Optimize Your Banking

Do you want to optimize your banking? Have you ever thought about how to squeeze the most out of your everyday transactions and every-month income? If so, this is the episode for you. We will dive into how I optimize my banking so that you can borrow and steal my ideas for your own implementation.

Before You Optimize Your Banking

These strategies are the tip of the pyramid of financial tactics. There are many things you must get right before you spend time or effort on this. The financial media loves to focus on credit card points and earning an extra 0.25% on your savings while ignoring lifetime financial impacts.

Here are a few examples of strategies, plans, and tactics you should have before attempting this bank optimization. Otherwise, you are stepping over Benjamins to pick up pennies. I comment on all of them further in the podcast.

Prerequisites

Before you optimize your banking, you should:

Planning Prerequisites

• Have a Financial Plan – Episodes 101, 6
• Have an Investment Plan – Episodes 26 and 111
• Have a Tax Plan – Episodes 28, 51, 148
• Have a Retirement Plan – Episodes 29-30, 84, 93

Cashflow Prerequisites

• Have Budget – Episodes 98-100
• Know your Cash Flow & Net Worth – Episodes 96-97
• Be Credit Card Debt Free

Banking Still Matters

All of these prerequisites matter more. A lot more! But that doesn’t mean that banking doesn’t matter or that you shouldn’t optimize it. I want to make sure we have it in its proper context.

So let’s get into it. Again, this is what I am currently doing to optimize my banking. I’m not necessarily recommending that you do this.

Optimize Your Banking with Credit Cards

I use credit cards wisely. We haven’t discussed them on this show, except in Episode 117 on Credit Scores.

Let me give some caveats. Here are some truths about credit cards.

Credit Card Caveats

People who carry a balance shouldn’t use them. Period.

If you carry a balance from one statement to the next and pay interest at 20-30%, that’s stupid. You should not have or use credit cards to buy more than you can afford.

People who are anti-debt and credit cards can stay that way.

If you’re a ravenous Ramsey fan or a miserly Mr. Money Mustache devotee, then stay that way! If it’s working for you, keep doing it. I’m not trying to convince anyone financially successful without credit cards to start using them. Why?

No one got rich off of credit card rewards.

Again, these strategies are the sprinkles on top of the icing on top of the cake. Stop focusing on this if you haven’t done the rest.

Most people spend more with credit cards than with cash.

They’ve done the studies. I’m pretty sure it’s been proven that people spend more with credit than cash. As an expert YNAB user myself, I’m the opposite. Credit and debit transactions can be tracked, and cash is much harder. I lose track of cash transactions, but there is a paper trail with my credit purchases. So I spend less. But I also keep my budget updated weekly, so you can’t claim this if you don’t.

Having a bunch of credit cards and continually opening new ones is damaging to your credit score and financial life.

People open a new credit card to save 10% on their one-time department store purchase. With it, they drop their credit score by 50 points and increase their mortgage rate on their 30-year mortgage. They save $16 at The Gap and pay $16,000 extra on the mortgage.

Dumb, dumb, dumb. Don’t trip over hundreds to pick up pennies!

Okay, on to the positives.

Current Credit Cards

I have three credit cards. All of them are set to pay the full statement balance at the due date automatically. I track the transactions when they happen, not when the card is paid.

Chase Amazon Rewards – 5% Cash Back at Amazon.com

I recently canceled Amazon Prime. It was part of a “cancel all subscriptions to see which ones I use” strategy. It lasted all of six days before I renewed it. We do a decent amount of shopping on Amazon, so getting the 5% is worth it. We don’t use it anywhere else.

Capital One Walmart Rewards – 5% Cash Back at Walmart.com and Walmart Pickup

We use Walmart Pickup for our groceries all the time. With how expensive groceries and household items are, we want them at low cost. And with a two- and four-year-old, we don’t want to go into the store. So, we run about $1,000 a month through this card. We don’t use it anywhere else.

Capital One Quicksilver – 1.5% Cash Back on Everything Else

All our other transactions go on this card. By “all,” I mean all transactions that can be put on a card go on this card. Utilities, the mortgage, and a few other bills can only be paid by ACH. But everything else goes on this card. We don’t do debit transactions at all.

Credit Card Strategies

Why do we do this? For a couple of reasons.

