Saving your hard-earned dollars is extremely important. The widely accepted rule of thumb is you should be saving 15% of your income in a qualified retirement account. You should also have socked away about 6 month’s salary for emergencies. However, the sad fact is that the majority of Americans fail to get anywhere near these goals.

Many people struggle desperately to save money for the future. The chart below says it all - savings rates are steadily declining into negative territory. It’s becoming the American way.

Let’s look at some more statistics. We as Americans are pretty good at being in debt for things that lose value. If you are the typical consumer your car, TV, furniture, and lots of garbage you’ll never use are probably financed. Given this, we have become extremely ‘disciplined’ at making timely payments. The average consumer has a FICO credit score somewhere between 675 and 707. This means that most of us pay our bills on-time.

How about using the fear of late payment fees and a lower credit score to pad your wallet? You can use these statistics to play a physiological trick on yourself to seriously boost your savings rates. The concept is simple; borrow money and deposit it into your savings account. The obvious goal here is to borrow at a lower interest rate than your bank is paying you to hold your money. If your credit score is good, you can accomplish this quite easily. Let’s look at the simple steps.

Open an online “direct” account. Many banks are now offering very attractive yields of over 5% in what are know as “direct” accounts. These accounts cut out the overhead of physical locations, tellers, and sometimes deposit options. One of the most popular banks for this type of account is Emigrant Direct (see below for more). When you setup an account here, all deposits are done electronically; saving the bank money typically spent processing paper. These savings are ultimately passed on to you.

Write yourself a check. Credit card companies often send promotional offers with your statement. These are typically checks on the last page of your statement. Most of the time these checks are eligible as a cash advance - meaning you can simply write a check to yourself and deposit it. The best deal is one that offers balance transfers until the balance is paid in full. To make this work well, shoot for a rate of 4.99% or less.

A few words of caution: Read every word the fine print on the offer. You may be required to pay a transaction fee to use these checks. Calculate the amount of interest you will actually pay during the time period. Depending on the amount you are borrowing, this may be a minor cost - so do the math! If the offer has a limited time frame, be sure to transfer to another offer before it expires, or pull the borrowed money out of your “direct” account to pay it off at the end of the promotion.

If you can’t deposit this check directly into your “direct” account, deposit into the account you linked electronically during the application process. Usually, you can link additional accounts by following the instructions on the web site. Transfer the cash to your “direct” account after the check has cleared and the funds are fully available for your use.

Make your payments automatically. Credit card companies are known to jack up your rates if your payment is just one second late. Don’t lose that great rate you’re leveraging to boost your savings. If you don’t already have a checking account that provides free or nearly free checking, find one such as Washington Mutual that provides free checking and free bill pay. It’s easy to setup automated payments on a monthly basis to your credit card company. This takes the thought and hassle out paying this bill and reduces the possibility of missing a payment.

Reduce your payment periodically. If you have setup bill pay to pay a fixed amount, or you prefer to pay your bills manually, you may notice that the minimum payment due on your statement consistently falls each month. Every payment you make reduces the principal you owe on the loan. The bank recalculates the interest payment monthly based on this balance. To make the most out of the spread between your credit card and the savings account, don’t pay more than what’s required.

Watch your money grow. The interest payments deposited monthly to your “direct” account will compound over time. Every month, you will notice this interest payment will go up slightly, while your payment to your credit card company declines. You’ll notice that in the time it took to pay off the credit card, you’ve accumulated much more in your savings account then if you would have simply been making deposits as most people do.

Repeat! Each time you pay off a loan, borrow again. This not only is helping you grow your net worth, but is also helping your credit record. As long as you stay disciplined, automate as much as possible, and repeat as often as possible, this process will reward you substantially over time.

Further Reading & Research

Direct savings accounts:
Emigrant Direct
HSBC Direct

Banks with free online bill pay:
Washington Mutual
Wells Fargo

Credit Cards with good promotional rates:
CitiCards
Capital One
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