Friday, July 27, 2007

Small-scale arbitrage

Dedicated to Financial Freedom has a new post today with a technique for maximizing the rewards of regular spending. Essentially, the method is
  1. Get paid

  2. Send "unused" cash to an online savings account

  3. Make your usual purchases on your credit card

  4. When your credit card payment is due, transfer money from online savings to pay the bill in full
If the card used is a no-fee rewards card, then this approach pays off in two ways:
  1. You earn interest on the "unused" money you set aside on payday

  2. You earn rewards on dollars that you would have spent anyway
This technique reminded me of my own cash flow setup, but it adds another layer, in that the "unused" cash earns high interest until the purchase is made on the credit card. I think this is a great enhancement to my own technique, so I'm going to try the following "hybrid" cash flow:
  1. Get paid

  2. Send "unused" cash to online savings (ING Direct in my case)

  3. Make the usual purchases on my credit card

  4. With each purchase, transfer money from ING to pay down my line of credit balance

  5. When my credit card payment is due, pay the bill in full using my line of credit
This milks my spending habits for about as much free money as I can think of. Of course, an even more lucrative method would be to send the "unused" money directly to the line of credit (which has a higher interest rate than my savings account) on payday, but my fear with this is that it makes tracking spending slightly more difficult. I like the fact that, with the approach above, I have a declining balance in my ING account that tells me at a glance exactly how much more I have available to spend.

No comments: