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Today is all about how to pay bills…the right way.
Wait, there’s a wrong way?
Yep. Actually there are several mistakes you could be making when paying your bills. So we’ll look at a few of the most common mistakes people make, and show you how to pay bills better.
Mistake #1: Paying bills late
Paying a bill late, or worse, missing a payment completely, is a big deal.
Maybe you can’t cover all your bills one month, and you’re forced to choose what to pay and what will have to wait. That’s a rough position to be in! If that’s you, we have some tips on how to pay bills when you don’t have enough money to cover everything.
That’s one thing. But have you ever paid late because you simply forgot to pay the bill before the due date?
Maybe a physical bill got misplaced, or your e-bill got lost in your inbox. Maybe you thought your SO paid it, and they thought you paid it. Or maybe you got an extra large bill and thought, hmm, I’ll just pay this as soon as I get my next check. But then you forgot to revisit that bill once you got paid.
These things happen to the best of us, despite our best intentions. And they create a big mess.
The problem with late payments
The first problem with late payments is that you’ll be hit with a late fee. Depending on the bill, a late fee could easily be $25-$50! And really, is there any bigger waste of money than paying late fees?
On top of the late fees, you could take a credit hit. Companies can report your late or missing payments to the credit bureaus, which will hurt your credit score.
And why is that such a big deal?
Ok, most 20-somethings (and some of us 30-somethings!) don’t realize how important credit scores are until they bite us in the tush:
- When you have to pay an extra security deposit of several hundred dollars for your new apartment because your credit is iffy, you realize how important your credit score is.
- Or when you get a worse interest rate on your car loan because you don’t have good credit. A 1% point difference in your interest rate can cost you thousands of dollars in extra interest over the term of the loan!
- Or when you’re denied a home loan…
Don’t let any of those things happen to you! Take good care of your credit score, starting with making all your payments on time.
How to pay bills on time
Automate! Schedule your rent to be automatically transferred before the first of the month. Set up automatic payments for your utility accounts. And create auto-transfers for all your debt with fixed minimum payments (like student loans and auto loans).
That will probably cover 90% of all your bills! You’ll only have to remember your debts with a minimum payment that changes month-to-month (like credit cards), and one-off bills (like a dental or vet bill or something).
Congratulations, you’ve substantially reduced the likelihood of incurring a late fee and dinging your credit!
Btw, automation is also my secret weapon in the quest to save money. Set up automatic transfers to move money from your checking account to your different savings/investment accounts every payday. That’s how I build an emergency fund, accumulated over $100,000 in my retirement account, and saved enough to buy 2 investment properties in California and move abroad!
If I had relied on my memory and willpower to set that money aside, I’d probably still be working on that emergency fund. I’d have a crap ton of shoes though 😐
Mistake #2: Not reviewing the charges
There is, however, a small problem with automating your bills. You’re less likely to review the charges because you don’t have to look at the bill to pay it.
That’s a big mistake because errors on bills are actually pretty common. The fact is, humans make mistakes. A lot. And it’s possible your bill could contain a typo or extra charges.
My previous cable/internet provider (I hate to name names, but…Time Warner. It was Time Warner.) was terrible at issuing accurate bills. Seems like every 3 months or so they’d charge for an upgrade we didn’t get. Or they’d continue charging the high-speed rate, but would “accidentally” reduce the internet speed. Ugh…my blood is boiling just thinking about them!
But it just took a phone call to correct the error and either get a reduced bill or a credit for the next month. I mean, yes, I had to check the bill the next month to make sure the credit actually showed up, but still. Babysitting them helped me keep more of my money.
How to review bills
You probably have a vague idea of how much you pay each month for certain services like Internet, water/sewer/trash, and Netflix. A quick glance at the total is probably all you need to do.
Then you’ll have some expenses, like electricity, that vary widely depending on the season. And really, how could you know if those bills are correct? Consider checking your bill against your bill for the same month last year. There will still be some variance, but it could help you confirm that the charges aren’t wildly out-of-line.
Then your credit card bills. Review your credit card bills carefully to make sure you recognize every transaction. Not only will that avoid routine errors, but it will also help protect you against identity theft! Oh, and one other bonus to reviewing your credit card statements: you might notice an annual subscription charge for subscriptions you no longer need (or forgot you even had!). So you can cancel that subscription and put the money to better use.
Mistake #3: Only paying the minimum amount due on debts
If you’re a typical 22-year-old, making minimum payments on your credit cards, you may have grandchildren before you pay off your credit cards. Not even kidding. And that’s only if you stop using your cards now and don’t start using them again.
Since 2010, credit card companies are required to warn you about the risks of paying the minimum balance. Go grab your credit card statements and look for something on the front page that shows your minimum payment due and your three-year pay-off amount.
This snippet is the warning from my credit card statement:
First: Notice that there’s no interest rate in this snippet. The interest rate is buried in the fine print. I have great credit, so my interest is a “reasonable” 15%. 😐
You can see that I would need 23 years to pay off my $5,286.01 balance if I pay $52/month. And it would end up costing $6,146.99 in interest alone ($11,433 minus $5,286.01). Gross!
But if I pay $182 every month for 3 years, I’m done in 3 years, and I save $4,869 in interest charges.
But then I’m still paying $1,277.99 just in interest ($6,564 minus $5,286.01). I could really use that $1,277.99 elsewhere! That $1,277.99 interest over 3 years averages $35/month. I’m not interested in throwing away $35/month just on interest.
That’s why it’s so vitally important to pay down debt asap.
How to pay more on your debts
Pay down debt can be tricky because it requires you to find more money in your budget to throw at your debt.
There are really only two ways to get this money:
- Spend less on other things so you can funnel more money toward debt payments
- Make more money so you have some extra cash to put toward the debt
Simple, but not so easy, right?
Luckily, we have lots of free advice for managing expenses and for increasing income. Check out some of those posts if you could use a little help finding the wiggle room in your budget to pay down your debt.
And if you’re struggling just to keep up with your existing bills, you need to check out our 4-step process in How to Pay Down Debt When You Can’t Even Pay All Your Bills. It could change your life. Not that we’re bragging 😉
Mistake #4: Paying more than the amount due on all debts at the same time
So we just looked at the mistake of paying the minimum amount due. You might be tempted now to add $50/month to all your debt payments to avoid paying all that interest.
But there’s a better way!
We call it the Champagne Waterfall Payoff Plan (but most people call it the “Debt Snowball”). It’s a strategic way to pay off your debt that will result in thousands, maybe tens of thousands in savings! it a perfect example of how much easier personal finance can be once someone shows you how to hack it.
Here’s how it works:
Instead of paying a little extra on all your debts at once, you pay a lot extra on just one of those debts: the debt with the highest interest rate. And you pay the minimum balance due on the rest (for now!). The point is to save as much as possible in interest, so you want to knock out the highest-interest debt first.
Once that first debt is completely paid off, you take the total amount you had been paying on that debt, and roll it into future payments on the next highest interest debt in line.
A visual helps illustrate this:
See how the payment for Credit Card B jumps from $50/mo to $250/mo once Credit Card A is paid off? It’s because we’re adding the $200/mo that we used to pay on Credit Card A on Credit Card B.
That’s how you pay down debt years faster and save thousands in interest.
In my case, using the Champagne Waterfall on my debts is saving me $39,047 in interest over the next 8 years!
Feel Like Sharing?
Got any more advice on how to pay bills? Or want to share how much money you’ll be saving with your Champagne Waterfall debt payment plan? Leave it in the comments!
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