How I Float

You may have heard that one of Warren Buffett's great innovations was that he used float to increase his investment returns. You may also have heard that people who use their credit cards to spend more per month than the sum of their paychecks "are floating." But what is float?

In the most basic sense, float refers either to obligated money you have on hand now that doesn't have to be repaid immediately or to the grace period between now and when the repayment is due.

Warren Buffett bought a bunch of insurance companies (and other, similar businesses, like Blue Chip Stamp Co), which collected premiums from their customers but didn't necessarily have to pay out on the insurance policies in the immediate future or ever (very few insurance customers experience an event they're insuring against--like death or property damage--as soon as they buy the insurance; this often comes much later and sometimes never). He used this money to invest, so it became, in effect, an interest free margin loan.

Most Americans do something similar with their credit cards and other loans: they buy stuff to use immediately but make minimum payments every month. They don't pay the full amount until well into the future.

There's a difference between the two examples of using float. In the first, Warren Buffett used it to get rich. In the second, most Americans use float to become poor. That's why financial gurus like Dave Ramsay recommend that all your purchases be in cash. In other words, don't use float at all.

How to Avoid Misusing Float if You Decide to Use It

In everything below I assume that paying interest on consumer debt is bad. If your credit card charges you interest, please do your best to pay off the entire balance every month. If you can't pay off your entire balance every month, stop using the credit card for any new purchases. This post is not really for you.

Now, if you're one of those people who likes to safely squeeze out every last cent from every last dollar and/or are a sucker for no APR offers, read on.

I get no APR credit card offers in the mail all the time. You might too. Similar terms are offered on furniture and other purchases. The offers are usually for 12 to 15 months, where as long as you make the minimum payment every month, the lender doesn't charge you any interest for the offer period.

I take advantage of these for large expenditures. For example, I recently opened a Fidelity credit card (administered by Elan, a US Bank company) to take advantage of the $150 bonus, 2% cash back, and no APR for 12 months to buy a new notebook computer that cost $1,500.

I have the entire $1,500 available to buy the computer with cash. I parked that money in a CD (a high yield savings account is the option I'll discuss below), and will make $30 per month in minimum payments for the next 11 months. For the 12th payment a year from now, I will pay off the entire remaining balance of $1,170. The end result will be that I paid $1,290 for the computer, minus the taxes that I'll pay on the interest I earned: $1,500 purchase price minus $150 card opening bonus minus $30 cashback rewards minus $30 interest earned.

The $30 interest is the profit that I made off of the float, with minimal extra risk.

But let's say I didn't have the entire $1,500 on hand when I bought the computer. Here's how I would use float to get ahead rather than fall behind. Use this method if you are a sucker for no APR offers and inadvertently end up carrying high interest loans.

1. I take the purchase price and divide it by the number of no APR months. So, for example, if the no APR offer is for 12 months, divide the purchase price by 12. If the offer is for 13 months, divide the purchase price by 13, and so on.
2. I take the result of the purchase price divided by the number of no APR months and pretend that is the minimum monthly payment I must pay.
3. If I can't make the minimum monthly payment in #2 above, I don't make the purchase.
4. If I can make the minimum payment and decide to make the purchase, I open or reuse a high yield online savings account and deposit the minimum monthly payment derived in #2 into the account every month.
5. I make the actual minimum monthly payment that the credit card is charging me from the high yield savings account* for the entire no APR period--except for the last month, in which I pay off the remainder of the credit card balance.

My savings account will have a balance remaining when the last credit card payment has been made. That's my profit from the float, the interest I earned on money that was obligated to my credit card company.

So, my notebook computer purchase would go like this:

1. Divide $1,500 purchase price by the 12 month no APR offer to get $125.
2. $125 per month is the mandatory minimum payment for this laptop.
3. I have $125 a month available in my budget.
4. Open a Capital One 360 Performance Savings, Discover, Markus, American Express, Ally, or some other high yield online savings account and deposit $125 per month.
5. Pay the credit card $30 per month out of the savings account for the first 11 months and $1,170 on the 12th month.

