Prepaying Expenses May Not Be Your Best Option

The way things are going these days, it seems like every family and business is re-evaluating its spending in an effort to trim the fat and add more to the bottom line. Businesses cost savings are coming from cutting payroll or looking at cheaper alternatives to current expenditures.  Individuals are cutting out what they deem as unnecessary entertainment, taking steps to reduce energy costs, and reducing housing costs.  Both groups are even looking to prepay their regularly occurring expenses in an effort to get their spending under control, even if there is no, or minimal discount involved in doing so. Unfortunately, when it comes to prepaying expenses, even if you do get a discount, the benefits are far outweighed by the drawbacks. And, in truth I was only able to come up with two really strong (well one really strong and one that’s just ok in my book) reasons to go ahead with a prepayment plan but 5 even stronger ones against it.

 

The Good:

  • Saving money with a discount

    In most instances, you will not receive any kind of special savings for paying your bill – let’s say 1 year in advance. Some times, like with insurance, you can a couple of dollars by paying the premiums up front rather than using a semi-annual, quarterly, or monthly payment plan. Vonage will give you a discount of up to 20% to pay your phone bill a year at a time, and Phone Power will give you the second year free if you prepay. This is the only solid benefit of taking this kind of approach, and even then, there may not be much of a significant savings realized.

     

Phone Power Annual Pricing Screenshot

 

Vonage Annual Pricing Screenshot

 

  • Less to remember

    With all of the required payments being made up front, that reduces the number of bill payments on a monthly basis. That also reduces the amount of paperwork (assuming you do not use auto-pay) to be dealt with.  That being said, since many small business owners decide to do everything themselves, it also means that there is less of a chance that you will forget to make a payment as well.  On the personal financial side, it certainly helps those individuals who have trouble with organization and keeping track of their bills (and due dates).

     

The Bad:

  • Loss of Liquidity

    You are spending the money up front, and losing flexibility of having those funds available for other, more immediate, and possible emergency needs. This isn’t like an investment account, where you can liquidate certain items in order to free up some cash in times of need.  You are locked into this purchase for the duration, unless there is some sort of pro-rated refund policy, which to be honest is a rare characteristic of prepaying expenses ore, if there is, it will take time to get that money back. Individuals will lose the ability to have their money working for them, and even though interest rates are low these days, anything is better than nothing.

     

  • Budgeting Concerns

    Great, you’ve paid your next year’s worth of expenses in one fell swoop. Did you remember to keep including the bills in your monthly budget or did you remove it since it’s technically not going to need attention for a while? Whether you are running a business or a household, it is important to keep planning for that expense if for nothing else, then for the sake of repetition and accurately reporting the expense. The last thing you would want is for the day that you actually have to start paying that particular bill regularly to come, only to realize that you removed it from your budget and now do not have enough free cash to cover it. Not only is it a pain to deal with, but it also means having to spend extra time reworking that budget and finding a way to fit the expense back in. Let’s face facts: some people just do not know how to budget and need to keep things as simple as they can for themselves.

     

  • Mergers and Acquisitions

    Companies merge quite frequently, especially in this economy where the weaker companies have little other options than to allow themselves to be bought.  The problem, is that many times the company that is purchased gets folded into the purchasing company effectively ceasing to exist.  What happens if your company merges with another and you end up not liking the resulting product or service or support from the new company? Essentially nothing, since you are stuck with them until your prepayment expires, or you get lucky enough to get an opportunity to void the remainder of your agreement.

     

  • Technological Innovation

    Every day advances are being made in technology.  Every day new ways of processing information are discovered. Regardless of what the product or service is, somewhere a company is rolling out a better product or service. Somewhere, a company is offering better rates for a product or service you or your business uses.  The unfortunate thing about it is that you cannot take advantage of either pricing or quality differences because you already paid for your current services, essentially creating a long-term contract that cannot be broken. Even in your personal life these things happen, especially if you are tech geek and love having the latest innovations.

     

The (Very) Ugly:

  • Bye Bye Company

    This is the most extreme and maddening of the negatives. Any business can go belly up at any time. Should a company happen to file for bankruptcy protection, the creditors are the ones that will receive the primary attention.  What happens to the customers? They’re left holding the bag in most cases.  That means you will be not only be out the money you had prepaid for the products or services, but you will also be forced to find another supplier which means paying twice for one thing.  Would it suck should that happen?  Absolutely. But, that is life and that is what sometimes happens in business as well.

