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How I Loaned My Electric Company $800 Interest-Free

in Joan's Posts, Money Basics

Note: This is a post from Joan Otto, Man Vs. Debt community manager. Read more about Joan.

Our home is fairly big and fairly old. It’s drafty in the winter, stuffy in the summer, thin on insulation, and full of wiring that makes my electrician wince every time he has to work on it.

You can guess that low electric bills really aren’t common for us. We do what we can to reduce costs…

  • We use compact fluorescent lightbulbs instead of incandescents.
  • We keep the thermostat set so that we’re not running heat or air-conditioning much (68 degrees in the winter, 75 in the summer).
  • We have (not at our choice, sadly!) replaced most of the major appliances, including the water heater and the heat pump itself.
  • We don’t leave lights on when we leave rooms.
  • We don’t leave many things plugged in.
  • We use our fireplace for as much of our heat as possible.

… but even so, with EVERYTHING electric, and three out of our four family members home all day most days, we’re routinely paying $300 or more in the coldest months of the year.

Knowing this, a little more than two years ago, as I was trying to get a handle on our finances and make sure bills weren’t late, I decided to use our electric company’s “budget” plan. In this setup, you pay the same amount every month, no matter your usage, with adjustments made periodically to “balance out” what you’ve paid in vs. what you owe.

First, the good part

Under this system, we paid $230 every month one year, and $185 every month the next year (after adjustments). We always knew exactly what we’d owe, which made budgeting easy. Our bills varied from $20 (in months where we didn’t run either the heat or the air-conditioning) to, at the highest, something like $575.

We were essentially allowing the electric company to manage our money for us. We paid them a fixed amount, and they sorted it out over the course of each 12-month period.

That’s not a terrible thing to do – and it served a purpose at the time. We weren’t, early in our debt-payoff journey, able to account for irregular expenses. We did great with bills – $50 due to this or $100 due to that, every month. But if we paid $50 one month, and suddenly owed $250 the next month, we were thrown for a loop, something would be late, we’d pay fees… and things would go downhill.

But things changed as we got a handle on our money.

The not-so-great part

Throughout the current year, I noticed that we were building up a rather startling account credit. I opened up the electric bill in November and saw that AFTER the current month’s costs were deducted, we were still something like $794 to the good.

I called that day and switched back to pay-as-you-use-it billing.

There’s nothing wrong with paying the same amount every month, if it helps you make sure that you’ve got the money to pay the bills. But for us, circumstances had changed. Now…

  • We routinely have a cushion of $1,000 in our checking account (a big goal of ours that we met this year).
  • We keep a $1,700 emergency fund.
  • We have a good budget in place, knowing what comes in and what goes out when.

And knowing that, having the electric company hold $800 of my money interest-free, so that I’d have it “in case,” seemed like a bad idea.

What happens next

If you’re going to do this sort of thing, I highly recommend looking at it in the late fall. Because of our timing, we paid NO heating costs in November or December, and a lower bill in January.

That’s not “found money” – it’s just a case of me getting back what I’d loaned – but I won’t say it wasn’t nice around the holidays NOT to have that $185 bill due.

Now, as I approach our February bill, I’ll have a big payment to make… in fact, one of our biggest ever, thanks to some unexpected electrical needs. (Can you say dehumidifiers running constantly?) But we have the money to cover it.

In the summer, we’ll have low bills. We don’t run air-conditioning much, so those are generally under $50. During those months, we’ll build up our checking-account and savings cushions to prepare for the higher winter costs, but we won’t build such a cushion that we’re sitting on hundreds of dollars for months at a time. We’ll save smart.

We’re choosing to manage our own money, instead of loaning it to someone else to manage. 

In addition, we’ve become immediately more conscious of what our usage is each month – instead of glancing at the bill and paying the fixed amount, we actually need to look and see what our costs are and where they came from. That’s already helped us identify a few significant savings.

This doesn’t just apply to your energy bills. My goal after we’re free of credit-card debt is to tackle our mortgage escrow for the same reason. If you’re getting significant tax refunds every year, that’s another area where the “free loans,” this time to the government, come into play and can be addressed. The point is to think about when it makes sense to have someone else manage your money, and when it doesn’t.

Where is someone else managing your money for you right now? It’s time to ask yourself if it’s still in your best interests – and to make a change if it’s not!

We’d love to hear your thoughts in the comments!

