Pay Upfront or Over Time? What to Consider When Faced With a Big Bill

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Oh, the dreaded annual bill.

The notification hits your inbox around the same time every year, like a gut-punch that comes out of nowhere.

Forking over $12,000 for your kid’s private school bill all at once seems unrealistic. Even paying 200 bucks for a subscription box renewal can be a tough pill to swallow when money’s tight. So when you’re given the option to pay in monthly installments — like financing a purchase except without the interest or credit impact — it feels like the obvious choice.

However, paying a bill upfront instead of over time is often the best move for your budget.

We’ll explain why and provide some advice on saving up to be able to do it.

Why Paying Upfront Instead of Over Time Makes Sense

Although paying an expensive bill upfront may seem overwhelming, you may be able to save significant money by paying all at once instead of in installments.

Let’s say your auto insurance premium came in at $1,000 for the year but you were given the option of paying $100 each month. The monthly amount seems much more manageable, but you’ll be paying $1,200 over the course of the year rather than $1,000.

It’s not just the insurance industry that has these types of payment arrangements. Expenses like memberships, subscriptions, child care and private school tuition often come with a big incentive to pay all at once and get significant savings in return.

Do the math to see if paying all at once is a better deal.

How to Budget for an Expensive Bill

Acknowledging that you can save money by paying a large bill upfront doesn’t exactly mean you have the cash readily available when the bill’s due — especially if the expense exceeds your paycheck.

Tackling an expensive annual bill takes time and commitment. This is when having a sinking fund comes in handy.

A sinking fund is a pool of money you regularly contribute to so that you can break up a large expense into more manageable chunks. If, for example, you had 12 months to save up for next year’s $1,000 auto insurance premium, saving $84 in your sinking fund each month would get you to that goal.

To calculate sinking fund contributions, take the total and divide it by the number of months you have before making the payment — or the number of weeks if you’re adding to the fund weekly. In addition to monthly or weekly contributions, funnel any extra money to your sinking fund — such as savings when a friend randomly treats you to dinner or windfalls like your tax refund.

Pro Tip

It’s not always easy to find extra money to put aside. This advice on how to save money fast will help you identify ways to free up cash to add to your sinking fund. 

When it comes to where to stash your savings, put your money where you won’t be tempted to spend it but can easily access the funds when it’s time to make your payment. A high-yield savings account at an online bank is a good option.

If you have more than one sinking fund, you could choose to open multiple savings accounts or use one account and just keep a record of your contributions and how much you still need to reach each goal.

No matter how you go about doing it, the main point is that you’re prioritizing saving in your budget so you can pay expensive bills upfront and reduce your overall costs.

Feeling overwhelmed? Create a budget that works for you with our budgeting bootcamp!

Nicole Dow is a senior writer at The Penny Hoarder.