Is Budget Billing for Your Utilities Right for You?

Caucasian woman sitting on floor paying bills with laptop
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If you've ever had your budget busted by a larger-than-normal utility bill, then you may want to consider budgeting billing.

Budget billing means your utility company (like the power or gas company) will offer you a set amount due each month for a certain utility. To determine this amount, the company will add up the amount you spend last year on that particular utility, then divide that number by 12, assuming that your usage will generally stay the same.

While budget billing may seem to be a great idea to help you with your budget, carefully consider several things before you sign up.

Find Out What Happens If the Company Estimates Incorrectly

Take a look at whether or not you will be charged extra if you use more power than they planned. Usually, this overage amount will be due at the end of the year without any notice. So, if you do decide to sign up for budget billing, check to see if you'll owe money if you go over. If the answer is yes, be sure to set aside some extra money in December to cover it.

Alternately, ask what happens if you end up using less electricity, gas, etc. than the company estimated. Will you be reimbursed, or will that overage be applied to next year's billing cycle? Either way, it's good to know what your agreement says before signing up for a budget billing plan.

Look at the Monthly Fees

Examine all administration fees associated with the service. Many will charge a monthly fee. The fees can vary from company to company, but anything more than $2-3/month is likely too much. Keep in mind that all the company is doing is giving you an average monthly payment. They likely aren't saving you any money and is not something that should require a high monthly fee.

Many people will sign up for budget billing over the phone, but it's important to not verbally agree to budget billing without first seeing the terms in writing. You can tell the customer service representative that you need to talk it over with your partner and ask them to send you a copy of the terms and conditions and that you will call back if you choose to sign up for it. The company can mail or email you the information and it will give you more time to make the right decision instead of being pressured into it over the phone.

Carefully Read Your Contract

Consider the contract that you are signing. When you do this you are signing up for at least a year. There may be complications if you have to move. You should look carefully at the expectations on this.

For example, you may need to pay extra if you move if you have used more power than you have already paid for. If this is the case, you may need to set extra money aside or dip into your emergency fund to cover the difference.

Create Your Own Budget Billing System

Think about doing this yourself, without the charge, the contract, and the hassle. You can even budget the amount they suggested. Then roll over the additional amount from the lower months to cover the months where you use more power. This will help you to budget without spending money on administration fees. You can do this with any category where the amount you spend each month fluctuates. Either divide the amount you spent over the last year by 12 or budget the highest amount you spent last year for each month and then put the extra money into savings or towards your debt payment plan.

Make Your Decision Carefully and Monitor Your Bill

As with any contract, it's important that you fully understand what you are signing up for. There are advantages to knowing exactly what you will be paying each month, so it may be worth the added expense.

If you do sign up for budget billing, you may be tempted to simply pay your bill each month and stop worrying about it altogether. However, you could still be hit with a large bill at the end of the year. That's why need to monitor your power usage throughout the year to make sure that you are within your the estimated power usage, especially as you begin to reach the end of your contract. And if you are worried about the cost of your utility bills, you can work to lower them, like preparing your home for winter.

Updated by Rachel Morgan Cautero.