Wednesday, 27 July 2016

Credit Smoothing.

It is better to have a credit balance of £100 all month than a surplus of £600 at the start and an overdraft of £100 at the end.

Why is this? It is because banks charge infinitely more interest on what we owe them that the other way around.

A photo posted by Richard Ford (@richard.ford) on

Two scenes from the City.

This will have the following benefits.

We will gain an accurate view of our true position.

We will not be tempted into foolish purchases when our account shows a large credit balance.
We will pay no interest to the bank. It is better to have a small credit balance throughout the month than to have a large credit balance followed by a large debt balance. Matched payments smooth everything out.
The second step is to balance liabilities and liquid cash.  For instance, if we have a credit card with a limit of £600 we may wish to have £600 in a deposit account to be sure we can pay the bill.

This has the following benefits.

Emotional security. It is good to know that bills can be paid.
Subtle discipline. If we make it our rule to cover every commitment we will tend to take on fewer of them.
Interest payments in our favor.
The third step is to set up a sweep facility (if available) on our current account. If our balance rises above a certain sum we should have it swept across to a deposit account. If our current account falls below a certain level have the money should flow the other way.

The advantage to this is..

Management of the account becomes automatic which saves time and mental energy.
This behavior tends to boost credit ratings.
These simple steps are the foundation of later victories.

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