Article by David Press (B.Comm)

 

Do you have a transaction account, a savings account and a credit card? Are you using them to their full potential? In this article I'll outline a simple and effective transactional banking strategy that could maximise the earnings on your savings and help you achieve the goals you are saving for even faster.

 

In this strategy interest earnings on savings are maximised by keeping as much cash as possible in an interest bearing account for as long as possible. Usual spending habits do not have to change resulting in no difference in quality of life (although if you spend more than you should, perhaps a better budget will be beneficial). The crucial step in this strategy lies in the discipline of the individual to ensure credit card statements are paid in full by the due date at all times (resulting in no interest charges in most cases).

 

The beauty in this strategy lies in its simplicity. The individual's salary credits are paid into their transaction account, with all but the minimal amount of cash required over the pay cycle, transferred to the interest bearing savings account. All day to day spending requirements are paid via the credit card (except where not accepted, hence the cash available via the transaction account), with statements paid off in full by the due date with funds transferred from the savings account.

 

The nett result of this strategy is increased earnings on savings due to funds earning interest for the maximum time possible. Effectively, by utilising the interest free periods available from most credit card providers (normally 45-55 days interest free), the individual can earn interest on funds already spent on day to day expenses. As already outlined, this strategy relies completely on the individual paying the entire statement balance by the due date under all circumstances. Any interest paid on credit card debt would outweigh additional interest paid on savings funds due to the large interest rate difference between credit cards and savings accounts.

 

In many cases the individual already has the three required banking facilities, but simply does not maximise their potential benefits. Small adjustments in payment/spending habits could make a difference to earnings on savings and the time required to save for current and future goals.