27 Apr The Overlooked Strategy by Financial Advisors (Part 2)
In my earlier posting, ‘Lazy Dollars Part 3’ to earn the maximum interest, you shifted the dates you paid living expenses to the end of the month. Why? This one time change increased the average daily balance in your savings account.
Average Daily Balance Used to Calculate Interest
Your bank or credit union uses this simple calculation to determine how much they will pay you interest and how much you will owe them in interest.
In my last post, an additional payment of $5,200 was made to your mortgage from a line of credit. This immediately saved you almost $21,000 in mortgage interest. You used the bank’s money and didn’t touch your emergency fund. So, borrowing $5,200 cost you just $6 in interest.
Optimizing Your Average Daily Balance is Easy
How is this possible? You minimized your average daily balance. The best part is you’ve already done all the work!
Instead making payments from your savings account. You will use your line of credit like you’ve used your checking account.
The First Step in Managing Your Line of Credit is Easy
This first step is what confuses people. The same day you’re paid, make from your line of credit the $5,200 additional payment to your mortgage. Immediately make a loan payment of $5,025 from your checking account. This moves your income to your line of credit. The balance owed on your line of credit is just $175.
From the 1st of the month through the 14th of the month, the balance you owe the bank is just $175.
On the 15th, make your $1,362.69 mortgage payment. The balance owed on your line of credit increases to $1,537.69. From the 15th through the 27th, this is the balance you owe.
On the 28th, make the remainder of your other $2,661 in living expenses. This increases the balance you owe on the line to $4,199.69.
On the 30th, you’ll make an additional mortgage payment of $1,568 and a savings deposit of $300. This increases the balance owed on the 30th of the month to $6,067.69.
The bank uses the average daily balance to calculate the interest you owe and not the ending balance. The average daily balance owed for the month is just $1,230.23. This means the interest owed will be a little over $6.
Using the bank’s money, you’ve saved $21,000 in mortgage interest and the bank has charged you just $6. How’s that for making your money work for you!
What a great return on your money with virtually no risk!
Three Simple Tools Not Used by Your Financial Advisor
You used a simple strategy using three simple tools that your financial advisor, banker and your CPA haven’t been taught to use. What are the three tools? The three tools are your line of credit, your loan payment and your average daily balance.
There’s no catch. Nothing’s hidden. It’s just simple math.