Everybody has a high-yield savings or checking account paying 4% or more, right? Here are a few other ways to maximize your bank balances and therefore your interest earned.
Stop withholding too much of your taxes
Did you get your tax refund? If so, that means you withheld too much on your paychecks last year. To fix that for this year, you should consider underwitholding your taxes for profit. You can control your withholding amounts by increasing the number of allowances on your W-4. To see the effects of doing so ahead of time, use the calculators at PaycheckCity.
The easiest rule of thumb to avoid any underpayment penalties, if your income will increase, is to simply pay as much taxes this year as you did last year. Since you don’t have to pay in full until April 15th, putting off $4,000 in taxes until it’s due can earn you over $100 in extra interest.
Pay down even small credit card balances
According to recent Federal Reserve study1, many household still carry small balances of a thousand dollars, even though they have the cash available in savings accounts to pay it off. Perhaps people feel that there is safety in having that extra money in the bank, but in reality credit card can be part of your emergency strategy, especially if you already have balances now. You can pay a variety of critical bills with credit cards now – hospital charges, car repairs, groceries, and more. Paying 15% in interest to the credit card companies while only earning 5% in the bank is a losing proposition, and may result in losing hundreds of dollars a year.
If anything, you should flip this in your favor and borrow at 0% and earn 5% from the bank on that money.
Maximize the float on your credit cards
Another benefit of paying your bills in full is that you get the grace period, which is the period between the end of your statement is generated and when the payment is actually due. During this time (about 20-25 days), you don’t have to pay any interest on your balance in addition to the time you have gotten during the billing cycle. Therefore, I like to use Online Billpay to schedule my credit card payment until very close to the due date.
Here is an example using my WaMu account setup (using the Checkfree Billpay system used by many other banks). If you have $1,500 due on June 29th, I will set my checking account to pay by June 28th (Deliver-by date, with 1 extra day of buffer). Then, I just schedule a future transfer from savings to checking of $1,500 on June 24rd, which is the earliest day which the money may be debited (Start on date). That way, my money is staying in my 5% savings account as long as possible. All in all, very little extra time involved as compared to simply paying the bill online. If you’re just starting this out, you may want to set it with a larger buffer times.
If you have a card issued by FIA (formerly MBNA), some people extend this even further by using the BillPay offered by some FIA cards, which allow you to pay certain bills by putting the balance on your credit card. You aren’t actually paying via credit card so you don’t earn any cashback or rewards, but you can get several more days of interest-free, or “float”, time.
If used together to keep your balances high, these strategies can add hundreds of dollars to your bottom line each year.
1Source and reference: SmartMoney magazine article 7 Money Mistakes to Avoid (only partially available online).
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I’m a bit of a risk taker and schedule my bill payments to be paid on the exact date their due online through Bank of America. What’s funny is the ONLY time I’ve had problems with the payment not arriving on time was when I paid off my Bank of America credit card. I called them up and “screamed” at them asking how can they pay other external banks, credit card companies, and utilities on time but can’t get a payment to THEMSELVES on time. Mind boggling. (They did correct the problem.)
Good points J. But be careful with the WaMu transfers. You are only allowed to schedule a maximum of 6 (via online) in any month; after 6, you incur a fee of $3 for each transfer. For more than 6 you have to go to bank to transfer without incurring a fee. You will even get the fee if you do it via ATM. I learned the hard way. And if you look for this fee rule online, forget it. It’s not there.
This extra float you’re talking about is just a mind trick. If you’re paying a bill regularly, you’re just pushing everything back by a couple days ONE TIME. That’s insignificant.
Also almost all people do not have the discipline to save the money if they reduce their withholding. Why do you think the government takes the money directly out of your paycheck? So before anyone reduces their withholding, ask yourself if you’d rather have the refund next April or no refund and a bill that you may or may not have saved for?
Ted, the extra float is not one time. If you push back a $1000 bill 15 days every month that’s 180 of float per year, not just 15.
