Have you ever forgotten to pay a bill and gotten whacked with a late fee? Or worse, gotten a “friendly” reminder call that your payment has not been received? Did you feel a nervous jolt when you finally got around to going through all that email only to discover an unseen bill notification?
Whether you rent or own, drive to work or use public transportation, like to travel or improve your home space, the bills keep coming. The consequences of not paying on time range from late fees, to lowered credit scores, to loss of the item or service you’re paying for. So how do you ensure that for all of those items, due at different times during the month, you not only have the funds when you need them, but that the bills are paid on time?
As a banker, I talk to a lot of people every day about money. Frequently, I’m talking with college kids, opening their first checking account or getting their first credit card and beginning to manage their first paychecks and payments. I often share my thoughts on managing money, taking on debt, and paying your bills to be sure your credit score is always going in the right direction: UP.
I have a method for managing my monthly expenses that I’ve used for years. And in all that time I have not stressed about having the money when the bill comes in. Nor have I ever missed a payment for any of the items on my plan.
I use my method for all of my fixed monthly bills, including mortgage, car payment, car insurance, cell phone and cable. Your list might look a different, but I think it makes sense to include any expense that is billed monthly, and that does not fluctuate very much from month to month. For example, I do not include my electric bill, which is often much higher in the summer due to air conditioning costs.
Once I’ve identified my fixed monthly costs, the next step is to open a second checking account, separate from my main (day to day) account. I call this second account my bill account. All of your fixed monthly expenses will be paid from the bill account. After you’ve established your bill account, add up all the monthly expenses you identified as being relatively fixed. Then, divide this number by the number of pay periods you have every month. If you get paid weekly, divide by 4. If biweekly, divide by 2.
Example:
Rent 1200
Car payment 250
Car insurance 150
Cable 180
Cell phone 180
Total 1960 / 4 (pay periods per month) = 490
This figure is the amount you need to deposit into your bill account each pay period in order to ensure enough funds to pay all expenses for that month. The best way to accomplish this deposit is to set up an automatic transfer through your employer for those funds to be deposited directly from your paycheck, removing the need for you to manually handle the transaction. Most employers offer this option, but if yours doesn’t, you can easily set up a recurring transfer through your online banking from your main account to your bill account. The keyword here is “recurring.” Set it up to happen automatically so you don’t need to remember and you will quickly get used to what’s left of your paycheck after the mandatory expense money has been transferred. The leftover money is what your have to work with for every day expenses–gas, groceries, bills not included in your bill account–until your next paycheck.
The last step is to set up automatic payments to your bill collectors by providing them with your bank routing number and the account number of your bill account, or by setting up recurring payments through your bank’s online bill payment feature. Voila! You have now set up a system to ensure you always have the money for your monthly bills, and that they are paid on time!
Here’s a recap of the benefits of using the bill account with automatic deposits and payments:
–Always enough money there when the bills are due
–Payments always made on time
–No late fees or consequences
–Credit Score continues to go up
—Extra paycheck twice a year
Wait, what??
Yes, you may have noticed that 2 months a year, there are 5 fridays in the month which means 5 paydays (or 3 paydays if you’re paid biweekly). Since you’ve planned to have enough money to cover your bills from 4 paychecks (or 2 when paid biweekly), you have an extra sum twice a year that you can use for whatever you want. It’s like a bonus!
As I said, I’ve used this method for about 10 years now and it works extremely well. No stressing about payments and no late fees! Occasionally I tweak when a payment changes or drops off (car is paid off, yay!) but for the most part it runs along smoothly with no thought from me of how, or when, bills are being paid.
And don’t worry if you actually like stress. I’m sure some will come along soon enough.
F Words that are not 4 Letters 