PREPAYING EXPENSES

It is good to be ahead financially. Being on top of things is the best way to go. The absolute best way financially is to not be in debt. Having no debt does not mean that you will not have any bills, you will. Each month we have recurring expenses that have to be paid. A financial situation can be viewed as a process of flows. We hear about cash flow. Cash flows in and it flows out. The key is to have more that flows in than flows out. The financial golden rule will forever be do not spend more than you earn. This principle is the key to becoming wealthy.

In accounting, prepaid expenses are considered to be an asset. Usually prepaid expenses are prepaid for less than a year and makes them a current asset on the balance sheet. As each month passes, this current asset becomes an expense. The original accounting entries are to debit the asset Prepaid Expenses and to credit Cash, as your cash account is going down. The monthly accounting entries are to debit the appropriate expense account on the income statement and credit the asset Prepaid Expenses. The principle of double entry accounting helps to keep financial statements in balance.

Why should you or a business prepay expenses? For a business, they prepay expenses such as rent because they are intending on staying in business for a period of time. A business may have to agree to signing a long term lease and have to pay many months of rent in advance. Psychologically, prepaying expenses in advance means that you do not have to hassle with preparing a payment each month. Prepaying saves you time.

Not only does prepaying save you time, but it can also save you money. For instance, my insurance is billed for six months. If I pay this bill monthly, the insurance company charges me $5 extra for an installment processing fee. By prepaying I save $25 over the insurance billing period. So it makes sense to prepay this bill. A rule of thumb is that if there is no money to be saved by prepaying, you may want to pay monthly.

Recently, I got the bill for a newspaper subscription renewal. The subscription is for a minimum of three months and a maximum of one year. There is no financial advantage in paying for three months and paying for a year. The only advantage for prepaying for a year instead of three months is time. With this I pay for a three month subscription. The reason is that money is more important to me than time.

Some businesses give you an incentive to prepay. If you prepay, they will give you a bonus or the price will be reduced. An example of this is where I buy my coffee for work. I go to a local coffee house called the Oasis. The proprietor adds $5 to your account if you put $50 on an Oasis card. Of course, it makes sense for me to prepay this because I get $5 worth of extra coffee. This is an advantage to the business and to me. Prepaying is a win win for both of us.

Only those who have their financial houses in order prepay expenses. If someone is relegated to having to pay additional fees on a monthly basis, then they are that much behind. This is why people remain in financial distress and can never get ahead is because they do not think in terms of saving money wherever possible. There are financial advantages to prepaying expenses and the frugal use these advantages to their benefit.