I pay as many bills as I can with rewards credit cards and then pay those cards and most of my other bills with an FIA credit card. So I get two billing cycles of float for many of my bills and one cycle for the rest. I estimate its about $150 of interest per year at todays rates. The only “extra” work is to pay off the FIA card once a month.
Ted is correct Markh and Scott…it is nothing but a mind game. It does work the first month, but after that, it’s just a game that doesn’t work.
However, Jonathan, I would think about recommending people to withold less taxes than normal. Since so few people save, if they’re hit with a large tax bill, they’re screwed. Also, if they’re not having to pay quarterlies, then if that tax bill hits $1001 owed on April 15th, then they have to start doing that.
I guess playing blackjack and craps have become a too mundane form of gambling for most folks.
While I don’t agree with playing tight with bills to get extra float, it’s not just a mind trick. It all depends on the other side of the equation – funds in the checking account. I don’t think the extra float is worth it. But for example let’s say you get paid on the 1st, and the credit card bill is due on 15th of every month, but you can pay it as early as the 1st, by delaying payment you do earn an extra 15 days of float on the deposit made on the 1st. If you paid your credit card bill on 1st of each month you wouldn’t get that “phantom” money to earn interest on. Essentially, the credit card company has given you a free loan that you can earn interest on. Again I don’t really think it’s worth it given the hassle, but it is free money.
great advice.
Difficult to show math here, but picture this. You get paid $1000 on the 1st of every month. You pay $1000 per month in bills which you pay on the 1st. Your balance is 0 all the time since you get and spend all your money on 1st of the month.
Now add 15 days of float and thus pay your bills on the 15th of every month instead of the 1st, thus earn interest for 15 days every month. Clearly each month you get 15 days of interest not just the first month.
Disagree? Show math.
markh – If you stop using a credit card to float purchases and begin paying those purchases with a debit card, you would not see any significant loss in interest earned on the money that comes in and goes out in the long run. You’ll earn 25 to 35 days interest the first time you do it. After that its a wash. Anyone can set up a scenario to show whatever they want because they pick the criteria. I’m talking about real world.
BTW, Mr. Mymoneyblog – the paycheckcity link was great. I used it to fill out a new W-4 to add for the new baby we had this year as an allowance. However, I took fewer allowances than the gov’t worksheet recommends so I will get a refund. When you have a mess of kids it is too easy to spend the money on the tyranny of the urgent. Maybe its the worst interest rate for a savings account in the world, but it works every time. I just tell myself the gov’t is using my interest free loan to pay interest on the public debt. 🙂
ted> Anyone can set up a scenario to show whatever they want because they pick the criteria.
Of course, I created a simple scenario so people could follow it. Vary the number of days of float, add multiple bill payments, add/remove deposits. Math is harder, need a spread sheet to follow it, but it still comes out the same, each day of float is money earning you interest, NOT just the first month.
Disagree? Show math. Pick your own criteria.
Would someone please take the time to show markh how it only makes a difference that first time? I agree that it’s mainly a mind trick…
Wait, maybe this will help…
Pretend you have a friend who consistently pays his bills LATE by 15 days. Every month.
Does he have to come up with extra money 15 days earlier every month? Or just once?
Just once. Once he’s caught up, he’s caught up and has the money in the bank to pay on time the next month.
It’s not a mind trick even though I don’t agree with it. Basically you’re constantly rolling over X amount every month as a free loan. The math is right. It’s not a great deal but it works.
Rich, the problem with your example is that your friend doesn’t need to borrow something every month. Let’s say for example your friend borrows on the 1st of every month and promises to pay back on the 2nd, but he instead pays it on the 15th without penalty. If he does it every single month he’s basically borrowed money for free for 14 days every single month on which he can earn interst.
Let’s try this to ‘show the math.’
