27 Apr Lazy Dollars (Part 3)
Timing is everything! We’ve all heard this phrase before. We’ve seen how it’s worked for other people. Rarely do we see it work for us. Everyday we can use timing to manage cash to our benefit. When we make the most of timing, the impact is seen in a commonly used but overlooked financial tool that we can’t avoid. In the U.S. it’s called the average daily balance. In Canada, it’s called the daily interest charge. While the terms are different, their impact is identical. This powerful yet simple tool few bankers, financial advisors, CGAs or bankers teach their clients to use.
Financial institutions use this tool to calculate both the interest they pay and the interest they are owed. Learn how to use this and you can maximize the interest you’re paid or minimize the interest you’ll owe. The concept is simple, you want to make your deposits as early as possible and schedule your payments as late as possible in your bank’s billing cycle.
Concept: Make deposits as early as possible and schedule making payments as late as possible in your bank’s billing cycle. I call this optimizing my average daily balance or daily interest charges.
For example, in our savings account, the bank calculates interest from the first through the thirtieth day of the month. This is the billing period.
Your goal is to build your emergency fund as quickly as possible. After you find a savings account that provides a competitive interest rate, you want to earn as much interest as possible.
How can you do this? You’ll make your deposits as early as possible and then schedule making payments as close as you can to the 30th of the month. Most companies don’t care when you schedule your payment. For the few that do, pay them on time by using your credit card. Schedule or choose a credit card payment date that is close to the end of your billing period. This will be a one-time change. Once you’re done, you’ve got a new system that you’ll use month after month.
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