What is budget billing and is it right for you?

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.

Sweltering summer days and icy winter nights can lead to budget-blowing spikes in your utility bills, and no matter how hard you try to budget and plan, you can’t predict the total each month. Or can you?

Budget billing may offer the consistency you crave. Here, personal finance experts describe how budget billing works and explain who may benefit from it, empowering you to answer this question for yourself: Does budget billing save money?

What is budget billing and how does it work?

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, and average it to determine your monthly charge, says Sara Rathner, financial author and credit cards expert. This will give you a predictable bill to pay each month, rather than one that fluctuates.

Keep in mind that 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, says Rathner. 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 blast 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?

Does budget billing save money?

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.

What are the benefits of budget billing?

Overall, there’s a fairly straightforward answer to what budget billing is, and the benefits are clear, too. While it doesn’t save you money per se, 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 account for this expense in your budget and more precisely allocate 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, ensuring they’re paid on time and in full, making money management a lot simpler. This could also help you deal with financial stress.

What are the downsides of budget billing?

While budget billing has its pros, it also comes with cons. Does budget billing save you money? To help answer that question, consider the following:

• You may face extra fees. Some utility companies charge a fee for budget billing. In Cothern’s view, this negates the benefit since there’s no reason to pay tacked-on fees for this service. It’s important to find out whether 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 complacent, Rathner says. They leave lights on or turn up the heat instead of grabbing a blanket. If this sounds like you, being frugal 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 right on your bill.

If you can financially 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 consumption. 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.

Make the most of how budget billing works with this hack

After scrutinizing how budget billing works, the potential downsides have led some financial pros, Cothern among them, to develop a new hack for paying utility bills.

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Instead of signing up for budget billing, open a savings account online specifically for utilities, Cothern suggests. 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. You’ll then want to 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 and then pay that bill with the money in your savings. You reap the benefits of maintaining a consistent amount coming out of your budget, as well as credit card rewards and any interest earned on that money from your savings account.

Do your homework before signing up for budget billing

After weighing your options and considering your personal budgeting style, 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 digging into 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 nuances and 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 make the call on whether enrolling is right for you.

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