: My answer to your Q was marked as spam once i put in corresponding links to the ING website. 😛
Short answer for everyone else while that gets cleared up:
Yes, they can take money out at a specific time, but it has to be from a checking account. & the free bill pay is only from the checking, but you can have money transfered into that from the ING savings account as well.
Utilities are one where it made a lot of sense to me to prepay for several months at time when I filled out checks and mailed them. They didn’t really vary other than seasonally and I still checked the bills as they came in. Small nuisance bills you will pay anyway are perfect for this. The funny thing is some companies, like insurers, charge you for the ‘convenience’ of paying monthly. I can’t think of anything less convenient. Now with online bill pay which is free from most major banks (Quicken usually costs though), I don’t usually do so anymore.… Read more »
I agree with those that say Billpay should be free. However, I would argue that the $5.00/month is worth it anyway.
It helps you go paperless.
Save some of the money not using stamps.
Bill pay is setup to pay monthly. So if you forget or don’t take the time to go through your bills, you pay on time anyway (just not necessarily the correct amount.
Allan and FinanceAndFat pointed out a good point. If you’re going to bill pay from an account, it might be worthwhile to check that account offers interest AND free Bill Pay. Schwab has a 4% High yield checking account w/ free bill pay I’ve been looking at. Free checks and FDIC insured, too. That makes it easy and seamless, which is what much of this prepayment is about. If I have to transfer money about, even automated, that just makes one more step for me to follow up on.
@Freecia:
Thank you so much! I am personally striving to make as many of my bills as possible auto payed. I have my money go from my paycheck into separate accounts automatically, that automatically pay those bills.
You can’t spend money you never “have” and i never miss a bill. 😀
If it works for you, go for it. What works for you may not work for everyone else.
Washington Mutual has both a high yield online savings account plus free bill pay. Checking is free with the regular savings account (where I keep just $1). You can instantly transfer funds between all of your accounts. I find it the best of all worlds – instant access to high yield savings (in person if there is a branch where you live like I have or just online into checking account) and bill pay to do just as you described.
Don’t regret having posted this topic this morning. Every discussion presents opportunities for learning.
If you hadn’t posted that, I am sure you wouldn’t have learned more about auto bill pay and others may not have thought entirely through the implications of taking this step.
Every single entity that I have to pay each month has an automatic payment plan. My mortgage is the only bill that I don’t take advantage of that with, mainly because I want the flexibility to move that large payment around if I have to. And when it’s time to pay I go to their website and schedule the payment for free. You don’t need bill pay, you just need to tell each company to come get their money when it’s time. And if you have a rewards credit card, you can actually get a little money back by having… Read more »
Why the regret? The post created a really good (if spirited) discussion. People brought psychology, logistics, and finance out to support their points. I’d call it a success.
It’s tangential to the current discussion but I’m inclined to point out that there is little reason to stick with a FI that changes for bill payment or atm fees. There are plenty of FIs that offer accounts with those perks as well as high interest, often with low or no minimum balance. The first three that come to mind are: ING, Schwab and CNB-Taylor.
You should be acknowledging the ones that commented on your previous post and made you post this new one. The commentors are the ones that gave you the idea for the new post 🙂
-Mike
They’re strong enough for me to regret having posted the money hack this morning. ** I’d like to dissuade you from censoring yourself. I thought all sides of the discussion had merit and if you hadn’t posted it, there is a lot I might not have learned about how other folks do things like this. So keep on being controversial. It is a good thing!!! One other thing: The alternative to bill pay is auto pay… when the Co. comes for their money automatically. 5 of my bills that don’t fluctuate very much I have set up for the company… Read more »
I don’t have the time to read all the comments but I have free automatic bill pay at Wells Fargo and ING Electric Orange. If I remember right, my old Key Bank account had it free as well. I haven’t even heard of it not being free! I love automatic bill pay from my Electric Orange account, I even have my rent automatically paid on it. All you have to do it set it up once and you are done. Only problem is when the bill is a different amount, like the electric bill, so I just have the electric… Read more »
Yes, you can transfer X number of dollars to ING from your regular checking and then use the bill pay. I don’t use the bill pay option as I have it free through my regular bank, so I can’t comment on it, but automatic deposits are easy enough to set up. That being said, I can understand why you would enjoy prepaying. What I hate about monthly bills is how they keep showing up every month. 🙂 And sometimes you do get a benefit; when my husband and I were DINKS, we had enough extra cash to pay our car… Read more »
JD — don’t regret this! Personally I think it’s a brilliant idea to pay ahead on bills, even if it’s just one or two months in advance. I am working on being three full months prepaid on every bill. (Either literally or by having that money set aside.) It’s like insurance to me that works together with my emergency fund — insurance that if I suddenly lost my job, I know that at least I have that 90 day grace period while various other things happen (transfers from investment accounts, etc.) It’s the same reason I prefer to pay certain… Read more »
“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.” Unless you fail to give sufficient notice, companies must refund your balance for canceled services. If you are worried about the notice requirements for your utility/service providers they are required by law to give you that information at your request. To avoid overpaying in an unexpected situation, you could not prepay on any services that require… Read more »
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. JD, You shouldn’t regret that at all. You like it and it works for you. Please don’t be afraid to post advise like this because I plan to be in the position to be able to prepay like what you described and I’d love to hear more about it. You take the good with the bad. What’s important is listening to what others have to say about it and then seeing if there’s… Read more »
I used to prepay my credit card bills before I went away for the summer. My credit card won’t let you do that any longer — they say it gives openings to terrorists — ?!?! So now I have to pay online while travelling. This summer I was in places where finding a cybercafe was very inconvenient, and of course I had lost the piece of paper that reminded me when the bill was due — meaning I had a charge for late payment by the time I got on line to pay the thing. Very annoying that I wanted… Read more »
Warning: Possible inflammatory post coming. But I generally don’t read comment threads on this (or any other, usually) blog after I post, since my comments are primarily for the blog owner/author. So flame away at my response if you want, I probably won’t read your comments anyway. “If you prepay your bills, you may not even bother to open the statements.” If you don’t even open the statements, then you are irresponsible and no one should listen to your advice about how to handle money. “Some companies refuse to accept prepayment…” These are few in my experience, but I haven’t… Read more »
JD … before getting too wired over the $5 bill-pay fee, consider the -whole- CU against the other places you could place your money. IMHO, a single $5.00 convenience fee is not a deal-breaker. Especially if the interest rate on savings is good or if some other feature is important to you. (Ie; are they close enough to easily walk to or along your normal daily driving route? Are their hours more in tune with your needs than nearby competing financial institutions?) The fee that troubles me is the hidden one … having my information so readily available to databases.… Read more »
Reading many of these responses is frightening. The number of people who use forms of auto-pay is astounding, given the penalties for errors. Even more frightening is that some people use vendor-initiated auto-pay.
