Give Yourself up to 1 ½ Months of Interest-Free “Float”
I once took an accounting course taught by the owner of a retail toy store. From what I recall his demeanor wouldn’t have endeared him to many children (or to many students for that matter), but he did impart some pearls of financial wisdom that I still remember and try to apply when managing my own finances. One was, “A dollar in your pocket today is worth more than a dollar a year from now.” This was his favorite one, and for good reason. You see, a toy store lives or dies based on how effectively its cash flow is managed, because over 50% of annual sales often occur during a 1-month holiday shopping season. So it has to survive the other 11 months on a cash flow diet.
The expression seems obvious. After all, a dollar in hand today could be deposited into a savings account and earn interest. These days the interest wouldn’t add up to much, but it would be better than nothing. Alternatively, you could invest the dollar into your business and if you do so wisely your return could be much greater. The main point, though, is that having the dollar now gives you greater control.
Importantly, the concept applies not only to receiving payments from others (accounts receivable) as soon as possible but also postponing your payments to others (accounts payable) as long as possible, for that also frees up cash flow. Here’s an example of how to stretch your credit card accounts payable by at least a month and as much as a month-and-a-half, without incurring a late payment penalty. This will require having and using two credit cards.
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Opportunities like this give you a little
more control. That’s what it’s all about –
taking greater control of your finances
Most credit card companies allow you to pick the end date of the billing cycle, so be sure your card company gives you that choice for each card. Now simply pick an end date of the 15th of the month for credit card #1 and the 30th of the month for card #2.
Use card #1 only for purchases between the 16th and 30th of every month. The credit card company will close off the billing cycle for card #1 on the 15th of the following month at which time they will issue you a bill but give you another two weeks to pay it. Voila’! 30-45 days of float.
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For card #2 pick the 30th of the month as the end date of its billing cycle. Then after the 30th and before the 15th of the next month, use only card #2. By doing so you will stretch out the float period for ALL your credit card purchases to at least 1 month and as much as a 1 ½ months.
I admit, this can be a lot to remember so to make it easier I just write “use 16th– 30th” on the back of card #1 and “use after 30th – 15th” on card #2.
It should go without saying that you benefit from this system only if you pay your card balances in full prior to the deadline; otherwise the hefty penalty and interest fees set you back much more than anything gained.
Alright, so you now have 30-45 days of float at your disposal. That’s enough time to receive an extra paycheck or two. How will you put this freed up cash flow to good use? You could keep the money in the checking account.
But would that help you get ahead? Unlikely.
Alternatively, you could use it in a way that provides some return. That’s probably what a good toy store owner would do.
For example, it might allow you to make an extra principal-only payment on a loan, such as a car loan or your mortgage. Or maybe make an additional retirement account contribution (a good example of the “pay yourself first” principle).
By itself, the benefit might seem small. Don’t be fooled. Eliminating a monthly mortgage payment or trimming months off the repayment of a car loan is meaningful progress. It all adds up. Over time, with each success you will gain a little more control. That’s what it’s all about – taking greater control of your finances, until you reach financial independence. Then you’ll have complete control.
Keith has worked in the banking and consumer finance industry and has an MBA from Columbia University. His focus is on providing tips and techniques to help you maximize your cash flow. Keith is a staff writer for Wise Bread and founder of www.cashflownavigator.com. The Cashflownavigator personal finance management system was awarded Money Management Program of the Year in 2012 by the Institute for Financial Literacy.