TIME: Almanac 1993/TIME Almanac 1993.iso/time/061791/0617201.000

Text File | 1992-08-28 | 3.7 KB | 90 lines

                                                                                BUSINESS, Page 50

MONEY ANGLES

Amount Due? Zero, Thanks!


By Andrew Tobias


    Here's a way to earn 10% or 20% on tiny sums: pay small
monthly bills two or three at a time. This wouldn't be worth
discussing -- I can tell by the dignified way you carry yourself
that tiny sums mean nothing to you -- except that it will save
you time as well. That's the real point here. Still, it's nice
to know the numbers work too.

    Take your $20 gas bill. Paying two months at once, $40
instead of $20, ties up an extra $20 but saves a stamp -- 29
cents -- and the trouble of having to pay the bill next month.
Twenty-nine cents is a "return" of 1.45% on a one-month
"investment" of $20, or nearly 19% a year compounded.

    Of course, not all your bills are the same each month. But
even if the amount varies, all but the most amateur of
creditors will have no trouble applying your overpayment to
future balances. Just note in the memo: "$23.15 for April, plus
$50 on account." Your next bill will reflect a "credit -- do not
pay."

    Not only that, you'll have the cleanest credit record in
town. "How's his payment history?" one computer may ask another.
"He pays early!" the other may flash back. "Aw, c'mon," the
first computer will say. "No, really! Here -- look!" Whereupon
the first computer will look over the second computer's
shoulder and sniff its perfume, and airline reservations clerks
around the country will frown and say, "Sorry, my system just
went down." All because of you.

    The table that follows shows the "returns" you earn on
each early payment, taking into account only the postal
savings. If you'd also save on the cost of checks or envelopes
-- let alone the hefty per-check fee some banks charge if you
fall below their minimum balance -- so much the better.

    But even just saving the 29 cents, look what happens if,
say, you pay four $10 monthly bills in a lump -- the $10 you
owe now, plus three additional early payments. As the table
shows, on that first early payment, the $10 you tie up is
"earning" about a 36% annualized rate of return. The second is
earning about 18%, and the third -- $10 tied up for three months
to save 29 cents in postage -- is earning an annualized 12%.

    Obviously, the smaller the bill, the more sense it makes
to pay early. Lumping four $10 monthly bills makes a lot more
sense than lumping four mortgage payments. But as the table
shows, even on a $60 monthly bill, doubling up cuts the chore
in half and "earns" you 6%.

    Note that:

    -- These returns are actually understated. For simplicity,
they don't take into effect compounding. (But no matter how
high your rate of return in percentage terms, it's still only
29 cents, so I guess there's no point getting carried away.)

    -- The returns are "tax free" (unless you're a profitable
business, in which case the savings add to your profit, which
is taxed).

    -- If you already pay 20% interest on everything -- your
life's a revolving charge card -- then borrowing more to "earn"
18% in saved postage makes no sense.

    Of course, you wouldn't want to pay in advance if you
thought the gas company might go broke next month, or if it
didn't have the capability to credit you for the overpayment --
or if you simply hate the gas company. Otherwise it's a good
deal for everybody: it saves you time. It's less work for your
bank (fewer checks to process). It's thrilling to your
creditors. And it's easy on the environment: half as many checks
to manufacture, transport and dispose of.

    In short: a postage stamp-size idea, but first class.