Optimize Credit Card Points

Note, I didn’t say to “maximize” points. If we wanted to do that, we would open a credit card at every retailer to save 5% wherever we went. But that would be detrimental to other aspects of our finances, so we don’t do that. We optimize points; we don’t maximize them.

Let’s say you have a card with 1% cash back on all purchases. A retailer offers you their card, giving you 5% cash back. That’s a 4% increase. Let’s say you typically spend $60 a month at that retailer. Your extra 4% cash back amounts to… drumroll, please… $2.40.

Saving a few bucks a month is a dumb reason to sabotage your credit score for things like a mortgage. And the extra hassle of trying to manage another card cannot be worth the single-digit dollars.

It is not worth getting a 5% cash-back card for a particular retailer unless you spend $500 or more monthly. That’s why the only two I have are for Walmart and Amazon.

We (mostly my wife) also shop at Target sometimes. But there, we can get 5% off with their RedCard debit card—all the savings without another line of credit.

Optimize Credit Card Float

Credit Card Float is the time between when you run the transaction and when the card is paid. Using this can be an advantage. Let’s look at why.

Suppose your credit card cycle runs from the 1st to the last of the month, and the payment is due on the 20th. If you buy something on the 1st of April, you are floating that transaction for 50 days. You buy it on the 1st of April, and that payment to the card is made on the 20th of May, fifty days later. If you buy something on the 30th of April, you still get to float that transaction for 20 days.

Thus, all transactions on a credit card float for anywhere from 20-50 days.

Why does this matter? It helps us to optimize our savings, which we’ll cover next.

Credit Card Conclusion

Don’t use credit cards if you carry a balance. Don’t worry about doing this if you haven’t done your real financial planning. (There’s a reason I’m waiting to talk about it until 150+ episodes in.) But if you’re doing everything else right, optimizing (not maximizing) your credit cards can generate significant points.

We earn $50-$100/m on credit card cash back without paying a dime in interest. That’s an extra date night a month, which is important to us. Being intentional with your credit cards and the rewards you get from them can lead to a bit more fulfillment in life. But using them frivolously can lead to disaster.

Optimizing your spending through credit cards is handy. But the real power comes in combining that with savings.

Optimize Your Banking with Savings

We all spend money, so getting the most out of that spending helps. But we also save money, so we should get the most out of our savings. Even if you think, “I don’t save money,” you do. You don’t spend your entire paycheck the day you get it. Minimally, you save a portion of your check from one paycheck to the next. And hopefully, you’re saving much more than that. How do we optimize this?

Three Tiers of Savings

There are three tiers of savings we could be in.

Tier Three – Ultra-Short Term

Checking accounts should be used for your daily and weekly transactions. These are ultra-short-term savings accounts where you save money for the next transaction. Most checking accounts pay nothing in interest, so we don’t want to put a lot of money here. We have a local credit union that pays 1.5% on their checking, but even that is not much.

Tier Two – Short Term

Savings accounts should be used for monthly transactions. In an optimized banking scenario, savings accounts, not checking, should be used for any large transactions that you pay monthly. With the right accounts, you can get much higher interest rates and much more interest overall. More on that in a minute.

Tier One – Mid Term

Money Market accounts should be used for 3-12 month savings goals. I use a Money Market Mutual Fund for this to get the highest interest rate. But you must sell the fund to get it back to cash to use, and therefore, they are not good for transactions. We can use these accounts for once-a-month savings and once-every-few-months spending. Money Market Funds are great for saving for major purchases and stashing most of your emergency fund.

Current Bank Accounts

Here are the accounts I use. (Again, this is a description, not a recommendation.)

Capital One 360 Checking – Tier Three

I switched to Capital One some time ago because it was the greatest combination of accounts. There is nothing special about the checking account, but I wanted my checking to be where my savings and primary credit cards were for simplicity. Again, I’m trying to optimize, not maximize, my banking.

Capital One is an “online-mostly” bank. They do have “cafes” in some cities, but not where I live. I can get cash out at almost any ATM without fees, and if I have cash to deposit, I can do that at Walgreens (as funny as that sounds). If you deal with many cash transactions, it may be wrong for you. For me, the savings account, “one bank” simplicity, and automation (more on that shortly) make it optimal.

