Let’s face it, the current economy has made making money through your investments without taking on a large amount of risk pretty hard. The average interest rate on a savings account is less than 1%. The days of being able to keep money in your savings account at the bank and earn a respectable amount from interest are gone…or are they?
There is a pretty simple trick to earning the absolute maximum amount of interest on your money every month. You simply have to optimize your account to take advantage of how your bank pays out interest. Even if you can’t afford to “save” every month because all your money goes out to bills. You can still take advantage of this, and boost what your bank pays you. Here’s how:
Average Daily Balance
Your “Average Daily Balance” is exactly what it sounds like. It’s the average amount of money you had in your account on any given day throughout the month. What happens is that your bank takes a snapshot of your account each day and records the each day’s balance. At the end of the month the bank adds each day’s balance up and divides by the number of days in that particular month (hence, average daily balance). It’s also the number your bank uses to determine how much interest you earn in your account each month. Optimizing your account all boils down to structuring your account to keep the highest average daily balance.
I’m sure most of you already have direct deposit, but I’m willing to bet you deposit the majority to your checking account and transfer any surplus over to your savings each month. Well, if that sounds like you…you’ve got it backwards! You should be having your paychecks deposited entirely into the account that pays you the most interest. This ensures you’re carrying the highest balance possible to be earning interest on.
But I need the money in my checking account to pay bills, you say? Well, that’s step 2 in the optimization process. Schedule all your bills for the same day. This is really the only part that takes any work. You’ll need to call your credit card companies, utility companies and anyone else you owe money to each month and request to change your billing date to the last day of the month (or whatever day you prefer). The majority of companies allow this, all it takes is a phone call.
Is it worth it?
In short, yes. Let’s compare the accounts of two people, John and his girlfriend Jane. They each earn $500 per week and unfortunately have $500 worth of bills to pay each week. The only differences between them is that John has optimized his account by getting direct deposit and paying all his bills on the 28th of each month. Jane has not (sorry ladies!). She deposits a physical paycheck the day after she would have received direct deposit and pays her bills by making payments of $100 each day for 5 days.
Here’s what a graph of each of their daily account balance looks like:
Current interest rates are around 1%. Assuming this is what both John and Jane earn. John will earn about $35 in interest this year while Jane will earn about $4.24. If savings rates go up someday, say to 5%, the difference is even greater. As you can imagine. At a 5% rate John will earn roughly $174.99 in interest per year, Jane will earn about $21.21. That’s a $153.78 difference between two people who make, and spend the exact same amount of money. Think you have time to make those phone calls to change your payment dates now?? That’s what I thought.
Sometimes the key to making money is simply using what you already have more effectively.