Actually Playing the Float

I just plowed through the third lecture of the Business Environment Concepts section of my CPA exam review. The material isn’t really all that bad when you 1) have no personality and 2) have gotten used to the stuff over the last 4+ years.

One of the things I was reading about today was how companies manage their liquidity-risk relationship. In preparing for the exam, you end up messing with a lot of problems that show you how much interest is lost or gained each year when companies actively manage (or mismanage) their cash.

It got me thinking to how I’m managing ours.

These last few days I’ve been talking quite a bit about credit cards. I mentioned the rules I have for anyone contemplating using a credit card. We use one for every transaction we possibly can – enjoying the 1% cashback.

Many people also say quite quickly that you get the advantage of the “float” with credit cards. Well, not really. Not unless you take some intentional steps in that direction. I just checked and the last interest payment I received on our checking account was just over one dollar. Some float!

As I mentioned above, we make all of our purchases (or as many as we can) with a credit card. Remember also that we’re living by Rule One – which means we budget and spend last month’s income this month. There are really two floats going on here: one from the fact that we don’t pay our credit card until the fifth of the month following the purchases (actually, it’s for purchases made before the 20th of the prior month, so there’s an even longer float in there really), and the other from Rule One.

I like having a large (relatively) and cushy checking account, so I didn’t want to do anything with the float from Rule One.

But the credit card float? There was definitely something to be done.

Based on our spending – which is really quite low for a family of two parents and two kids under the ages of two – the one percent cashback we enjoy from the credit card usage results in the equivalent of about one month’s worth of groceries each year. Prior to this evening, the “float” advantage was miniscule – meaning it could be counted using nickels and dimes.

Tonight I logged into ING and opened a new account (the beauty of ING, even though their 4.15% interest rate is no longer competitive, is their easy-to-use, lightning-fast interface. My account was opened in literally 15 seconds) entitled “Float”. I wanted to track the interest earned throughout the year separate from the other accounts we have in there (house downpayment fund, emergency fund, etc.).

Our credit card is with our bank as well, so we had a very easy time setting up an automatic payment on the credit card for the balance in full on the day it is due. That day happens to be the 5th of each month.

Knowing that money is due on the 5th, doesn’t it make sense to pull out our average monthly expenses (which we easily know, because we budget) and sock that amount into our ING float account? So I went into the ING interface and set up an automatic transfer to reoccur each month on the 5th for the amount of our average monthly expenses.

Now, with the money being due on the 5th, I also need to transfer the money back in time to pay the bill. I’m not sure exactly how long it will take to get the money from ING to my checking account, but I’m going to start with the 25th of the prior month – just to be sure. I’ll adjust it accordingly if the money arrives too early.

This gives me a float of 20 days (roughly) where money that normally would have been spent had I been paying in cash or a debit card, is making me money. The annual interest rate given this scenario is 2.7 percent. If our average monthly expenses are $1,800, that means it’s worth an extra $50 per year to do this.

$50 sure doesn’t seem like very much when you’re looking at an entire year – but can you think of any subscriptions or services you use that cost $50 per year? I’ll bet you can. And as little as $50 over a year is, the whole setup took me 10 minutes. That’s the equivalent of working at a job for $300 per hour. Not too shabby.

I’m sure those reading this probably already do something similar. It’s certainly not an original idea to play the float, but I thought I’d share anyway.