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Assuming my debit (current) account pays me interest on the funds that are in the account, my intuition is telling me that it makes sense to schedule direct debits for the day before I'm paid. This means that the majority of my pay will be in my account for most of the month, increasing the amount of interest I earn if compared with the system I often see for managing direct debits, of scheduling them for the day after payday.

I understand why you would do it the other way (it makes it easier to see what money you have "free" to spend); but is my logic correct that I would get more interest by scheduling the direct debits as late as possible? Are there any other downsides to this approach?

Presumably I could then get even more interest payment by transferring the value of the direct debits into a savings account for the majority of the month; but that seems perhaps to be taking it too far.

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    If you schedule it for the day after payday, will the money be in your account for a day, or will it be there for a month and an extra day? – not_a_comcast_employee Oct 9 at 12:31
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    "my intuition is telling me that it makes sense to schedule direct debits for the day before I'm paid." My intuition is asking how your employer is putting the money in your account before payday!! – RonJohn Oct 9 at 12:36
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    My intuition is also telling me that one day's interest on £1,000 at 2% is a measly 5.6 pence. – RonJohn Oct 9 at 12:39
  • @RonJohn Well, after the payday is before the payday. Your employer is putting money in your account the payday(n-1) if we currently are at payday(n). So we can happily have money pulled out of the account the day before payday(n). – glglgl Oct 9 at 15:12
  • @glglgl I'm really confused by what you wrote. Are you suggesting that OP have his employer delay depositing his paychecks until the day before the next payday?? – RonJohn Oct 9 at 16:37
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Your question is predicated on being able to schedule when you get to pay your bills. While this is become more common, in my experience certain bills don't give you this option. If you are lucky enough that you can pick the due date for all your bills, that's great! But if not, you'll need to do a bit more work to maximize your interest earnings.

Overall it's true that you want to pay each bill as late as you possibly can to maximize interest while waiting to make the payment. But it does matter when your payday occurs, because unless your checking account pays the maximum amount of interest of all the options available to you, you'll want most of your cash to be somewhere else earning higher interest. This cash may be less liquid or have restrictions placed on it - for instance, you may have a restriction on how many withdrawals or transfers you can make from an account in any given period, or a delay of a few days to perform a transfer between accounts.

An approach I have found useful to maximize interest is to run a predictive ledger on my account. You can do this in a simple spreadsheet although in my case I actually wrote some code to automate most of it as it can be really tedious otherwise. Take each expected expense and put a transaction line for that expense, out as many days as needed. In my case I would usually run it three months out, but you can run it further out or less as needed - it will depend on what expenses you have infrequently so if you have biannual or yearly expenses you may want to run it out that far. Start with your current balance and write a formula for each row (you can copy/paste down) calculating the new projected balance after that transaction. To be conservative, use the earliest possible date that the transaction will hit your account. This is because regardless of when the transaction is supposed to take place, there are certain days like Sunday and maybe Saturday when transactions won't happen - so if the payment date is set for the 28th of each month, it may be earlier or later if that falls on one of those days - and this will depend on who you are paying and how (e.g. bill pay versus direct debit versus ACH versus debit card, etc.)

Once this ledger is created, look at the low water mark for the period, that is, the transaction after which you have the least amount of money in the account. Determine how much of a safety margin you want to leave in case something unexpected happens (expenses you can't cover other ways or just payments that go through wrong), subtract that from the low water amount, and this gives you the excess amount that you can transfer to a higher earning account.

As transactions occur, you can periodically update the predictive ledger to ensure that your predicted balance stays above your minimum amount and make adjustments by scheduling fund transfers to make sure enough money is in your account when needed.

  • I do something similar, but use a spreadsheet with one month, one row per day and one column per category. Another column is for my savings account's running total. Works like a charm, and is simple because I can just copy a previous month's tab into a new tab to make a new month. – RonJohn Oct 9 at 17:52
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It is independent of payday and, in order to maximize interest, the debits should happen as late as possible within the payment frame so they are not late.

For example, if you have to pay, say, utilities or mortgage or whatever, which relate to the calendar month, it makes most sense to pay them on the last calendar date.

It doesn't matter if your payday is the 1st, the 15th or the last - in all cases, the approach I describe maximizes your interest earnings.

But, depending on the amount we talk about and the interest rate, it might make more sense to not care about that and just take the approach to see it more important to have an overview of all "free" money you have.


Edit: In order to add a bit of personal experience:

My salary generally reaches my account on one of the last days of the months, in very rare cases on the 1st of the following month. I have a bunch of direct debits and automatic payments:

  • on the 1st or 2nd, some insurances and some house costs
  • utility bills around the 15th
  • some minor fixed payments scattered over the month
  • around the last (or 1st) a direct debit to a "house saving account" (Bausparvertrag, special kind of high interest saving account made for biolding purposes)

I don't like having too much money on the "checking account" (giro account in Germany, as we generally don't use checks any longer).

So I put the money which is after the 2nd or so on a savings account, from which I transfer some money back during the month as needed. This way, I am independent of when the payments take place and it becomes an issue of convenience:

  • For maximizing the interest, it would be better when all payments were due as late as possible,
  • but for the sake of clarity, I would prefer when everything would be paid on the 2nd or 3rd.

Depending on when my salary comes in, the saving amount at the end of the month is paid from the "old" money (from last month) or, if it is already there, from the "new" money.

  • Overall it's true that you want to pay each bill as late as you possibly can to maximize interest while waiting to make the payment. But the part about it not mattering when your payday occurs is only true if you have money left in your account after the debits have taken place, for instance if you have other higher earning but less liquid investment to park excess funds - or if you're just broke! – Michael Oct 9 at 17:00
  • @Michael The money must be here. But that's true in all cases. Of course, I have to take care about the money which is not free, but needed for the payment XY. If I don't spend this money, but manage to keep it until the payment occurs, the best is to keep it as long as possible. But as already said: it can only be some pennies, so it is probably not worth the hassle to deal around with some days. – glglgl Oct 10 at 7:22
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One potential downside of scheduling the payments as late as possible is risk of late payments. If you are manually scheduling these payments, you may one day make a mistake and accidentally schedule it too late. Compare the amount of interest you would actually earn by delaying payment against late fees. An extra week or two worth of interest on the amount of money for a utility bill is likely far smaller than any single late fee. I'd wonder if it's even enough to be worth the time and effort to adopt such a scheme.

  • OP has asked about Direct Debit payments. There is no risk of "manually scheduling a payment too late" with a Direct Debit. – AndyT Oct 17 at 9:24

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