If you keep all your money in a checking account that doesn’t earn interest, you are missing out on free money. Instead, you should consider depositing all of your money in a savings account (interest bearing checking if you can find a good one), then transfer money to fund your checking when you are paying bills. This way you will earn money on your average daily balance.
(Click to read about earning 4.09% APY with an interest bearing checking account)
“I can’t earn interest because my expenses total my income, so I never have a balance at the end of the month.”
Banks calculate interest based off of average daily balance. It doesn’t matter if you carry a balance at the end of the month or not. So long as you have deposits every month, you can earn a great deal of interest. If you know how to optimize your deposits and withdrawals, you structure your average daily balance so that you earn interest on 80-90% of your deposits even though your expenses will wipe out your balance by the end of the month.
How average daily balance is calculated
Banks record your balance each day of the month, then add those balances up and divide by the number of days in the month. This means that if you carry a balance for at least one of the days of the month, you will earn interest. However, there are ways to structure payments and deposits to influence your average daily balance and earn more money.
How to earn more interest with the same amount of money
Optimizing your savings account is about making deposits as quickly as possible and delaying taking your money out of the account for as long as possible. There are only two steps to optimizing the interest you earn:
Direct deposit your paycheck: As timely with your deposits as you may be, nothing is quicker than direct deposit. Every moment that your income is sitting on your counter in an envelope, is money you are losing.
Pay all of your bills on the same day: Your account is best optimized when all bills are paid on the same day; preferably the last day of the month (although not a necessity). This is the part of optimizing that can be a challenge. It will take time calling your creditors to request a specific billing date, most creditors will let you pick the day of the month to pay your bills. However it is not always the case.
Graphical Proof of Optimizing
If you want a little proof of how optimizing improves the amount of interest you can earn, I put my geeky love of graphs to work.
Below are two graphical representations of savings accounts. Both accounts make the same deposits and withdrawals. At the end of the month, all of the deposits in the accounts will be withdrawn. The only difference between them is that: the first one optimizes with direct deposit and pays out all the bills on the 28th day. The second, deposits one day later than the direct deposit and makes a $100 payment every day for the last six days of the week.
How to read the graph: Each yellow square represents $100 that the bank will use to calculate the interest earned for the month. Each blue square represents $100 that the bank will not use in the interest calculation.
To give you a feel for the difference in interest earned between the two savings accounts above. At 4% interest, the optimized account would earn $56.57 in interest and the un-optimized account, $8.57.
Sometimes making money is simply about changing habits and making use of what you already have.
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