When your home energy usage peaks in the summer and winter, you could be surprised by a higher energy bill — and might have to scramble to cover the cost. Signing up for budget billing with your utility providers can eliminate these unexpected cost surges and make it easier for you to plan your monthly expenses.
But what exactly does budget billing mean, and is it right for everyone? Here, you’ll learn:
• What is budget billing?
• How does budget billing work on a monthly basis?
• What are the pros and cons of budget billing?
• Does budget billing save you money?
• Can you start budget billing on your own, without the utility provider’s help?
What Is Budget Billing?
Budget billing is an alternative, optional payment program for utilities like gas and electric. By opting into budget billing, you will pay the same predictable amount each billing cycle, regardless of how much or how little energy you actually used.
With budget billing, you can avoid the roller coaster-like highs and lows of utility billing — where costs skyrocket during sweltering summers and frigid winters. For many, this makes building a monthly budget much easier.
To opt into budget billing, call your utility provider or check out the website for information about what is available.
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How Does Budget Billing Work?
Energy prices and usage fluctuate throughout the year. This can make it difficult to anticipate what your gas and electric bills will be each month. Depending on where you live and how harsh the seasons are, you might be in for a surprise on a few bills each year.
Budget billing eliminates those bill fluctuations. Instead, your utility provider analyzes past energy usage for your residence (usually over the prior 12 or 24 months) to estimate an annual total. The company then divides that total into 12 identical payments for the upcoming year.
Of course, it’s unlikely that your energy consumption will be exactly the same as it was the previous year. And with increased inflation and unpredictable weather events, the price of electricity and natural gas could increase over time. To account for this, your utility provider will track your actual energy usage throughout the year and calculate what you would owe (sometimes called a “true-up amount”).
• If you overpaid for the year, the provider will issue you a credit on an upcoming bill.
• If you underpaid for the year, you’ll have to pay the outstanding balance.
Either way, the utility provider will use this year’s worth of data to calculate a new monthly payment for the year ahead.
Note: While annual plans are common for budget billing, some providers may also offer a quarterly (three-month) plan.
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Does Budget Billing Save You Money?
Budget billing does not save money on utility bills. Instead, it just makes your monthly payments more predictable. Some months, you will likely pay less than what you actually owe. In others, you could be paying more than what you would owe.
Having a predictable line-item budget may make it easier for you to handle other monthly expenses or keep you from needing to dip into your emergency fund to cover an especially high energy bill.
Advantages of Budget Billing
So what are the pros of budget billing? For many families, budget billing can add some stability to their finances. Here’s how it may help you out:
Easier Budget Management
Not knowing how much you’ll owe your utility providers each month can make it tough to build a budget. With predictable bills, you’ll know how much money to set aside each month for utilities. You’ll also know how much is left for other expenses, as well as for savings and retirement contributions, debt repayments, and investments.
Less Financial Stress
If seeing an unusually high total on an email statement or paper bill can send you into a panic, you may appreciate the stability afforded by budget billing. Budget billing won’t save you money, but when you know what to expect each month, you might rest a little easier.
Reducing Late Payment Penalties
If you receive a high energy bill that you can’t afford to pay, you may have to take on unwanted credit card debt with a high interest rate, dip into emergency savings, or even just pay the bill late. The latter could result in late payment penalties.
With budget billing, you won’t have to worry about a spike in your monthly energy bills. This may help you avoid late payments altogether.
Drawbacks of Budget Billing
As helpful as budget billing can be for some families, there are also some cons to consider:
Potential Fees
Some utility providers charge a fee to enroll in budget billing. On top of the startup fee, the provider may charge ongoing fees for the service. If that’s the case, budget billing will actually cost you more money than a traditional billing program. It’s a good idea to ask about fees before signing up for any new program.
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Chance You Could Underpay
At the end of the program — usually a year after it kicks off — the gas or electric company will calculate what you actually owed for the year, based on your energy consumption. If you overpaid, you’ll get a credit on a future bill (nice!).
But if you didn’t pay enough each month, you’ll owe whatever remains. If it’s a sizable amount, you may have to rely on a credit card to cover other expenses or take money out of savings to pay off the bill. Many people enroll in budget billing to avoid such surprises to begin with, so this can be counter-productive.
