Choosing Bill Payment Methods

by Lie Dharma Putra on 26/07/09 at 7:34 am

Figuring out an appropriate way to pay your bills is one of the most important financial tasks of everyone. The main considerations here are accuracy. Accuracy is a matter of keeping good records and paying bills in a timely fashion. There are myriad possible bill payment methods to choose, of which I’ll focus in this post. What are advantages and disadvantages of each bill payment method?. Read on…

Using Automatic Debit Plans

One option that may simplify your bill paying is using automatic debit plans. By making arrangements with your bank and creditors, you can have some monthly payments debited directly from your checking account. Typical automatic debits are payments for your mortgage, car loan, charitable contributions, and insurance premiums. It’s often possible to have a series of automatic debits pay all monthly fixed costs, leaving you to manage only your variable expenses. In addition, some companies allow you to pay your bills by using a touch-tone phone.

Advantages. The advantages of automatic debit plans are most significant from a standpoint of time: The arrangements spare you the hassle of writing checks, filling out payment slips, and addressing envelopes. This approach also helps prevent late payments, which is beneficial in avoiding additional charges and—more important—in maintaining a good credit record. In addition, you save $0.37 in postage for each bill you would have had to mail. This may seem a minor advantage, but it adds up fast. There’s a special advantage, too, if you use this method as part of a savings plan: The automatic debit transfers a predetermined sum directly to savings, thus sparing you (at least temporarily) from the temptation to spend it.
Disadvantages. The main disadvantage here is that you may lose track of certain payments if you don’t log them carefully in your checkbook. Errors would foster the illusion that you have a greater balance than you really do. In addition, you might forget to take certain expenses into account for tax purposes, such as a contribution to charity. However, good recordkeeping can eliminate these risks.

Computerized Check Writing

Many people have found that using a computerized check-writing system is beneficial for several reasons. These allow you to designate which expenses should be paid through your checking account. At a convenient time, you enter the information for your checks: payee, amount, payment date, and so on. On the appropriate date, the program can direct your bank to transfer the money electronically from your checking account to the payer to the extent possible or, alternatively, to print the checks for you.

Advantages. As is true for many high-tech variations on standard tasks, computerized check writing reduces the amount of drudgery you face. The initial time you spend setting up the system pays off quickly once you’re paying your monthly bills. In this sense, computerized check writing bears some resemblance to automatic debits—it’s another fancy way of doing something you’ll have to do in any case. The difference is that this kind of check writing doesn’t work just for fixed expenses, as is true for automatic debits; it’s as good or better for variable expenses. You’ll save lots of time. However, the biggest benefit concerns recordkeeping. Computerized check writing will maintain complete records for whatever you’ve spent as long as you use it consistently and completely.
Disadvantages. Typical of other computerized functions, however, this one has a few drawbacks. One risk you run by paying bills this way is that your computer knows you’ve paid them but you don’t. Or you may have paid bills manually and failed to inform the computer. As a result, you may lose track of your bank balance and the total of your expenses. It’s also possible to make inputting errors, such as typing $2000 instead of $20.00 or paying last month’s bill twice.

Paying Bills Manually

This payment method is the old standby. It seems rather ordinary nowadays, but it’s flexible, simple, and familiar. Many people swear by this method, and it can potentially serve you well. Your dilemma following marriage will be deciding whether to use the one-account method or the multiple-account method.

The One-Account Method. The one-account method means simply that you write checks drawn from the same account, typically a joint checking account.

Advantages. The main advantage of this method is that you only need to maintain one account. If you can keep track of what you deposit into and withdraw from this account, you may end up with simpler accounting tasks. This payment method tends to be more straightforward and less paper intensive. Obviously, it works best if you are a single [you are the only one who use the account] and you keep good records.
Disadvantages. The chief disadvantage of the one-account method is that it easily leads to errors. This method is never good for a couple. Most couples with one checking account use two checkbooks, which means that each spouse can make payments without telling the other. This situation may lead to both spouses writing checks without informing each other, thus losing track of the bank balance and overdrawing the account. Many couples spend considerable time retracing their steps to determine who spent, deposited, or withdrew which amounts—or else they throw up their hands in frustration and simply give up trying to balance their account at all. Some people leave larger-than-necessary balances in their account simply because they have no idea how much is available. They want to avoid the risk of overdrawing. Rather than figure out where things stand, they just pad in an extra (and often non-interest-earning) cushion just in case. Another response—also counterproductive—is for one spouse to abandon the account to the other spouse, thereby abdicating a degree of control and responsibility over the family finances. This response can lead to mutual resentment and, in some marriages, one spouse’s ignorance pertaining to his or her personal financial position.

