Earning the Float - Make Passive Income Thinking like a Bank

How I make passive income thinking like a bank

A little background on Earning the Float

Float, in a traditional sense, is basically banks double counting deposits for a short period of time while a transaction clears.

Think of it as you write a check to me for $1,000,000. (That was sure kind of you. Thank you very much!)

I immediately deposit the check in my bank and walk out feeling like a million bucks, literally.

Well, for a short period of time, your bank account shows your one million, and mine, also shows that same one million. During that time each bank tries to earn interest on that deposit. They’re both floating cash they likely don’t actually have at one point or another, and trying to earn interest on the float.

The strategy

My use of funds are similar, but unfortunately on a much smaller scale, for now any way. I call it earning the float, because I’m earning during the interim of when the funds are due, and maybe I just want to sound cool. This idea may be closer related to a carry trade or arbitrage. Consider this basically funding 101.

Nice credit cards should be your friend

While many are afraid of credit card debt, you need to know they can be a useful tool. The idea is to use cheap, or free, money as funding to earn risk free returns. I try to think like a bank, or insurance company, as much as possible. They're the ones with all the money after all; they must be doing something right. I’ve also used this strategy to take on more risk, but let’s keep this simple and relatively safe for now.

You’ll need a 0% credit card

What I do, is get a 0% credit card. (Chase) ← Here’s one I’ve used. Determine the terms for the 0% period. Is it 12, 15, 18, or the holy grail 24 months? The term matters for two reasons. First, I need to know when I need to pay back this debt. I want to be sure I don’t pay interest on a credit card, EVER! Secondly, the length of the 0% term determines what product I can invest it in.

I apply, and get approved for my 15th month 0% card. Sweet! The bank graciously extends me a $10,000 line of credit. Depending on the company, some cards will offer points, which can be redeemed for cash if one spends, for example, $500 in the first 3 months. Offers like these aren’t necessary to do this, but are icing on the cake. All my cakes must have icing...

Spend, Spend, Spend

Here comes the hard part. I use my new credit card for all my spending: groceries, gas, entertainment, and rent, so long as I’m not charged an additional fee.

Whoot whoot! Free money! Not.

Tuck that cash away

What this does is free up cash that I would have normally spent for these items. Let’s say after three months I have $5000 on the credit card and now $5000 in my bank account. I consider the 5k in my bank already spent; hence earning float. It’s an accounts payable in the balance sheet in my head.

Find your risk free investment

Now since the card is 0% for 15 months I have a few choices. Again, for simplicity, let’s say I decide to choose between a high interest online savings account, like Discover, Capital one, or Synchrony. Or a 12 month CD at my current bank.

A high yield savings account will offer me the most liquidity, but typically CDs will pay a higher rate. The problem with a CD is that your money is locked up for a specific period of time. You typically can’t access the funds early unless you pay a fee. If it matures before the 0% term is over, and I’m confident I’ll get the funds back in time, then I may go with the CD.

Float away

While I carry the balance on the credit card, I just make the minimum monthly payment. At maturity of the 0% offer, I pay a balloon payment of the remaining balance in full.

Step by step

Here’s an example of one I recently did.

Get 0% credit card
Charge 5k on it in first 3 months.
Earned $150 bonus plus 1.5% cash back on purchases equaling $75. Total $225.
Then I put the cash in a Discover high yield savings account earning 1.60%.
Wait a year
…
Not counting the slight compound interest, I earn $80.
Total earnings $305.

Is it worth it?

Now you may be saying, “Uggh that’s so much work for $305”, or “$305 isn’t worth my time”. The way I see it, I’m making money doing something I’d be doing anyway, buying everyday items. Was it really that much work??? I could buy 305 $1 slices of NYC pizza with that money. That’s like a year of lunches for this frugal guy!

Conclusion

The main idea is that there’s many ways to stretch your dollar and earn a little without doing too much to change your habits. Credit cards are a very useful tool if you know how to use them properly.

You need to have self control to do this strategy. If you do, there’s no reason to be afraid of credit cards or taking on intelligent debt. If you don’t, ixnay on the credit cards. Try another strategy instead.

Warning

Applying for a credit card and taking on debt will lower your credit score and add an inquiry on your credit report for two years. You need to be okay with this in order to do this strategy. I am, because I believe credit should be used when it makes sense to. I wouldn’t use this strategy if I was making a large purchase, such as a home, in the near future.

Please note, interest rates are constantly fluctuating. The rates used in this example could be higher or lower at the time you're reading this.

Hopefully my example inspired you to think outside the box on ways you can make extra money.

Have a favorite credit card or credit card trick? Let us know in the comments below.