27 Apr Lazy Dollars (Part 2) Canadians
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 bank with CIBC. Their eAdvantage Savings Account pays 1.5 percent and their Tax Free Savings Account pays 2.0 percent. You open an eAdvantage Savings Account with $5,000, a Tax Free Savings Account with $229 and you use CIBC’s Select Visa (Annual fee of $29).
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.
The first month, you’ll earn $12.00 in interest. Using Select Visa’s on-line bill payment program, use the a 21 day grace period on your $2,662 in living expenses and make the payment on the 15th of the following month. In sixteen months, your savings account balance will total $24,212 equaling a little over six months of household expenses. Over this period of time, you’ll earn $379 in interest. You’ve also saved $62.40 in chequing account fees.
Let’s add a little twist. If were to use CIBC’s Aventura MasterCard that provides air miles, the annual fee is $39 and the interest rate is 19.99 percent instead of 11.99 percent. Interestingly, the monthly payment date of this card is the 29th of the month. Making the payment date 14 days later, CIBC will pay you an additional $1.46 in interest each month. Annually, you’ll earn $17.53, which is more than enough to cover the additional $10 annual fee.
By being conscious of timing, you’re able to earn travel rewards too! Sticking to your budget is creating additional benefits that you never would have imagined. There are benefits to being disciplined!
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’ve also made the most of your Tax Free Savings Account. Over the next twenty years, this one shift will provide you tax savings of $13,822! (Reference is CIBC’s website about its TFSA
If you don’t have enough to maintain a $5,000 balance in savings account, that’s o.k. So long as you have $5,000, you can open an eAdvantage Savings Account. On any given day, when the balance drops below $5,000, you won’t earn any interest; however, you’re saving on the fees you would incur using a checking account. The longer you stick with your budget; you’ll have an increasing number of days that your balance is over $5,000. 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.