Scenario #1: You charge $1200 every month on a credit card, on the first day of the month, and it is your only charge. Your bill is always due on the 30th of the month (please ignore February for this hyopthetical example). Ok, now you choose the max float strategy and you always pay on the 30th, and your account yields exactly 5.00%. Each month your $1200 sits in the high yield savings account for 30 days, and generates $5 of interest/month, or $60/year of float interest.
Scenario #2: You pay $1200 every month on the first of the month with a debit card and it is removed from your account immediately. You get $0 of float interest.
Scenario #3: You charge $1200 on the first day of every month and you always pay your bill on the 15th of the month, the very first day that your credit card posts. You get $2.50 of interest/month, or $30/year of float interest.
Scenario #4: You charge $1200 on the first day of every month and the first month you pay on the 30th, collecting $5.00 in float interest, but every single month thereafter, you pay on the 15th, because you are nervous about cutting it so close. for the other 11 months you get $2.50/month in float interest. This adds to a total of $5 + $2.50*11 = $32.50.
Ok, now please compare Scenario #4 to Scenario #3 – you will see an extra $2.50 shows up in your coffers, why – because of 1 month of 15 extra days of float. With 12 months of an extra 15 days of float (scenario 1 vs scenario 3) you get an extra $30/year.
Just by virtue of using a credit card you get some small float, this is because we usually only pay our bill after we get our statement. Yes, my example simplieifes things, and no, that does not change the final outcome. By paying as close to the due date as possible, and BY PAYING IN FULL, you will maximize your interest every single time, and this is cumulative, and not simply a ‘one time deal’.
Q.E.D.
What many of you are failing to take into account is how the interest is calculated. My bank’s interest formula is like this:
average daily balance * (interest rate * (# of days in month / # of days in year))
The only variable in that formula affected by when you pay your bill in the month is the average daily balance.
Lets say you get your Credit card bill on the 1st of the month. If you pay it immediately the funds with which you paid it will not count at all towards your average daily balance. However, if you pay the bill on the last day of the grace period (say, 25 days) then your funds would have counted toward the average daily balance for all 25 of those days.
Depending on the size of the bill that can have a great affect on the amount of interest earned, as basically you’ll be earning interest on
bill amount * (grace period / # of days in month)
If the credit card company charged you the same rate during the grace period as your bank gave you in interest it would be a wash, but since they don’t charge you any interest during this period you are actually making money by keeping it in the bank.
Wow. This sounds really cool. I’m really glad I subscribed to this email. Also, I got my $25 gift card from Sprint. Thanks so much Jon. You rock!
You guys seem to be assuming that there’s $0 in that account. I’ll try to do the math later (break out Excel or something), but it seems to me that if money is being deposited in your account at a steady rate (every two weeks, or whatever), and you continually pay your bill at a set interval (say, every 30 days), then only that first “float” really matters. After that, money is entering and leaving your account at the same rate. The balance dips when you pay the bill, and grows the rest of the time.
Almost all of my bills are paid automatically from my checking account on the due date, so I guess I take advantage of all this “float interest” without even trying…
And maybe it’s just that the scale of it all is so small, that it doesn’t seem to matter to me. I mean, if I think of it as a monthly small-scale version of the “0% balance transfer / credit card arbitrage” thing, then I guess I can see your point.
I think people are confusing the grace period with a one-time changing of the due date (i.e. moving the due date from the 15th to the 30th for the rest of the year). The grace period is 20 days (usually more) when purchases incur no interest. As long as you pay the balance in full pay each cycle, the credit card company will continue to offer you a grace period each month. By paying early, you’re effectively declining a short-term 0% loan. Also, if you keep your money in a checking account, it likely earns little or no interest. There are high-interest checking accounts, but they are the exceptions.
I’ve prepared a small sample based on the following assumption:
1. The person gets paid on the 1st and 15th of each month. Each paycheck that goes into their savings account is exactly $1000.
2. The person has a credit card bill of exactly $2000 every month which is received on the 1st of each month and has a grace period of 25 days.
