Your paycheck arrives, and you have a choice about where it sits until you spend it. I covered four places in my talk on what to do with your income the day it arrives. This post is about after-tax dollars, which means the money that reaches your bank account after taxes and retirement contributions.
Checking is first. You can reach the money right away, and it usually earns close to nothing. Every dollar you spend leaves and stops working for you.
A savings account is second. It pays a little interest, and that interest is taxed as income in the year you earn it. You can reach the money, but moving it between savings and checking takes a step. The rate stays small, which means the dollars aren't doing much in the days before a bill.
Here's what actually separates them. A savings account paying 4% earns about $6.58 on that same $4,000 over 15 days, and the IRS taxes that interest. A line of credit charging 6.25% saves about $10.27 over the same 15 days, and, generally, interest you avoid paying isn't taxed as income. So the line of credit comes out ahead whenever its rate is higher than the savings rate.
A line of credit is third, and it's the one I use most. You deposit your pay onto it, which lowers a balance that was charging you interest. Say your line of credit charges 6.25% and a $4,000 paycheck sits on it for 15 days before the bills pull it out. That saves about $10 of interest. Do it with twelve paychecks and it's about $123 a year. The money is still yours to use, because you can draw it back out the same day.
A cash value life insurance policy is fourth. Some people, and I'm one of them, send money through a policy too. But what goes in is a premium, which is a payment that buys coverage and builds cash value over years. It isn't a place to hold money for two weeks. Dividends aren't guaranteed, insurance charges come out of the cash value, and a loan reduces your cash value and death benefit until you repay it. An illustration is a projection and not a promise.
So the jobs are different. The line of credit handles the days between payday and bill day. The policy handles the years. Money you need on Friday belongs on the line of credit, and money you won't touch for a decade is the policy's job.
If you don't have a line of credit yet, checking is where most pay lands by default, and why bother with the line of credit when checking is free shows what the default costs you. The starter move walks through the first deposit.
Open your last two pay stubs and add up the days between each payday and the day the first big bill clears, because that gap is the number of days your pay could be working.