{ 28 comments… read them below or add one }

Jason Burk January 21, 2013 at 12:01 PM

With regard to mortgage escrow, I found after many arguments that they like to keep about two months + worth of excess, which translates for me into $600 or so. I finally decided to let it alone though, because I have a couple rental houses with mortgages too, and having to remember to pay the taxes and insurance separately was more of a hassle than the comforting feeling of knowing that those are being paid for along the way. This is assuming your mortgage company doesn’t screw up your escrow – I have Wells Fargo and I’ve never ever had a problem with things NOT getting paid correctly. Also keep in mind, that if you whittle your taxes down to next to nothing, and you end up owing the feds (which isn’t a horrible thing — now you’re using THEIR money up front : ), you are supposed to pay quarterly estimates to avoid owing the following year. Found that out from my accountant this past year, and have a $180 check going to the IRS every three months.

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Joan January 21, 2013 at 1:18 PM

Those are good points, Jason!

2012 was our first year paying estimated taxes (since the majority of my income comes from what are considered self-employment projects) and we’re just waiting to see how it worked out for us (since we have so many streams of income, it’s hard to say how one or the other will impact us!)

Once we get a feel for how we make out, we’re going to revisit the places where we have withholdings (corporate paycheck-type jobs) and see what we need to change there!

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Jason Burk January 21, 2013 at 2:02 PM

Self-employment estimated taxes are certainly more of a moving target!

As for the mortgage issue, IIRC, for those with PMI (private mortgage insurance) as a part of their mortgage note, they may be required to include property taxes and insurance in their mortgage payments through escrow. I *think* the concept is that with a riskier loan, generally those over the magical 80/20 LTV (loan to value) balance — and thus subject to PMI — the loan provider has added insurance that the debtor will not place the collateral (your house) in danger of having either a tax lien or uncovered catastrophic property damage. Not using escrow is certainly something to consider if you plan on managing your money closely, however, it’s utlimately a risk / reward issue which may or may not make sense depending on each individual’s respective situation.

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Maureen January 21, 2013 at 12:19 PM

I am lucky that my electric company reviews the usage every other month, so if I did not use alot, they will reduce the budget amount. If I use a lot, they adjust it in their favor too. This is something they started quite a few years ago. I have electric heat and work at home, so I do watch that electric bill. Thankfully, we do have a woodstove, so that helps tons. Nothing like hanging your clothes to dry in the winter and they dry faster than in the summer!

As for the mortgage, I believe federal law says you have to keep so much in escrow to cover increases in taxes each year. However, the bank can up that figure so they are covered too. I hate, hate, hate getting the notice that my taxes have gone up for the next year, so the amount I have to put in escrow will go up. I tried putting additional money into my escrow account as the months passed, but the bank kept screwing it up. So now I will just wait for the notice that I need to pay the additional amount so that my mortgage payment doesn’t go up too high the next year. Oh and I do plan to appeal my taxes once again this year and maybe even hire a lawyer because 3 houses sold in my neighborhood for $20,000. less than the assessed value, but the town doesn’t agree with that.

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Joan January 21, 2013 at 1:21 PM

We’re lucky – while I know different types of mortgages and even different states have varying mortgage codes, we don’t HAVE to allow the mortgage company to escrow for us – and in fact you don’t even have to have any money in savings. (There’s some sad family past that ended up with some people charging their taxes – so when I got my first mortgage, I was DEFINITELY like, “uh, yeah, you can manage that for me.”) I hope the appeal goes well for you!

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Bilgefisher January 21, 2013 at 1:23 PM

Joan,

Congratulations. I consider this line of thinking the advanced 201 class of finances. Its where you really start looking at the true costs of day to day practices. We cost ourselves thousands of dollars of after tax money annually in situations such as this. After tax money costs more than pretax money.

One thing I learned awhile ago, is to look at my true income. Say you make 50k per year. Assume 25% to uncle Sam, gas to and from work of $150/mo, vehicle maintenance of $600/yr and cloths or $300/yr (I know it can be much higher especially for corporate jobs). Then you have travel time to and from work, unwind time from work, prep time for work. There are 2080 working hours assuming 40 hrs per week times 52 weeks. Add 1.5 hours per day for drive, and 1 hr per day to get up and get ready, plus 30 minutes per day for unwinding. That adds 780 hours per year (for a total of 2860 for work). Lets add it all up. 50,000 * 0.75 (taxes)=37500. 37500 – 2700 for vehicle costs. = 34800. 34800/2860 = $12.1/hr. Now think of that next $100 purchase. Is it worth working 8.2 hrs for? I was conservative with the numbers. I did not include all the time and costs associated with work.

Jason

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Jason Burk January 21, 2013 at 2:06 PM

I love this line of thinking. This makes the perfect argument why young people should be encouraged to make careers out of something they love to do. That way, you’re getting paid $12.1 / hour to LIVE, not necessarily to work! I’d be happy to LIVE another 8.2 hours to get that $100 item, but not necessarily feel the same about working a menial labor job to get there.