3. The savings account interest is calculated on the last day of each month based on the average daily balance. The interest rate is 5%.
4. $1000 seed money was placed into the account on Jan 1… this was to prevent the early payer scenario from not paying off the balance and thereby incurring interest on the credit card balance.
Payment on Last day of grace Period:
Jan
Starting Amt : 1000
Avg Daily balance : 2129.03
Interest Earned : 9.04
Feb
Starting Amt : 1009.04
Avg Daily balance : 2259.04
Interest Earned : 8.66
Mar
Starting Amt : 1017.70
Avg Daily balance : 2146.73
Interest Earned : 9.12
Apr
Starting Amt : 1026.82
Avg Daily balance : 2193.49
Interest Earned : 9.01
May
Starting Amt : 1035.83
Avg Daily balance : 2164.86
Interest Earned : 9.19
Jun
Starting Amt : 1045.02
Avg Daily balance : 2211.68
Interest Earned : 9.09
Jul
Starting Amt : 1054.11
Avg Daily balance : 2183.14
Interest Earned : 9.27
Aug
Starting Amt : 1063.38
Avg Daily balance : 2192.71
Interest Earned : 9.31
Sep
Starting Amt : 1072.69
Avg Daily balance : 2239.36
Interest Earned : 9.20
Oct
Starting Amt : 1081.89
Avg Daily balance : 2210.92
Interest Earned : 9.39
Nov
Starting Amt : 1091.28
Avg Daily balance : 2257.95
Interest Earned : 9.28
Dec
Starting Amt : 1100.56
Avg Daily balance : 2229.59
Interest Earned : 9.47
Year End Total: 1110.03
Year Interest: 110.03
Payment on bill delivery day
Jan
Starting Amt : 1000
Avg Daily balance : 516.13
Interest Earned : 2.19
Feb
Starting Amt : 1002.19
Avg Daily balance : 466.47
Interest Earned : 1.79
Mar : 8.21917
Starting Amt : 1003.98
Avg Daily balance : 520.11
Interest Earned : 2.21
Apr
Starting Amt : 1006.19
Avg Daily balance : 506.19
Interest Earned : 2.08
May
Starting Amt : 1008.27
Avg Daily balance : 524.40
Interest Earned : 2.23
Jun
Starting Amt : 1010.50
Avg Daily balance : 510.5
Interest Earned : 2.10
Jul
Starting Amt : 1012.60
Avg Daily balance : 528.73
Interest Earned : 2.25
Aug
Starting Amt : 1014.85
Avg Daily balance : 530.98
Interest Earned : 2.25
Sep
Starting Amt : 1017.10
Avg Daily balance : 517
Interest Earned : 2.13
Oct
Starting Amt : 1019.23
Avg Daily balance : 535.36
Interest Earned : 2.27
Nov
Starting Amt : 1021.50
Avg Daily balance : 521.5
Interest Earned : 2.14
Dec
Starting Amt : 1023.64
Avg Daily balance : 539.77
Interest Earned : 2.29
Year End Total: 1025.93
Year Interest: 25.93
I did these calculations by hand so its possible that I’ve messed up somewhere, but I did each set the same so I don’t think it will really throw off the ratio too much.
I have my credit card bill automatically drafted in full from my bank account. When I authorized them to do this, I don’t believe my credit card company (Citi) gave me an option to delay payments at all. I believe when the bill hits, they withdraw it.
It is worth it to me to have my credit card bill automatically paid each month. I don’t like to write checks.
None of these “tricks” will get you rich, but they will get you some money. Also, many topics on this blog involves tricks for people that are not “everyone” or “average”. I leave it to people to make their own decisions. I don’t think the average person out there would read my blog unless they were interested in improving their situation and earning a few more bucks…
—-
Let’s say your credit card cycle starts on the 1st, and end on the 30th. Then you get 25 days of grace period.
