I’m wondering if it is a good idea or a bad idea to pre-pay monthly expenses. In the past, I’ve put any “extra” money on my hydro account to make it less of a price shock when the bill arrives. Does it make sense to do this with bills, putting extra on them when I can afford to do so?
From a purely mathematical, financial point of view it doesn’t benefit you to pre-pay your bills or put extra money toward bills before your statement date. Any money you give to a company beyond what you owe them on your statement – whether it’s for your hydro bill, phone, or Internet – will not reduce the total amount you pay and it will not accumulate interest. You’re not getting ahead in any way by pre-paying or over-paying your bills.
At the same time, you’re taking money out of your bank account sooner. Money which could probably sit in a savings account, generating small amounts of interest is being spent early. The interest probably won’t be much, but it’s slightly better to have money in your account generating more money than not having it. Also, any money you pre-pay is money that is not in your savings account for emergencies. You’re basically handing over money early that you might need in case something bad happens in your life.
The one scenario I can think of where it makes sense to pre-pay an account, getting your balance lower (or negative) before your billing statement date, would be in situations where your bills tend to be irregular. For example, if your heating bill spikes in the winter, but drops to almost nothing in the summer. Then, in order to “get ahead” of the spike, you might want to put more money toward the company providing your heat before the large bill comes mid-winter. In other words, you are basically figuring out the average amount of your bills and paying that each month. This means you’re over-paying in inexpensive months in order to get ahead in more expensive times.
Personally, I think in these situations (where bill amounts spike and drop), it can help to get into the habit of pre-paying to keep your budget consistent. However, I think a better solution is to set up a high interest savings account (HISA) and place any extra money you might want to spend on bills into the savings account. This gives you a pool of money that will slowly accumulate interest and is separate from your main bank account so you cannot spend it by mistake. Using the HISA also means that, in the event of an emergency, you have a small pool of money from which to draw funds. If you give companies money before they ask for it, they won’t give it back when you need it.
In short, I don’t think it’s necessarily a bad idea to over-pay your bills if it makes your budget more predictable. There is a psychological benefit to having a stable, predictable flow of money in and out of your accounts. However, I think a better solution is to maintain a separate savings account where you can pool money for your bills. This not only provides you with an emergency fund, but also generates small amounts of interest in the long-term.
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