How to set up an account for automatically paying bills

How to set up an account for automatically paying bills

Automatic bill paying has three moving parts: a separate account that holds bill money, a recurring transfer that fills it, and automatic payments that draw from it. The account is separate from everyday spending money, so bill money and spending money are never mixed.

The weekly deposit is set by one division. Monthly bill totals divided by 4.333 give the weekly amount. The number 4.333 is 52 weeks divided by 12 months, the average number of weeks in a month.

A sample shows the arithmetic. Sample monthly bills total $1,300.

$1,300 ÷ 4.333 = $300.023-->$301 (round to nearest dollar always) dollars a week.

Across 52 weeks, $301 a week totals 15,652 dollars, which matches twelve monthly totals of $1,304.33. The figure 4.333 is approximate, and rounding up to the next dollar leaves a difference of about 52 dollars across a year.

Note for utilities that vary. Electric uses are higher in summer and heating(gas) costs higher in winter.

Therefore the 6 highest cost months should be averaged and become the (projected) monthly payment so that they may compensate for each other.

Explanation:

In summer you are still depositing the highest cost for gas while paying a lower amount but the electric expense is higher and vice-versa.

The recurring transfer is timed to payday, so money arrives in the bill account in the same rhythm as income. Automatic payments are set with each biller to draw from the bill account on their due dates. Due dates fall throughout the month while deposits arrive weekly, so the balance builds between due dates and falls as payments leave.

A cushion of one weekly deposit is a common practice. In the sample, that is 301 dollars sitting in the account beyond what the month's bills require. The cushion covers timing gaps, such as a due date arriving just before a payday deposit.

Bills that vary, such as electricity and water, change the picture month to month. The deposit is set from the average of those bills, so a high month draws the balance down and a low month rebuilds it. When a bill changes permanently, the monthly total is recomputed and the weekly deposit is divided again from the new total.

Two failure modes are worth knowing. A transfer that does not arrive leaves the account short, and a payment larger than the balance can fail or draw a fee. Overdraft rules and fees vary by bank and by account agreement, and the agreement states the terms that apply.

General education only. This article describes how automatic bill paying and the weekly deposit arithmetic work. It is not financial advice, and it does not consider any reader's situation.