27 Apr Lazy Dollars (Part 2) Americans
Our first step to putting our dollars to work was to shift all of your positive cash flow to savings. Over twenty years, the impact is huge. If a key concern you have is the possibility of not having enough in your checking account. There’s a simple solution that solves this problem AND allows every dollar deposited to work for you until you have to pay your bills. The solution is so simple that it will surprise you.
Solution: Instead of depositing your paycheck into your checking account, deposit your funds into your savings account! How’s that for a simple solution?
This is a great way to earn the interest necessary to cover any service fees on your checking account.
To earn the most interest on your savings, your withdrawals should be as close to the end of your saving’s account the billing period.
Let’s say you’ve chosen a financial advisor from Morgan Stanley Smith Barney. Your first surprise will be that Morgan Stanley is a one-stop shop for all your banking and investment needs. They’ve got a couple of low risk ways that are safe and ensure you have quick access to your hard earned dollars. Currently, they have funds that earn between three and four percent. To play it safe, I’m going to use 3.5 percent. You open your account with $5,000.
Let’s assume you deposit your monthly paycheck of $5,025 in your savings account at the beginning of the month. Your monthly mortgage payment of $1,362.69 is paid on the 15th and your other monthly living expenses total $2,662 and after you pay all your bills, your positive cash flow is $1,000.
While your first priority is to create an emergency fund, you also decide to invest $300 a month toward achieving your long-term savings goals. To play it safe, you settle on a strategy that will to earn at lease six percent over the next twenty years.
Using your mortgage company’s 15-day grace period, you pay your mortgage on the 15th of the month using Morgan Stanley’s free on-line bill payment program. Using your grace period has no impact on your credit nor do you incur any late fees.
Not only is Morgan Stanley’s bill payment program free, you can also use it like a checking account. If the organization or individual doesn’t accept an electronic transfer, Morgan Stanley will print the check and mail it. You’re also saving on postage.
Similarly, you charge your $2,662 in living expenses on your favorite credit card taking advantage of their 21-day grace period. You schedule your credit card payment date for the 29th of the month. This means that the first month you begin using this system; your only withdrawal from your savings account is your mortgage.
The first month, you’ll earn $27.74 in interest. In sixteen months, your savings account balance will total $24,318 equaling a little over six months of household expenses. You’ve met your first goal. Over this period of time, you’ll earn $994 in interest.
Using this strategy, you don’t have to worry about your account ever dropping to zero. You’ve made every dollar you’ve earned work for you all month long. By scheduling your payment dates later in the month, you’ve maximized the interest you’ve earned.
You’re on your way!
A couple of small changes in your cash management have started you well on your way to achieving your dreams.
In Lazy Dollars (Part 3) we’ll review why and how we shifted our payment dates.