So it could be cycle of June 1st to June 30th, and due date for all charges during those dates is July 24th.
Now you want to buy something for $1,000.
Debit card/cash: You pay $1,000 and it’s gone, no interest earned.
Credit card: You could charge in on June 1st, and not have to pay until July 24th. Worst case, you charge on June 30th and pay on July 24th. That’s 25-55 days of interest that could be earned on $1,000 to $10,000 to whatever your large purchase is. Could be $6 or $60 of interest.
Regarding mind trick – I agree with Markh. It accumulates. If you just did the above example once, you’re already ahead. Repeat it, and you get more interest.
Wow. Had no intention of starting this. Very interesting. Thanks to those that did the calcs. I still say the only difference is in the interest you earn on that initial float. I will show my calcs below how the difference is because you begin with a set amount (say $1000 in TechJosh’s example) and you carry that for 30 days every month.
I ran calcs myself and floating does get you a little more interest. The amount of difference depends on your average daily balance. If you assume the money comes out at the end of the month while your money is in the bank all month then the difference is huge. This is almost never the case in the real world. If you assume the money comes and goes out within a week then the difference is ever so slight. The real difference is in the middle which is what I try to show below.
TechJosh’s example is obviously way skewed. Taking his assumptions of $1000 income and $2000 monthly payment for a 30 day month with 5% interest on an average daily balance, I get:
Monthly float method
1st: 1000 income
15th: 1000 income
20th: -2000 payment
Avg Daily Bal = $833.33
Interest = $3.47
Monthly debit method (assume equal $100 debits occur on each weekday for simplicity)
F 1st: 1000 income
S 2nd: 0 (1000 balance)
Su 3rd: 0 (1000 balance)
M 4th: -100 (900 balance)
T 5th: -100 (800 balance)
W 6th: -100
Th 7th: -100
F 8th: -100 (500 bal)
M 11th: -100 (400 bal)
T 12th: -100
W 13th: -100
Th 14th: -100
F 15th: +900 (income minus debit = 1000 bal)
etc….
Avg Daily Bal = 566.67
Interest = $2.36
Difference = $3.47 – $2.36 = $1.11 per $1000. As Jonathan said, good luck getting rich on that.
The difference is because you carried the first $1000 the entire month, or an average of 8 extra days compared to regular debits. So if you play it right by timing your bills with your income you can make an extra $1.11 per month per $1000 you float.
I think I just wasted about $100 of my time here. But at least it was fun. 🙂
After all that I’ve figured out a much simpler formula for calculating the interest earned:
Avg Bill Amt * ((Avg float time * 12) / days in year) * interest rate
So, for my example, the extra interest would be
$2000 * ((25 * 12) / 365) * 5% = $82.19
Floating for 20 days would be
$2000 * ((20 * 12) / 365) * 5% = $65.75
Floating for 0 days would be
$2000 * ((0 * 12) / 365) * 5% = $0
For those people who are able to float for 2 billing cycles (FIA cardholders with billpay… 2×25) it would be
$2000 * ((50 * 12) / 365) * 5% = $164.38
So thats extra interest that you wouldn’t have had if you paid your bills immediately.
As Jonathan says “real world” float is between 25 and 55 days depending upon when your bill is due and when you pay. I moved my FIA card’s due date/statement close to maxiumize this float for my biggest payment, mortgage. (which is late after the 15th of the month, more free float). And I pay bills directly from a Fidelity brokerage account so money earns a good MMF return right up until payments are made.
Ted, so in your example the “float” checking account is 0 on the 20th? Yet the “debit” account still has $500 on that date? I don’t think your example is showing float and no float just a big payment verses many small payments.
You have to be careful about IRS withholding. If you owe more than 1K and you did not pay more income tax this year than you owed last year, you will have to pay penalty.
Yep – Isn’t that the way a real budget works? A lot of small payments over a period of time? Obviously its more random, but over a long period of time it would tend to average out to be about what I showed. That is a true float vs no float example. There is really a very small margin in the one month scenario.