Capital One 360 Performance Savings – Tier Two

I had watched Capital One’s high-yield savings rates for years before I switched over. They were consistently the highest in the market. As I write this, in February 2024, it is paying 4.35% APY. That’s well above what I can get anywhere else locally. We’ll explore why this is important in a moment.

Schwab One Brokerage Accounts – Tier Three

I invest in the Schwab Value Advantage Money Market Fund for my Emergency Fund and mid-term savings (3-6 months out). As I write, it is paying 5.21% APY. This extra 1% is not worth getting if I can only earn it by constantly shuffling money around. But for money I know will be parked for months, the juice becomes worth the squeeze.

Now, let’s put it all together.

Optimize Your Banking with Automation

The real power in optimizing your banking is getting it automated. If you constantly have to work at it, you won’t keep it up. We discussed automation in the financial habit episodes 75, 76, and 77. Check those out for more details.

Income: Direct Deposit

I direct deposit about 10% of my paycheck into my checking account and the other 90% into my savings account. Most payroll companies can split checks, and rather than having to push money to savings manually, I have it split before it arrives. Why does 90% go into savings?

I want my money to make 4%+ for as long as possible. It can sit there and earn the maximum interest by going straight into savings.

Spending: Credit Cards

Most of my spending happens on credit cards. Savings accounts limit the amount of transactions that can happen in a month. You can’t use them like a checking account. Rather than having all my transactions come from checking, they hit the credit card and accumulate on credit. That way, my savings can sit there for longer.

Spending: Checking

Some expenses cannot be paid with a credit card. My utilities, for example, can only be paid via ACH. All my automatic charitable gifts are by ACH so that the charity doesn’t have to pay 3% to the credit card companies. I put some money automatically into checking to cover these expenses.

Automatic Payments

All the following bills and transfers are set to automatic payment from my savings account.

• Mortgage Payment
• Quicksilver Credit Card
• Walmart Credit Card
• Amazon Credit Card
• Schwab One Transfer

These are my largest payments, and I get the most bang for my buck by having these set to autopay from savings. Here’s why:

Optimization Benefits

There are a few reasons to do this.

Optimize Credit Card Points

As already noted, we get a non-trivial (for us) amount of points back by spending it all on credit cards. We track it as it is spent using YNAB; we don’t let it get away from us and then get surprised by the bill.

Optimize Interest

We can spend a month’s expenses in January on our credit cards. But those bills won’t be due until February 20th. The money we spend on January 1st isn’t deducted from my bank account for fifty days. Money spent on January 20th still has thirty days to sit in savings. This gives us the optimal amount of time for money from our paychecks to sit in our savings, earning 4%.

Critical Caveat!

I can’t overstate the importance of tracking money when it is spent, not when you pay off the card. This is where people get into trouble. They are using February’s income to pay off January’s expenses. That is not what I’m doing. I’m using January’s income to pay January’s expenses in February. This is the key difference between living paycheck to paycheck and optimizing your banking.

Optimize Transactions

Earning 4%+ interest is great! The tradeoff (because all of finance is tradeoffs) is the transaction limit. Capital One and most banks limit you to six transactions per month. With the mortgage, three credit card payments, and one transfer coming out of the savings, we use five of six monthly transactions, with one more for flexibility.

Optimize Long-Term Saving

Our one transfer to our Schwab One Brokerage account accomplishes a few things. I leave money in the brokerage account for Money Market tier one savings. I transfer some money (automatically, of course) to Roth IRAs. And if you have multiple incomes paying bi-weekly, you can accumulate all that income at a high saving rate to be ready for the monthly transfer.

Optimize Your Banking

There you have it. It takes a bit of work to set it up, but then almost no work to manage it. It’s a great way to instill a lot of great habits automatically.

If this interests you, take some time to:

• Switch banks
• Get the right credit cards
• Set up automatic payments and savings
• Enjoy the benefits of monthly cash bank and interest

If you’re a client of mine and want additional guidance, I’d love to chat with you more about implementing this.

Don’t forget about the prerequisites at the beginning, but after that, optimizing your banking can be a great next step.

Cheers.

This article is educational only and is not intended to be investment, legal, or tax advice or recommendations, whether direct or incidental. Again, this is not investment advice. Consult your financial, tax, and legal professionals for specific advice related to your specific situation. Never take investment advice from someone who doesn’t know you and your specific situation. All opinions expressed in this article are those of the people expressing them. Any performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be directly invested in.