     

Can any of these scenarios happen? Of course they can.  The likelihood of some occurring are greater than others though.  So, what can you take away from all of this?  Simply put, it may very well be better to spend a few extra dollars in order to have more control over your money both in a business environment and in personal financial situations.  Do you have to listen to me? Not at all. This is simply my view of this particular spending strategy and how I view the pros and cons.  You are your own person and are free to choose to do business or handle your personal finances in any way your see fit, and without judgement (unless of course you end up asking someone for their opinion).

 

Do you prefer to prepay your expenses (either in your personal life or your business)? Considering the drawbacks, would any of them make you think twice about doing so?

  • http://www.moneybeagle.com/ Money Beagle

    Our auto insurance was one I used to pay every month but then the insurance company knocked off like $30 pay every six months, so I did that as it’s a lot more than I could make in interest with that money.  And, I’m pretty sure Allstate will be around for awhile so no need to worry about them taking the money and running :)

    • http://www.dollarversity.com Eric J. Nisall – DollarVersity

      Even for $60 a year I’m not quite sure I would buy in for insurance. I just happen to be shopping for a new provider right now, so my view may be a bit skewed.  But in general, anything where I may not want to stick with the same company/supplier/provider would be a reach for me to prepay.

  • Funancials

    My dad bought a lifetime membership at 3 consecutive gyms, all of which went out of business in 3 years. He learned his lesson the 4th time but unfortunately the 4th gym has been going strong for 40 years now…advantages and disadvantages.

    • http://www.dollarversity.com Eric J. Nisall – DollarVersity

      Things like that are really hard to judge.  But, at least I got someone to illustrate my point with a real world example!

  • http://www.thefreefinancialadvisor.com/average-joes-money-blog/ AverageJoe

    Those are HUGE drawbacks. Unfortunately, I’ve seen these scenarios (takeover/bankruptcy/service change) happen to too many people.

    I will only prepay if I get a significant discount. If there’s no way I could deploy that cash for a larger gain elsewhere, I’ll then pull the trigger if I think there’s a 99% chance I’ll at least recoup up to the discounted amount I paid.BTW – rule of thumb sounds like you shouldn’t go to Funancial’s dad’s gym!

    • http://www.dollarversity.com Eric J. Nisall – DollarVersity

      Yeah, the cost savings would have to be tremendous to sway me, especially when it comes to utilities or insurance where you never know how much you can save by switching.  Then again, some people live with their blinders on and see any chance to save as a “good thing”

  • greg

    I am guilty of prepaying but honestly that is just how my mind works!  I pay any bill that I can in as large of an increment as I can, just to ge it off of my plate. 

    • http://www.dollarversity.com Eric J. Nisall – DollarVersity

      My motto is “do what works for you” so if that’s how you operate and aren’t seeing any negatives to it, who am I to tell you otherwise.  I just have a problem with trusting some of these companies to be around and always have a feeling that I can do more with my money in other places than tied up in prepaying bills.

  • http://www.insiderrealestatetips.com/ Dominique Brown

    I personally don’t like prepaying my expenses. I definitely agree with
    you that it is better to shell out a few extra dollars to have more
    control over your money. I do not want to be locked in for a certain
    amount of time. I prefer my account to be flexible, so when a better
    deal comes up, I have the option to switch companies or providers. 

    • http://www.dollarversity.com Eric J. Nisall – DollarVersity

      Absolutely. That’s why I’ll gladly pay an extra 5 dollars to pay my auto insurance in installments as well as my homeowners policy. That way, I can shop around at any time and not worry about paying on multiple policies simultaneously should I decide to switch (which is essentially the case until the first one gets refunded).  I’m a huge fan of controlling my money rather than others.

  • http://www.dollarversity.com Eric J. Nisall – DollarVersity

    I agree. And also, you aren’t getting as much utility from your money when you prepay things. 

  • http://www.narrowbridge.net Eric

    I pre-pay my car insurance annually and my home owner’s insurance annually through my mortgage’s escrow. I work with large, reputable companies so I don’t worry much about them going away. The discount on the car insurance makes it worthwhile and not having to worry 11 months a year is a nice perk.

    • http://www.dollarversity.com Eric J. Nisall – DollarVersity

      I think my car insurance would go down a total of $10 if I paid ahead of time, so for the extra little savings, it isn’t worth it for me. I did just buy new condo insurance and paid in full, but that is only because I saved a ton and know there isn’t any way I’m going to find it cheaper in the next year.