I am impressed with markh’s set up of paying bills with a card and then floating all that another month. He must really like doing bills and balancing accounts. I hate it. I just have all my bills directly withdrawn from checking. I have 3 small kids so time is more important to me than figuring out a way to get a few extra bucks by working a system.
Ted, you have negative float for 1/3 of the month. That’s not a real life example. In a real life example the float account would always have more money than the non-float account.
FYI, the only extra bill I pay is the FIA card once a month, everything else is just normal billpay as much of it automated on credit cards as possible. However I do change all the due dates that can be changed all to the same day of the month so I only have to pay bills once a month. So about 1 hour per month.
In a real life example the float account would always have more money than the non-float account.
True, to a point.
I’m simply talking about cash flow. Compare exactly what goes in and what goes out. In other words, figure out the monthly difference in interest for floating regular expenses vs. just using a check card or writing checks.
What you’re talking about is cash reserves. You can’t use reserves to compare because that is not borrowed.
Ted – In your example, if you were to charge $100/day vs. debit $100/day, the payment would not be DUE on the 20th of this month. Your statement might CLOSE on the 20th, but due to the grace period, the payment might not be due for an additional 25 days. That is where the real float is earned. In your example, the debit card person is spending money he has (although technically in your example, he runs out of money on the 14th), and the credit card person is spending money he doesn’t have yet. While this may be how alot of people manage their credit, it doesn’t make for a valid apples to apples comparison of interest earned. Let me see if I can correct your example, but using a 2 month example. I will set a $400 opening balance to prevent the debit user from going negative, and begin the charges on the 1st of the month, so that the $2000 in charges is done by the 20th in both examples.
Monthly float method
Starting balance: 400 (for comparison with debit method below)
1st: 1000 income
15th: 1000 income
20th: credit card statement closes ($2000 balance due in 25 days)
1st: 1000 income
15th: 1000 income
16th: -2000 payment
20th: credit card statement closes ($2000 balance due in 25 days)
Avg Daily Bal = $2433.33 (2 months)
Interest = $20.28/2=$10.14/mo
Monthly debit method (assume equal $100 debits occur on each weekday for simplicity)
Starting balance $400 (so it doesn’t go negative)
F 1st: +900 (income minus debit = 1300 bal)
S 2nd: -100 (1200 balance)
Su 3rd: -100 (1100 balance)
F 15th: +900 (income minus debit = 900 bal)
S 16th: -100 (800 balance)
W 20th: -100 (400 balance)
Su 1st: +900 (income minus debit = 1300 bal)
M 2nd: -100 (1200 balance)
T 3rd: -100 (1100 balance)
Su 15th: +900 (income minus debit = 900 bal)
M 16th: -100 (800 balance)
F 20th: -100 (400 balance)
Avg Daily Bal = 566.67 (2 months)
Interest = $4.72/2=$2.36/mo
Difference = $10.14 – $2.36 = $7.78/mo
You still may not think that is much or worth your time, but considering that you can set up automatic full balance payments at Chase (and Citi with a little more effort), you can avoid spending time every month to take advantage of it.
Not sure if the FIA card can be automated in that manner, since this is the first I’ve heard of it (why I come here), but for those with the time, I’m sure it is worth it. I wonder if I could use it, not only for float, but to consolidate my credit card bills, simply to avoid using up those valuable 6 transfers from my savings account.
Exactly Ted, you are talking about cash flow. And when talking about cash flow, it is indeed just a “mind trick.” But, when talking about interest, paying your bills at the last moment does allow you to keep higher average balances in *your* accounts. If your accounts are interest bearing then this will indeed translate into more interest earned over the year and is not just a one-time mind trick.
Why else do you think that big businesses always pay their bills at the last possible moment? It is not because they are tricking themselves. It allows them to earn extra interest and goes directly to the bottom line. Just as it will with an individual.