Budget billing, explained

Summary:

• Budget billing averages your past 12 months of energy use into one steady monthly payment to smooth seasonal spikes.

• The main benefit is predictable monthly budgeting. However, some utilities charge fees and the fixed amount can make it easier to lose track of real energy use.

• This method doesn’t save money. It simply spreads costs out. You may later owe a balance or receive a credit depending on actual usage.

• A self-managed approach is to set aside a monthly average in savings, pay bills with a rewards credit card and use the savings to cover changes while earning interest and rewards.

Your utility bills likely make up a significant part of your monthly budget so it’s important to keep a close eye on them. But while your rent or mortgage stays the same month to month, your utilities don’t.

Hot summer days and icy winter nights can lead to spikes in your utility bills that blow your budget. No matter how hard you try to budget and plan, it can be difficult to predict the total each month.

Budget billing may offer the consistency you’re looking for. Our personal finance experts break down how the program works, who it’s designed for and what to consider before enrolling. By the end, you’ll feel ready to answer the big question for yourself: Does budget billing save money?

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. Then they will average it to determine your monthly charge, says Sara Rathner, a financial author. This will give you a predictable bill to pay each month rather than one that changes.

If you recently moved into your home, the charges used to calculate your budget billing amount may be based on the previous owners’ or renters’ usage, Rathner says. 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. There’s 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 a personal finance blog.

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 turn up 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?

Not exactly.

“Budget billing won’t save you money; it just evens your bill out over time,” 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.

How does budget billing work if you underpay? You’ll 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.

Overall, there’s a fairly simple answer to “What is budget billing?” The benefits are clear, too. While it doesn’t necessarily save you money 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 budget for this expense and assign funds into other expenses or savings.

“Anyone who sticks to a strict, detailed monthly budget may prefer the predictability of budget billing,” Rathner says. “You know exactly how much your utility bill will be each month and can plan your other spending around it.”

Combine budget billing with autopay and you can set and forget your utility bills. They’ll be 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. Consider the following:

• You may face extra fees. Some utility companies charge a fee for budget billing. In Cothern’s view, this outweighs the benefit since there’s no reason to pay tacked-on fees for this service. It’s important to find out if there are fees before signing up when you’re 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 too comfortable, Rathner says. They leave lights on or turn up the heat instead of grabbing a blanket. If this sounds like you, this approach can cost you money even as you’re trying to save money with budget billing.

“Always keep an eye on your monthly bill, even though you pay a level amount for months at a time,” Cothern says. Most utility companies provide your usage information on your bill.

If your finances can 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 you’re paying attention to the full amount, he says, which may motivate you to reduce your energy use. And that’s where the real opportunity to save money lies.

By considering potential fees and the impact on your energy usage, you’ll have a good sense of whether budget billing saves you money in the long run.

After looking at how budget billing works, the potential downsides have led some financial pros, Cothern among them, to develop a new hack for paying utility bills. Instead of signing up for budget billing, open a savings account online specifically for utilities, Cothern suggests. 

For example, 360 Performance Savings offers a high rate to help your balance grow. You’ll also want to sign up for a rewards credit card, if you don’t have one already.

Next, grab your last 12 months of utility bills, total them up and divide by 12 to get your monthly average. Then 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. Then pay that bill with the money in your utility savings account. You get the benefits of a regular amount coming out of your budget as well as credit card rewards and any interest earned on that money from your savings account.

Now that we’ve answered the question “What is budget billing?” and shared helpful recommendations, you may decide that budget billing is right for you.

If that’s the case, it’s important to read your utility’s program rules in detail. Yes, that means looking at 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 specifics or 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, you’ll 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 decide if enrolling is right for you.

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