Complacency
When you’re on a budget billing plan, you might get used to a low electric bill in the summer and be tempted to blast the AC. Similarly in the winter, it could be tempting to get all toasty by cranking up the heat. You won’t feel the financial repercussions of those decisions until much later, when your provider calculates your true-up amount and determines that you owe more money.
If you don’t think you can be responsible with energy consumption without the threat of a high bill looming over you each month, budget billing may not be the right fit for you.
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What Happens If You Are Billed Incorrectly?
Mistakes can happen. When you opt in to budget billing, it’s a good idea to read the agreement and understand how your monthly total is calculated. You want to be sure you understand how bill pay works. Even if you have your bill set to autopay, you may want to review your statement each month to ensure it’s what you expected. If it’s not, you can call your utility provider to discuss.
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Can You Make Your Own Budget Billing System?
You don’t have to opt into a utility provider’s system to take advantage of budget billing. In fact, you can make your own budget billing system if you’re willing to do some math.
Just analyze what you spent on utilities over the previous 12 months to figure out an average monthly total. Use this amount when building your monthly budget.
If your first bill comes in and is less than your monthly budgeted amount, pay the bill and hang on to the leftover funds. Stash them somewhere safe, where you won’t spend them. When your bill is eventually higher than what you’ve budgeted, you can dip into that leftover money to cover the difference.
By handling budget billing yourself, you can avoid any potential fees the utility provider might have charged you. Plus, you can store leftover budgeted funds in a high-interest savings account. While this approach requires discipline, it can be well worth the effort.
Alternatives to Budget Billing
Budget billing may not be for everyone. Some alternatives include:
• Traditional bill programs: You’ll pay what you owe each month, but that means some bills might be high in the summer and winter. In other months, you may enjoy lower-than-average bill totals.
• DIY budget billing: If you don’t mind doing some math to figure out an average monthly payment, you may be able to do budget billing without the fees and hassle of going through a provider. You’ll still pay what you owe each month, but by planning ahead and setting money aside in savings, you can make a more predictable budget.
• Low Income Home Energy Assistance Program (LIHEAP): Depending on your income level, you may qualify for government assistance with your home energy bills. Qualifying for the program does not guarantee assistance; roughly 20% of households that qualify actually receive help through LIHEAP.
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The Takeaway
Budget billing allows utility customers to pay a set amount each month for electricity and gas, based on past usage patterns. You won’t save any money with budget billing, but it can make monthly budgeting more predictable. Before enrolling in a budget billing program, it’s a good idea to review the pros and cons and understand how it can affect your finances each year.
3 Money Tips
1. Typically, checking accounts don’t earn interest. However, some accounts will pay you a bit and help your money grow. Online banks are more likely than brick-and-mortar banks to offer you the best rates.
2. An emergency fund or rainy day fund is an important financial safety net. Aim to have at least three to six months’ worth of basic living expenses saved in case you get a major unexpected bill or lose income.
3. If you’re faced with debt and wondering which kind to pay off first, it can be smart to prioritize high-interest debt first. For many people, this means their credit card debt; rates have recently been climbing into the double-digit range, so try to eliminate that ASAP.
FAQ
Do all utility companies offer budget billing?
Not every utility company offers budget billing. Your state may have a network of regulated electric and gas providers that are required to offer this program, but unregulated suppliers may not offer budget billing.
Am I better off budget billing or not?
Budget billing can be helpful if you like a predictable utility bill each month. Knowing what you’ll spend may make it easier to budget for other expenses. However, budget billing does have its drawbacks, especially if the utility provider charges a fee for the service.
Can I budget bill for other areas of my budget besides utilities?
Outside of utilities, most recurring monthly bills are predictable — rent or mortgage, internet, phone, student loan payments, etc. But if you like the predictability offered by budget billing for utilities, you might benefit from creating your own budget billing program for other unpredictable monthly totals, like groceries and fuel for your car. To do so, just calculate your expenses from the last year and divide by 12 to determine your average monthly total. You may want to account for inflation when estimating expenses like food and gas.
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