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Joan January 21, 2013 at 2:19 PM

I think you guys have both nailed it. Yeah for Jasons! :) There is a point at which the “101″ thinking of – it just has to get paid and I need to be sure I can pay it – works. There’s a point at which the “201″ thinking, the way of deciding what really makes the most sense for you, takes over.

And then there’s the idea of the REAL cost of things. Someone emailed me a comment saying that with most banks only giving .01% interest, why on earth did I care? My point was that I’m using this money to attack debts, some at 20%+ interest, but as I think about it, I care EVEN IF it wasn’t for that purpose, because I want the flexibility to put my money to work for me in whatever way is best. If I wasn’t attacking debt, that might be CDs or some more risky investment. It might be purchases.

But the point is, it’d be an option open to me, and the more options you have, the better off you are – in my opinion, ALWAYS.

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Darnell Jackson January 21, 2013 at 7:49 PM

Very interesting post,

It seems to me if we have technology to land robots on mars we should be able to heat a home for less than $100/month.

PS

i’m curious though

Why did you say replacing your appliances was not your choice?

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Joan January 22, 2013 at 1:04 AM

Because they BROKE!! We were saving up to replace them a little later down the road. :)

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Diane January 21, 2013 at 8:22 PM

Joan –
This article hits all of the notes in this sonata called electric company! Both the electric & gas company offers this same fixed payment arrangement. We currently do have this with our electric company. Mainly because when we first moved into this house, with it being bigger, we didn’t know what to expect so the fixed payment schedule allowed us to see actual usage. But to estimate our payment, the company looked at the previous resident. Turns out that she (single) was so rarely here, that the fixed payment was way below our actual family usage (and yes, we follow the same energy savings habits you listed). Thus our fixed rate has been adjusted up and if we stop we will likely have a significant bill to pay first before catching up. So we are just letting this ride out and it should be caught up in about 9 months. Then we can analyze where we are in our debt mountain and hopefully come to the same conclusion you have.

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Joan January 22, 2013 at 1:07 AM

I’ve never understood that “we’ll take the previous occupant’s usage” thing – for that reason. I would more think it’d make sense to take YOUR previous usage-per-square-foot in your old house or something, though I’m sure that’s hard if not impossible to get at and convert into something usable.

I’m glad you’re doing what you’re doing – it sounds well-thought-out and very much makes sense at this point!

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Johnny Moneyseed January 21, 2013 at 10:02 PM

Joan,

You should look into installing solar panels. When we had our house surveyed by SolarCity, they did a full energy audit for free. They showed us every area of our house that was losing us money in energy costs each month. It also showed the average costs to have some of the more labor intensive services completed. The panels cost us a total of $6,000 after credits, and produce 600kWh in the summer and 250kWh in the winter. After installing the panels and switching all of our bulbs to CFLs we significantly reduced our monthly energy costs!

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Joan January 22, 2013 at 1:03 AM

We are actually moving toward that exact thing – we’re about two or three years out yet, but we have a company in mind and plans in place!

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Paul January 22, 2013 at 9:16 AM

Joan,

We purchased a house a little less than a year ago and I was contemplating going to a fixed, estimated bill for gas and electricity (one bill for us). For now I am using the previous month’s utility bill to budget for the next month, but I usually get the actual bill prior to the first of the month, so I can adjust to accommodate any differences. Fixed costs are much better for budgeting, but I do not want to lend (interest-free) money to the utility company. I think I will stick to my current system after reading your post.

I also started a new job last year and I will be interested to see what my tax situation is like once I fill out the forms. I hated having to guess at the number of exemptions. I also hate giving the Federal Government an interest-free loan. Last year was weird for taxes. I knew I was going to owe a lot. This year should be more typical, so I will adjust my with-holdings based on how things turn out this year.

Paul

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Joan January 23, 2013 at 12:58 PM

Paul, that’s what we’re doing with taxes too – last year was an anomaly for us, so once I see exactly what comes of it, I’ll adjust for 2013!

You sound like you really have a good grasp on how to manage the utility company situation – huge “BRAVO” to you! I think your plan is a good one and I’m glad you’re not giving out an interest-free loan :)

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Andrea Standin January 22, 2013 at 2:11 PM

You’re right! It’s NOT “found money.” That term throws me for a loop every single time I hear it. There is almost no such thing, unless you receive a gift. The balance you still have when your year adjusts on the electric bill isn’t found money. It’s yours. The tax return you receive each year isn’t found money – it’s also money you “lent” the government and allowed them to sit on all year; money you could have been using for other things.

