Budget billing, also known as levelized billing, allows households to pay a fixed amount for their utilities every month. This avoids the inconvenient seasonal spikes and dips associated with actual monthly usage and makes it easier to budget for household expenses. Instead of paying the bill amount that varies month-to-month, your utility company calculates a monthly average payment based on your previous 12 months of usage.

How Does Budget Billing Work?

Most utility companies offer budget billing programs that let customers pay a consistent amount each month instead of fluctuating payments. Here is an overview of how these programs work:

Utility companies utilize your past usage history and billing amounts, usually looking at costs over the last 12 months, to estimate your average annual costs for service. They then take that total estimated yearly expenditure and divide it into 12 equal monthly payments.

For example, if your total utility costs over the last year summed up to $1,200, your budget bill under this program would be $100 per month. So every month, regardless of your actual usage or the weather that month, you would pay $100 toward your utilities.

Customers pay the same preset monthly amount over a 12 month period. At the end of the 12-month budget cycle, the utility company reconciles or balances your account. They compare your total actual usage charges for the year to the total you already paid through your monthly budget amount. If you overpaid relative to your usage, you get a refund or account credit applied to your next bill. However, if you underpaid and didn't cover your full costs, you would owe a little extra on your next statement to make up the difference.

After reconciling your account, the utility company reevaluates your account details and sets a new fixed monthly payment for the next 12 months. This updated budget bill amount reflects your most recent annual usage based on the previous year's energy costs.

Read: Does Checking Your Credit Score Lower It?

What Are The Pros And Cons Of Budget Billing?

There are both benefits and downsides to using a utility company's budget billing program. Evaluating the key pros and cons can help you decide if this billing approach makes sense for your financial situation.

Pros

• Provides predictable utility bills every month so you can easily budget household expenses

• Avoids bill spikes in high usage months like summer and winter

• Allows you to gradually pay for seasonal utility costs over the full year through level monthly payments

Cons

• Monthly budget amount could end up higher than your actual usage and costs during certain months

• Must be prepared to pay the reconciled balance at the end of the 12-month cycle if you underpay

• Changes in your usage patterns or costs aren't factored into the payment amount until the next annual assessment

While budget billing makes utility expenses more routine and consistent month-to-month, you may end up overpaying relative to your actual usage, especially in months when you use less energy or utilities. Carefully assess if the convenience of predictable payments outweighs potentially overpaying during slower months.

What Should You Do Before Enrolling In Budget Billing?

If you decide that budget billing could simplify payment planning, there are a few important things to consider beforehand:

Review Last Year's Bills
Take a look at your past 12 months of utility bills to ensure that the estimated monthly average payment calculated from your costs is actually affordable for your current financial situation. Make sure that it aligns with your household budget based on your income.

Check For Account Balances
See if you have any outstanding balances or overdue payments already on your utility accounts. Most companies require your account to be in good standing before allowing budget billing.

Assess If You Can Reduce Usage See if there are ways you could reduce your home energy usage in order to potentially lower the budget bill amount. This could include upgrading appliances or turning off lights.

Have Savings To Cover Shortfalls While overpayment gets refunded, you need to be able to pay a reconciled balance owed if your payments undershot actual costs for the year. Have some emergency or utility savings earmarked to cover potential shortfalls.

Know The Reconciliation Date
Find out the exact month that the annual reconciliation and realignment of your budget bill occurs. This lets you proactively anticipate and financially prepare for a potentially higher “true-up” bill.

Find Out: Hidden Costs of Chapter 13 Bankruptcy

How Else Can You Save On Utilities?

While budget billing can make expenses more predictable, decreasing usage is the best way to lead to bigger savings on your utility and energy bills over time. Along with exploring budget billing, some other ways you can proactively reduce monthly costs include:

Home Energy Efficiency Upgrades

• Replace old appliances and light bulbs with more modern, energy efficient models

• Use less electricity during periods of peak demand

• Lower your thermostat temperature a few degrees during winter months

• Invest in insulation upgrades like blown-in attic insulation to reduce heat loss

• Perform weatherization upgrades like caulking, air sealing and weatherstripping to reduce leaks

Utility Company Cost-Saving Programs

• Take full advantage of rebates, incentives, and financing offered by your utility providers for efficiency upgrades

• Opt-in to flexible rate programs that offer lower prices during certain times of day

• Earn additional rewards and savings by enrolling in customer loyalty programs

Evaluating your total home energy footprint holistically provides the most opportunities to cut utility costs far beyond just altering your billing approach. Assess all aspects of your utility usage and bills to find additional ways to maximize savings.