The following is a guest post from Shaun at Smart Family Finance
Have bills to pay? You know that you can make money off of them right?
The speed of earning income is often much faster than the speed of paying expenses. I’m sure this is surprising news, because we always feel like expenses have control over our bank accounts. Think about it and you’ll see that it is true.
For most, paychecks are issued weekly or biweekly. Interest on savings and checking accounts is usually calculated by average daily balance, which means that interest earning occurs daily. Now when do you pay expenses? Most bills, unless paid for at the register, aren’t due for at least a month. Additionally, your expenses, with the exception of loans, are interest free. If you pay your credit card bill by the due date, you won’t have to pay for a purchase at the beginning of the month for 30 days.
The part of me that desires to monetize every aspect of my life is wondering; “if there were some way to race your cash flow, betting on your income would win you money every time.” Good news! There are ways to make money off of your bills.
1. Race Your Monthly Bills
The easiest money race that anyone can win is one between your paycheck, bank interest and your monthly bills. All this race requires to win is that you deposit all of your income into an interest bearing account before you pay your bills. As I mentioned earlier, banks calculate interest on checking and savings accounts in a way that earns you money on a daily basis. Thus, so long as your paycheck is deposited in your bank account for as little as a single day, you will earn interest income.
It sounds like such an easy way to make a few dollars, but few rarely take the opportunity. In 2006, less than half of tax filers reported any interest income on their taxes.
Bills You Can Use for This Race: Credit card bill, utility bills and loan repayments.
2. Race Bills Longer than 30 Days as If They Were Due in 30 Days
Part of most mortgage payments is an expense called escrow. Escrow is all about pretending that your periodic property tax bill is due every month. For example, if your property taxes are due every year, your bank will divide the bill by 12 and collect an equal portion of the bill every month. Banks then use this monthly collection to earn interest until tax bills are due.
There is no reason why you can’t escrow your personal expenses in the same way. Simply divide your bill by the number of months you have to pay, then each month set aside the calculated portion in an interest bearing account or certificate of deposit until the bill is due. Since you can save for a longer period of time, you can usually find better interest rates.
Bills You Can Use for This Race: property tax bill, income tax bill, water/sewer bill, insurance premiums and sales tax collections (if a business owner).
3. Take Advantage of Offers to Handicap Your Expenses
Often, credit card companies and retailers offer to handicap their bills for you. Interest free credit cards and interest free financing all allow you to defer payment, interest free, for a period of time. Since you should never purchase anything without the money first, you can put that money in an interest bearing account until the interest free period ends.
This race can be lucrative since most interest free retailers offer deals for large expenses like jewelry, appliances and cars.
Bills You Can Use for This Race: Interest-free credit cards (not to be confused with 0% interest balance transfers) and large purchases offering an interest-free repayment period.
4. Handicap Your Expenses, but Give Your Income a Head Start
For best racing results in any of the races above, it’s best if you handicap your expenses, while giving your income a head start.
Two people with the same monthly income and expenses can earn considerably more or less interest income, as a result of how average daily balance is figured. Average daily balance is calculated by adding up your daily balance for each day of the month, then dividing by the number of days in the month. Thus, to maximize interest earning you need to put as many days as you can between depositing all your income in a month and paying all your expenses in that month.
A best case scenario for a 28 day month would be to deposit all of you money during the first 27 days of the month and pay your bills on the last day of the month. I can’t say for certain the size impact following this advice will have on your interest earning potential, but I did run a simulation where an optimized saver earned more than six times the interest of an un-optimized saver.
There are only two steps to boost the interest earning potential:
- Put income in an interest bearing account as fast as possible and nothing is quicker than directly depositing your paycheck.
- Pay all of your bills, on as few days as possible, and as far away from your first deposit as you can. Most creditors will allow you to change the payment date for your bills. Take advantage of this and set up all of your bills for the same date or as close together at possible. It doesn’t matter which day you pick, but personally I use the last day of the month.
Bills You Can Use for This Race: All bills.
With interest rates at record lows, racing your cash flow is not the ticket to retirement, your dream vacation or supplementing your income. It’s just a way to earn a little extra money and when you think about the time commitment spent on many penny hoarding ideas, few require as little time or effort.
Your income earning will naturally outpace your expenses; why not make money from your bills?
Shaun is the author of the blog Smart Family Finance, a site dedicated to exploring the challenges of family finance; from starting a marriage to starting a family, from teaching your children about finance to helping them pick a college, from single income to double income. The intricate world of family finance unlocked, one post at a time.