Paycheck Parking on a $7,000 Balance: $18.27 in Interest Instead of $35 to $37

Here's the example I put on the board in a video about eliminating debt. A line of credit charges 6.25% APR, which is the yearly rate. The starting balance is $7,000. Monthly income is $5,000 and monthly bills are $4,000. That leaves $1,000 a month of cash flow, which means the money left over after the bills.

Interest on a line of credit is simple interest, figured daily on your average daily balance, which means the average of what you owed on each day of the month. So the question is how to keep that average low while living the way you normally do.

Start with the usual way. Your paycheck goes to checking, the bills come out of checking, and at the end of the month you send the leftover $1,000 to the line of credit. The balance sits between $6,000 and $7,000 all month, and in a 31-day month the interest runs about $35 to $37.

Paycheck parking changes the route. The whole $5,000 paycheck goes onto the line of credit on payday, and the bills get paid from the line of credit. The balance drops right away. It climbs when the mortgage payment comes out mid-month, and it climbs again when you pay off the credit card at the end of the month. The average daily balance for the month is $3,441.31, and the interest is $18.27. You save about $20 a month, and nothing about your spending changed.

The credit card is part of why it works. A card you pay in full every month charges no interest, so the money you spend on it stays on the line of credit, offsetting interest, until the card's due date. If it's a rewards card, the rewards come on top. The card has to be paid in full each month, though. A balance that carries over costs far more than the line of credit does, and it wipes out the savings.

You can check the interest on your own line of credit from the statement, which I walked through in how to check your HELOC interest charge yourself. Your numbers will move with your pay dates, your rate, and when your bills are due.

Take your last statement, find the average daily balance, and run the same two versions of your own month.