Auto-pay is a bad idea no matter how you slice it. You are surrendering control and flexibility. All it takes is one screwed up vendor-initiated payment or one errant number in the ledger to cause a cascade crash. Expen$ive stuff, that.
I’ll stick with launching each payment from my end of things.
I use mycheckfree.com, all the bills show up on one site, and I can set them to pay right then, later or on the due date. They email me each time a bill shows up. There are only 2 I can’t pay there and those I can take care of from my bank site. They don’t pay automatically, so I can check the bill and that works for me. The only thing that is automatic is our mortgage, that’s a no-brainer for me. I used to prepay things for the summer too, but that was before online banking, and everyone… Read more »
It’s been a few years (almost 10 now) since I’ve had bills to pay in Canada but I do remember my Dad always prepaying the cable bill for the year because he got a discount for it. Heat and Hydro could go on average amount to make it easier to budget. Most people pay insurance by the month (which cost a touch more) because they can’t afford the once a year hit. My Dad had a good plan which I never had the cash to do. he keep track of all his bills and then put enough money in the… Read more »
The Netherlands banking system allows you to “empower” utility companies to draw automatically money owned from your account. Alternatively, you may set up a monthly payment, free of charge, and define the period during which it will be active. Which gave me this idea: setting up a “bills” account. The only constraint this account has is “have enough money every month to cover all bills”. It doesn’t really matter how you finance it – I dump a portion of my monthly income there, and leave a reserve to cover the “variable” bills, such as the mobile subscription. It works like… Read more »
How about: I can’t afford to prepay bills? 😛
If I did do that and moved, the companies I paid would issue a credit, no extra charge. It’s happened before when I had a bill set up with auto-payment. I was moving out but the auto-payment already went through, so they wrote me a cheque.
If you need to prepay your bills to fool yourself, then definitely use automatic payment. This is great if they let you charge a credit card – more free perks! I currently have this for all my utilities. I have them set up to ping me by e-mail when the bill is ready so I can review the charges, but the bill payment is handled automatically. I do not automatically pay my credit cards, but I do use bill-pay to send my payment. I don’t get charged for this service. I still have complete flexibility by stopping the withdrawal whenever… Read more »
Hi!
I’m new this blog but I wanted to say that I read your money hack post about prepaying bills and then read the comments. . .
I am very impressed by your humble stance and respect your willingness as a blogger to say that you regret leaving that post. Well done.
Chase
@MikeVx: I’m sorry, but your concerns are really non-issues. It’s just as easy for your check to get lost in the mail (or the horror storys of CC companies ripping up payment checks to charge you late-fees) as it is for a computer to mess up when to send the bill. On the plus side, with auto payments, if they DO mess up, you can go after them to remove the late fees (if they are deducting), or to pay you back for them (if they are supposed to have been sending it out). PLUS, you’ve got proof that you… Read more »
If you really think that sending tons of money to your creditors BEFORE you owe them is a good idea, you should change the name of this blog to “Get Rich VERY Slowly”
Don’t pre-pay your bills. Pre-pay yourself! Put it in savings.
Have you checked with the companies you do business with? I know that some, such as the cable company, will do auto-pay and just pull the amount from your account on the due date, without charging you a fee. There are even companies who are charging if you pay with a check nowadays! I was actually shocked to learn this, as there are several people who I know that aren’t technologically coherent.
A credit union charges $5/mo for bill pay? Yikes! And I thought Wells Fargo was bad! I certainly hope you can switch to another credit union or bank that provides free bill pay (thank you, BECU!). However, if $5/mo were still the standard fee that it was a few years ago, I’d think it was still worth it for saving me from having to deal with stamps, envelopes, and check-writing. Additionally, bill pay payments show up in my online account right away, whereas checks can take several days–even up to two weeks–to show up. Even though I track my accounts… Read more »
If you feel comfortable doing it, you could set up an auto draft with the companies that you want to auto pay. They would be taking the money, not the bank sending the money, and it is typically free. I just don’t know if I am comfortable with it.
I thought of another downside to paying your bills early. What if someone were to scam you? say for example your landlord skips town with six months of your rent. You risk losing a larger amount if you pay over the minimum payment.
I find it hilarious that each of this pair of posts currently sports a 2.58 star rating. They’re exactly tied.