Managing Your Float

A couple years ago I was working for a senior manager that would not pay his electric bill regularly. It wasn’t because he couldn’t afford it, from what I could gather he had his financial house in relatively good order. His reasoning was because “why pay early when they aren’t going to penalize me or shut off my service? I’d rather keep my money as long as possible. Gotta manage your float!” From what I’d gather he’d regularly pay his electric bill at least a month late, especially in the winter time when electric companies in the northeast are not allowed to cut your power due to failure to pay.

Float, by definition, is when the bank will credit your account for a deposited check even though that check has not cleared. So in essence it’s not your money yet, but you have access to it, and it is counted twice as the payer still has that money in their bank account as well.

This conversation spiraled into another conversation where two other coworkers explained how they pay off their credit card weekly and sometimes daily, because they can’t stand “owing money when they just have it sitting in their checking account.” To be honest, I was baffled when I heard this as I set my credit card bill to be paid ON the due date, always.

When you pay your credit card early or any bills for that matter, in most cases, you are paying off a 0% loan early. I would rather use the money to fund my Roth IRA sooner, pay down a mortgage, pay down student loan debt, or just leave it in my checking account in case an emergency arose before it was due.

I think it all has to do with the person’s financial mentality. Where some people rush to pay down student loan debt at 1.9% or less, I would milk that payment out as long as possible and deploy that capital to investments.

But it’s easier said than done. I am actually running into this issue right now where my only student loans left are at 3% and I can’t decide if they’re worth paying off in advance or not. I have the funds to pay them all off now, but I don’t think it’s worth it with the low rates. So therefore I settled in the middle and pay extra over the minimum due even though I know over the long term the broader stock market has returned greater than 3%. Plus I do not receive the student loan interest deduction anymore. What would you do if you were in my situation? At the current pace I pay them, they will be paid off in less than 20 months.

Help me out folks. Which group do you fall in?

1) Do you manage your float to your full advantage?
or
2) Do you pay off your bills ASAP?
or
3) Do you fall somewhere in the middle?

-FF

12 thoughts on “Managing Your Float

  1. Debtless in Texas

    Interesting idea managing float, but it seems strange to me. You can hold onto that money as long as you can and pay off the bill, but you still owe that money. It is not like you are going to be earning a 3% return on your $88 electric bill.

    I like to pay as early as possible and get the known bills out of the way. That way I can take the leftover cash and throw it into investments right after the bills are paid. I like to get things done early and I hate being in debt for anything. Since I know I have to pay those bills anyway, why not get it over with and invest what I know I will have?

    It is hard for me to see the point of procrastinating to “hold on to it as long as possible” when I have it earmarked for these bills. You really have nothing to gain and a lot to lose, especially if you mismanage your float and forget something. I generally avoid as much hassle as possible and this just screams hassle to me.
    Debtless in Texas recently posted…Stop Blog Referral SpamMy Profile

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    1. Fervent Finance Post author

      Personally I do not pay any bills late as everything is set to pay on the due date (with the exception of medical bills since I like to ensure all the charges are correct and make sure the insurance is calculating correctly – also no penalty for paying late). But let me give a better example of what I mean.

      Say you are getting paid on the 14th and 28th this month. Your credit card bill is due on the 30th. From what you’re saying is you’d use your 14th paycheck to pay the bill early and then use 28th paycheck to invest. Whereas I’d invest 2 weeks earlier with the 14th paycheck and pay my bill on the 30th with the 28th paycheck.

      I don’t really think you have anything to lose as long as your bills are scheduled to be paid by the due date. I’m not condoning what my older senior manager did, but just wanted to raise that point.

      It is all personal preference and I’d rather hold onto the cash until the due date. I do not think there is a right or wrong answer.

      So I’m assuming if you were in my shoes, you would pay off the 3% loan early. Correct?

      Thanks for stopping by!

      Reply
  2. The Money Mine

    Very interesting post. I wonder myself if there’s a break-even interest rate above which it is better to pay early? What I’d do is that I would calculate the cost of interest remaining on the loan and would compare to how much value add you could get from an investment with that loan money. If the investment amount is greater, I’d invest it and let the loan run its course. Otherwise I’d pay it off early.

    On managing a float for utility bills, do you know how much interest your colleagues get from doing this?

    Nick
    The Money Mine recently posted…How to Calculate your Net WorthMy Profile

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    1. Fervent Finance Post author

      Thanks for stopping by Nick. It’s not so much how much interest you make from deferring paying bills but that you have options such as: 1) holding onto the cash in your checking account for emergencies, 2) deploying that cash to investments and paying the bill with a future cash inflow, 3) paying down debt with an interest rate (not 0%), etc.

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    1. Fervent Finance Post author

      Yep no late charges on utilities or cable/internet usually. Yeah I don’t understand those people who pay before the due date 🙂

      Reply
  3. Gen Y Finance Guy

    We always pay everything by the due date. I had no idea that utility companies didn’t charge some sort of late fee.

    When it comes to credit cards we do pay the balance off every month. But I have my credit card payments set up automatically to make the payment on the due date as well to take full advantage of the float.

    I didn’t look at my student loans the same since the interest rate was greater than 0%. It was a nagging little debt that was only $8,000 when I decided to finally just put it to bed. We did the same thing with the car loan on my wife’s car that was $7,000 when we put it to bed.

    There is certainly the argument about the potential to earn more than the interest rate if the money was invested in the market. But I took my guaranteed 4.5% return by paying off the student loan early and the 1.7% for paying off the car loan early.

    This frees up bandwidth to focus more energy on investing.

    But when it comes to 0% money, I will always maximize the float on that.

    Cheers!
    Gen Y Finance Guy recently posted…February 2015 – Detailed Financial Report #2My Profile

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    1. Fervent Finance Post author

      I’m the same way with my bills. Also with regards to student loans, even though they are only at 3%, I think the peace of mind I will have once they are paid off will outweigh any market appreciation I am forfeiting by paying them off early. It’s obviously not always about the numbers but about peace of mind as well. Thanks!

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    1. Fervent Finance Post author

      I’d agree in your case it would be better to try and pay early, because why risk cutting it close and getting hit with perhaps interest and penalties. Thanks for stopping by and take care!

      Reply

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