The Multiple-Account Method. Multiple-account method mostly used by couples. If you’re married, this method maybe good for you, you and your spouse could maintain two separate accounts, one for each of you, with each account having a single checkbook. You pay “your” bills separately. In addition to each spouse’s separate account, some couples also have another checking account for paying “their” bills. The multiple-account method requires each holder to divide up the bills. For example, spouse A is responsible for paying the mortgage payment and car payment; spouse B is responsible for paying all other bills. Based on how much income the spouses have coming into each account the particular division of payments can involve a complex breakdown. But overall, this method has more advantages than disadvantages for a couple.

Advantages. There are three reasons that the multiple-account method is advantageous for a couple. First, it tends to result in the fewest errors. With two separate accounts, you’re more likely to know what the account balances are. This method also works well if each spouse feels a need to have his or her own personal account (as opposed to one half of a joint account). Second, both spouses have control over the financial situation. They’re more likely to understand what’s involved in decisions, and they’re more likely to share day-to-day responsibility over money matters. Third, the two-account system allows for a degree of financial privacy. This can be important even for couples who are committed to sharing the work of financial planning. For instance, keeping two accounts means that when each spouse purchases gifts for the other, the costs involved can remain secret.
Disadvantages. There are two main drawbacks to the multiple-account system. One is financial; the other isn’t so much a financial issue as it is marital. The financial issue has to do with a couple’s overview of their finances. Having separate accounts means that you may not have the “big picture” of your financial situation. You may not know the sum of the money you have in all your checking accounts. You may therefore be uncertain about what you’re spending and what you’re saving. In a sense, you’ve decentralized your finances. This can leave each of you wondering what the other has received in income or paid in expenses. It’s not difficult to go from this situation to one where you’re actually losing control over your finances. The other drawback is that if you use separate accounts to pay your bills, you or your spouse may end up feeling a lack of control over how much money is in his or her account. That is, one of you may feel that your share of the family funds is more easily depleted by unpredictable circumstances. Unless you’re careful to ensure that an equivalent share of the vari- able expenses winds up the responsibility of each spouse, one spouse’s share of overall expenses may end up disproportionate. Alternatively, many spouses simply divide their bills based on whether they are fixed or variable, giving the responsibility of paying variable expenses to the spouse with the better cash management skills.

For example, let’s assume that spouse A brings in $4,000 per month, while spouse B earns only $2,000. Assume as well that A’s cash management skills are considerably better than B’s. In this case, spouse A should take over $4,000 of variable expenses, including payments to savings. Spouse B should pay the fixed expenses—mortgage, car payment, savings, and so on—equal to $2,000 per month.

Some couples have a joint checking account in addition to their separate accounts. This is typically used to pay large fixed expenses, such as the mortgage payment. The advantage of having a joint checking account as well is that you can arrange each spouse’s contribution requirement to the account in an equitable way, and you can have the account pay all or some nondiscretionary expenses. Then each spouse’s other expenses can be paid from that person’s separate account, thus eliminating some of the disadvantages of the two-account method. Of course, this three-account method is even more complicated and requires greater recordkeeping.

Effective Use of Credit Cards

There’s no question that indiscriminate use of credit cards can limit your ability to avoid debt and save money wisely. Used effectively, however, credit cards are actually an excellent way to pay your bills. However, such use assumes that you pay off your accumulated charges each month, thus avoiding interest charges.

Advantages. Among the advantages that credit cards allow are:

Time value of money
Simplicity of use
Organized, detailed records
Somewhat lower costs (e.g., postage and the charge for checks)
Consolidation of payments
Potential secondary benefits (such as frequent-flier miles)

Disadvantages. Credit cards have significant disadvantages, most of which we noted in Chapter 1. Their ease of use is all too tempting; you can rack up big bills effortlessly. You’re charged interest on any expense left unpaid past 30 days, and any new expense added to an existing balance generally causes more interest charges from day 1 onward. You must also typically pay an annual membership fee. If you believe that your own situation is such that the drawbacks of using credit cards don’t outweigh the advantages, it’s still important that both spouses have sufficient recordkeeping skills to use the cards effectively.
Using credit cards to pay as many of your bills as possible obviously requires a strong sense of purpose by both spouses. Without this commitment, you may end up damaging both your financial position and your marital harmony.

What bill payment method have you been using, how do you arrange? Your experience may help others.

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