The end result is the credit card is fully paid off. I've paid no interest. At the end, the savings account balance is $7.88 if we assume a 1.5% interest rate (at the time of writing 2% is available, but going forward rates may be lower).

Purchase Price	$1,500
No Interest Offer Length	12 Months
Pretend Minimum Payment	$125
Minimum Credit Card Payment	$30
High Yield Savings Interest	1.50%

Month	Deposit into Savings Account	Pay Credit Card	Credit Card Balance	Interest Earned	Balance
1	$125.00	-$30.00	$1,470.00	$0.12	$95.12
2	$125.00	-$30.00	$1,440.00	$0.24	$190.36
3	$125.00	-$30.00	$1,410.00	$0.36	$285.71
4	$125.00	-$30.00	$1,380.00	$0.48	$381.19
5	$125.00	-$30.00	$1,350.00	$0.60	$476.78
6	$125.00	-$30.00	$1,320.00	$0.71	$572.50
7	$125.00	-$30.00	$1,290.00	$0.83	$668.33
8	$125.00	-$30.00	$1,260.00	$0.95	$764.29
9	$125.00	-$30.00	$1,230.00	$1.07	$860.36
10	$125.00	-$30.00	$1,200.00	$1.19	$956.56
11	$125.00	-$30.00	$1,170.00	$1.31	$1,052.87
12	$125.00	-$1,170.00	$0.00	$0.01	$7.88

That $7.88 profit doesn't seem worth the trouble. That's true, if you look at it in isolation. But look at the bigger picture. That $7.88 was generated entirely from someone else's money, and with very little additional risk. The debt is fully paid off, and without any outflowing interest. Moreover, the $7.88 in profit can add up if you replicate this process over time for all your large purchases. For example, I use this method to pay for my vacations and any other large bills.

Also, if you think about it, there are a lot of expenses that we will be obligated to pay in the future. These include but are not limited to holiday and birthday gifts, vacations, tuition, car repairs, wardrobe changes, house repairs (roof, water heater, HVAC), vet visits,** and so on. Some of these have fixed due dates while others are more like the insurance policies Warren Buffett will have to pay out in the future.

If you estimate the cost of all of these future expenses, estimate when they are due, and put the "mandatory minimum payments" into an interest bearing savings account (or a bond or stock index fund for the expenses that come due in five years or more and you are willing to take on the extra risk for potentially greater rewards) the chances are high that when you've paid all your bills you'll have a good sum of money left over in your accounts.

* Federal law limits savings accounts to six withdrawals per month. The example above involves only one withdrawal per month. Nevertheless, if you want to be safer at the cost of earning less interest, you can deposit only the difference between the pretend minimum payment and the actual minimum payment, and keep the funds for the actual minimum payment in your regular checking account. Suppose your pretend minimum payment is $125 and the actual minimum payment charged by the credit card is $30. You would then keep the $30 in your checking account, and pay the credit card from there. You would deposit the $95 difference into the savings account. You would make the final lump sum payment out of your savings account. Another option is to open multiple online savings accounts. Many of the online banks let you have more than one savings account per login, and setting them up is very fast and easy. But beware that the more accounts you have, the harder it can be to manage everything. Also note that once an obligation is paid off, the same savings account can be used for a new obligation.

** I have sickly cats (of the rescue variety) and, after reading the many horrible pet insurance reviews, chose to self-insure. Every month I pay a premium into a savings account I've called the "Cat Float." I determined the premium by going to a pet insurance website and getting a quote (but rather than paying the insurer, I pay myself). When the cats go for their checkups, get their inoculations, and have the occasional emergency, I pay out of this account.*** This has worked very well over the last four years.

*** Actually, I pay the vet with a credit card, which I pay with this account. An extra month of interest is better than one less month of interest.