How Much Do You Like Free Money?

Most of the time this blog is all fun and games, but today we're going to discuss something serious: free money*. Many of you out there are going to say "I like free money," but you could be lying to yourself. Take a look at what I describe here and see what you think.

One of my favorite things in the world is interest. Why is interest so great? Because it's income that I didn't do anything to receive. All I did was NOT spend money in the past. I live within my monthly income, so every time I don't spend money it goes to some type of savings or investment. Therefore, I actually get paid for a non-action. In fact, the more I do this non-action, the more income I have. Sure, the income I make each year on interest is small, but over my lifetime I aim to change that.

So, here's how I maximize my interest each month (I get paid monthly, so that makes this a little easier):

1) Direct deposit to my ING's Direct's "Electric Orange" checking account.
2) I don't have any big bills due early in the month, so I'll transfer probably 80-90% of my paycheck to ING Direct's "Orange" savings account.
3) Time for bills - once I know what I owe and when it's due, I schedule payments (close to the due date) to be sent from my checking account.
4) Time to cover the bills - Money transfers instantaneously between ING Direct's savings and checking accounts, so I set it up to transfer the money back from savings to checking a day or two before the payment gets sent out.

"Wow," you might say, "that seems like a lot of hassle on the internet."

Yeah, it's a lot of hassle...if you HATE FREE MONEY! Look, you're already doing internet banking and online bill pay**, I'm just adding an extra step that pays a little more interest on your money. Not only that, but because I only transfer back the money I need to cover bills, it's a sneaky way to accidentally save money (as long as you spend less than you make - otherwise you have bigger problems).

How much money am I making? Well, assume that I mail my rent check on the 24th of every month. Assume that for 20 days of that month I have the month in the ING Direct Savings account (4.50%) and 4 days in the ING Electric Orange account (4.00%). For every $100 of rent, I will end up with $3.49 of interest at the end of the year. What if I only used ING Electric Orange (4.00%)? I'd end up with $3.16 (for every $100 of rent I pay) at the end of the year. That's not a lot of money, but if you look at it over time for a realistic rent for a young professional in Baltimore, you get the following graph:
One can reasonably argue that the extra $5 that you end up using my scheme for two years is not worth the hassle, but the $45 you get for using ING Direct's Electric Orange checking account is absolutely worth it. It's like there's an extra $45 sitting on the table, all you have to do is reach forward and pick it up. It's yours! All you have to do is open an interest bearing checking account.

So if you like free money (but not quite as much as me) then I recommend you do this:

1) Direct deposit to my ING's Direct's "Electric Orange" checking account.
2) Time for bills - once I know what I owe and when it's due, I schedule payments (close to the due date) to be sent from my checking account.

Finally, I am aware that I do not love free money as much as some others who have already ditched ING Direct for HSBC or some other online savings account with an even higher interest rate***. My answer to that is that I already have some ING Direct CD's, so I need to keep some sort of ING Direct presence and the 0.50% increase in interest is not enough to make me open yet another banking account. Besides, I'll admit it, I love the ING Direct website, it's just plain friendly.

So where does one get this ING Direct? If you don't already have it, let me know so that I can invite you to join. If you wait for my invitation, you'll get $25 free with an initial deposit of >$250 (and I'll get $10 if you do)!

* Ok, for those literalist economist types in the audience, I realize that this is not "free money." In order to get this money, you have to go through all the steps that I lay out above. However, many of these steps are simple, one-time tasks (opening an ING Direct account) or things you do anyway (like paying bills), so I would say that this is as close to "free money" as you are likely to find available in mass quantities.
** If you're not already doing internet banking and online bill pay, you must really, really hate free money. Checks cost money, stamps are about to go up to $0.41 each, and you end up paying way ahead of time usually. Of course, who cares if you pay ahead of time? It's not like regular banks pay interest on checking accounts. You're lucky if you're not getting hit with fees for not maintaining a "minimum balance."
*** I do have an E*Trade savings account with a 5.05% APY that I use instead of keeping cash in my E*Trade brokerage account.