Prorating monthly fees

May 2, 2012 11:06 AM

What is the right way to calculate daily rate for monthly charges?

With something that is charged monthly, like rent or a phone bill or a gym membership, when you need to pro-rate it for a partial month, how do you calculate the right daily rate? There is a different number of days in different months, so it's not a straightforward calculation. Is there some generally accepted way to figure this? Ignoring leap years, there's an average of 30.42 days per month, is dividing by that the right thing to do?

posted by primethyme to work & money (10 answers total)

You don't use the average number of days per month, you use the number of days in the month for which you are calculating the rate. The number of days in other months is irrelevant.
posted by Justinian at 11:09 AM on May 2, 2012 [1 favorite]

What if it spans months? For example, a period starting on the 23rd of August and ending on the 7th of September? You calculate each part independently and add them together?
posted by primethyme at 11:11 AM on May 2, 2012

I've seen it done two ways: Either assume 30 day months or post a daily rate along with monthly rates. For example the latter is common with equipment rental companies (and their daily rate is often 1/10th the monthly rate IE: $50 a day or $500 a month). The former is fair because it generally averages out and as you've calculated it is actually slightly advantageous to the customer in the long run.
posted by Mitheral at 11:17 AM on May 2, 2012

Is the monthly charge on the 23rd of every month? (ie the bill would be due 23rd September). In that period there are 31 days so the daily rate is monthly/31.
posted by missmagenta at 11:18 AM on May 2, 2012

You divide the monthly rate by the number of days in the month. In your example that's only a 2 week time frame anyway depending on how you count the 7th. But if all days are included in the month in your example you'd say Monthly Rate/(August Days (which is 8) + September Days (which is 7)). So you'd have Monthly Rate/15.

It helps to keep in mind that for these services you don't have a daily rate, you have a monthly one. February is more expensive than anything else because there are only 28 days. 31 day months are a better bargain of the "extra" day. But for all of them, you're paying $X for the month.

This sort of craziness is why a lot of places will pro-rate a monthly charge when you sign up That way they don't have to know when in the month your month starts once you get to month 2.
posted by theichibun at 11:19 AM on May 2, 2012

There are a number of different ways to do this, though in "civilian" life (roommates or whatever), it is probably easiest to do the actual number of days in the month, with the understanding that if X costs $100 a month, your daily charge will be marginally higher in February than it would be in August, for example.

When you span months, you just add the days together. August 23 to August 31, plus September 1 though September 7.

(In finance, this is usually distilled into whether you're counting 30/360, actual/365 or (theoretically) 30/365--i.e., whether interest is accruing in assumed 30-day months, with a 12-month year of 360 days. In this case, confusing as it may be, you might get three days' interest if you bought a CD on 2/28 and sold on 3/1--since 2/28 would also be treated as 2/29 and 2/30).

So, in sum, there isn't a right way, it's just what you agree with your counterparty. Again, if you're dealing with roommates, just make it easy, and don't sweat the few cents here or there.

Life's too short to worry about paying or being paid for a proportionate share of 1/30th versus 1/31th of a gym membership.
posted by Admiral Haddock at 11:19 AM on May 2, 2012 [3 favorites]

Great, thanks everyone.
posted by primethyme at 11:23 AM on May 2, 2012

You could also mulitply the monthly rate by 12 and divide by 365.
posted by yawper at 1:16 PM on May 2, 2012

Multiplying by 12 and dividing by 365 is basically the same as dividing by 30.42, of course.
posted by primethyme at 3:25 PM on May 2, 2012

If it is a fixed rate, same amount due on the same date every month, then you divide by standard days (30.42). If, however, it is variable (like a gas bill), then you have to divide by whatever period the billing statement does. And do that separately for each month that is covered by the span.

I've seen billing statements for variable bills go both ways, either they use the same date of every month, or they float the date around so that each statement is 30 or 31 days.

For fixed monthlies, don't get bogged down in the February versus March length thing. At the end of a year of service, you will have paid [monthly * 12] for a year of service. So then it only makes sense to divide that by 365 to get a daily rate.
posted by gjc at 3:49 PM on May 2, 2012