That said, I like using the estimated payment plan for my electric bill as well. I live in a small apartment but I’m on a budget. I watch my bill carefully, every month, to see if I’m ahead or behind, and by how much. It’s most important for me to watch it after the summer months, because I only have a couple of months left to “catch up” if needed, before my year ends in December (why I started this in December, I’ll never know).

I think it’s worth keeping in place but you definitely have to keep an eye on it!

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Joan January 23, 2013 at 12:59 PM

Andrea, I think it’s absolutely fine to do what you’re doing – especially since you’ve put thought into it! In our case, we started out thinking about it, and then it became an automation that wasn’t benefiting us, and we weren’t doing a good job re-evaluating, you know?

And I agree so much – that “found money” idea drives me nuts! I hate when people are like, “Oh, I overpaid on X bill and got a check back, I’m so lucky!” NO! :)

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Bilgefisher January 22, 2013 at 6:06 PM

I forgot to ask. Do you get a tax return each year? Its the same principle.

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Joan January 23, 2013 at 1:00 PM

You nailed it, mortgage escrow and tax refunds are the other two things I noted at the end of the post as places this crops up for people! In our case, we’ll have a weird tax situation this year and then hopefully be back to “our normal” next year!

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Jane Savers @ The Money Puzzle January 22, 2013 at 9:34 PM

I am not sure what mortgage esgrow is. I have had mortgages but have never been in esgrow. I hear it on the American property television shows but I thought it was a period when the title of a property and the financing for the property were being researched and guaranteed, Sort of a sale finalizing limbo?

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Joan January 23, 2013 at 1:22 PM

It actually has two meanings – one use (that they don’t use around where I live) is the phrase “closing escrow,” which is what you describe – kind of a waiting period right before you take ownership. We call it making settlement or the settlement process where I live in Pennsylvania, but my friends in New York call it closing escrow. I’m sure there’s some technical difference or some reasoning, but it’s not one I know!

For us, you “escrow” your various house-related taxes and insurances by paying your mortgage company more than the mortgage amount each month, and they then pay your tax bills, your homeowner’s insurance, etc. out of that money. To give you a very broad idea, I pay the mortgage company about $1,650 USD every month, but the part that is for the mortgage loan itself is about $1,000. The rest is money they’re holding for taxes, etc. Some of it you can pay yourself, some you can’t, and we plan to address the parts we ARE able to remove once we’re free of the credit-card debt!

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Candi Urdahl January 23, 2013 at 2:10 AM

One thing I notice about paying the exact electric bills, etc. each month is that it is more
motivating to switch those lights off and find other ways to save when it shows up right away in my bill. I like immediate reinforcement! It’s also surprising to see how much difference a few small changes can make over time.

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Joan January 23, 2013 at 1:01 PM

Candi, that’s a HUGE point in favor of the “un-automated” approach – the accountability! I think you’re right, you really do see it and make changes more when you’re actively managing the cost. Good for you!

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Jeffrey Mitchell January 23, 2013 at 2:19 PM

Some important things to consider about Budget plans;

If you are setting up auto debits to your account, you will not know what to pay each month unless you go to the budget plan. With no budget, you put yourself at risk of an overdraft if there is a “surprise bill” due to the change of season or a raise in the rates. An easy way to counter this is to leave extra money in your account that would normally be part of an emergency fund.

I still don’t like the budget plan because if there is a dispute about charges, the company already has your money. It is much easier to fight for an adjusted bill before they take your money than to get back money you were overbilled.

Keep in mind that if you do not set up a budget plan or ACH with the electric company, you have to factor in the cost of the check, the postage stamp and the time it takes for you to record this in your checkbook. This about an extra $1 per electric bill.

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Joan January 23, 2013 at 9:36 PM

Jeffrey, I don’t have any auto-payments (I’ve talked about that in the past – http://manvsdebt.com/bill-paying-system/ is one good example), but I pay online totally free – so no cost to mail, AND I get to manage my own money 100%! We also are big fans of checking-account buffers too.

I would definitely agree – it’s not good to do anything that runs a risk of overdraft!

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Monica Toress January 30, 2013 at 11:57 AM

I don’t think paying the same amount each month is so great considering you will still pay what you owe. It doesn’t make any sense and I would much rather pay what I owe when I owe it. I think this is the safer way to go.

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Jose February 3, 2013 at 6:44 PM

I’ve been using a level payment plan for years, but with one big difference. I pay a flat monthly rate to myself using an envelope budgeting system. At teh beginning of the year I look back at all of my utility expense for the last year, divide by 12 and come up with the amount that needs to go into the “Utilities” envelope on a monthly basis. It’s worked out well for me and once you get started it’s pretty easy to keep it going. One added benefit is that you’re budgeting and setting aside for ALL of your utility bills.

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