Have you ever wondered how businesses manage all that money they make? No? Maybe?
Let’s take a quick look at one of the cash management practices of nearly every major company and many small to medium ones utilize. The Master Sweep Account (MSA), which also goes by ZBA or Zero Balance Account, Business Sweep Account, Bank Sweep Account or Cash Management Sweep. What does this alphabet soup of banking terms mean? They all mean the same thing: companies maintain a checking account with a near zero balance overnight and during portions of the day and “sweep” the cash to and from some kind of savings account. So why don’t businesses just keep every penny in their checking or savings account like the rest of us?
Because businesses aren’t like the rest of us. They may be legal entities in the eyes of the law and have many of the same rights and privileges. But at the end of the day (for profit) businesses exist for one purpose and one purpose alone, to generate a profit for their owners. Those owners could be the Mom & Pop owners down the street, Hedge funds on Wall Street, shareholders expecting a return or dividend or Mr. Wonderful, from Shark Tank, with his Royalty deals (though technically he isn’t an owner of a business in this case, but he is expecting a profit).
And why is this different from the average Jane and Joe American? Doesn’t everyone want to make money? The answer is resoundingly, Yes. However, from an early age most individuals are taught to save money in a way that is most advantageous to the bank, not themselves. What I really would like to discuss is WHY businesses utilize the MSA.
The short answer is: it makes (i.e saves) them money.
The long answer:
Let’s start with a discussion on what an MSA is and what it isn’t. What it isn’t. An MSA is not: a scam (important), fraud (also important), widely used (most banks offer them to all businesses), difficult to set up (depends on you and your thinking) and known by all (hence this post). What it is. An MSA is a system of bank account transfers that leverage your savings growth or lower interest rate to keep more of the money you have and not give it to banks. The two components are a checking account and a high yield savings account or a line of credit, which are then linked together through the ability to perform funds transfers. That’s it. Chances are that many of you reading this already have these accounts in your personal financial landscape.
At the heart of this discussion is the concept of the MSA. While nearly every bank has some kind of offering for businesses, I’ve not found a single one that offers this same financial tool to individuals and families. So the question is why? Because the banks are making such good profits on your checking and savings that they don’t want you to do anything different.
Now that we have the big picture concept down, let’s take a look at the tactical logistics of executing in your own life. For this discussion we are going to utilize a standard checking account and a personal unsecured line of credit (LOC). (Though this works with a home equity line of credit or even your savings account.) You will continue to utilize your checking account to receive your income and pay your bills from. The only change will be that you will keep only a minimal amount in this account now. You will “sweep” any income or residual cash from the checking account into the LOC to pay it down. When you need cash for paying a bill or going out on a date night, you will “sweep” cash from the LOC into the checking account. Below is a picture of what this looks like.
Pretty simple really. Again, the principal of an MSA is to maintain a zero or near zero cash balance in the checking account while maximizing the amount of cash sitting on the LOC. Simple. Elegant. Somewhat tedious to set up.
We have been using an MSA in our PERSONAL finances now since October 2014. We learned this principal from one of our mentors, George Antone, and knew that it was something that we had to implement right away. The hardest part was going out and getting the LOC. But once we had that and spent some time working out the kinks of the system, we manage to dramatically reduce our interest costs and financial flexibility by utilizing an MSA.
Some math about why this is amazing. And it is really, pretty simple math. First, take the APR interest rate that you RECEIVE on your checking account and divide by 365. Next, take the interest rate that you PAY on your LOC and divide that by 365. And, for fun, take your credit card APR interest rate and divide that by 365. This is your effective DAILY interest rate to carry credit on any one of these finance vehicles. The following table shows an example.
|Item||Interest Rate||Daily Interest Rate||Flow of Interest|
|Line of Credit||8.5%||0.0233%||Out|
For those of us who only look at what we are getting this is small, really less than small returns. For those who have a desire to be more like businesses, they see that by using an MSA they can save 0.0281% per day (0.0514% – 0.0233%) in interest by sacrificing 0.000685% per day. Or a net 0.027415% (0.0514% – 0.0233% – 0.000685%) per day INCREASE in opportunity costs.
The other key aspect of this is that checking accounts and credit cards are charged on a monthly basis. Whereas lines of credit are charged interest daily. Now that may seem like a big deal, and it is, but not for the reason you are thinking of. When you pay your LOC down or off with every dollar that comes in you are keeping your effective daily interest cost down. Then at the end of the month, when your credit card bill is due you take money from the LOC, sweep it into the checking account and pay the credit card off. Thereby negating the interest incurred on the credit card.
This may seem like just paying one interest rate with a lower one instead of using your cash, but the way that the LOC is structured is different from credit cards and can soak up more interest per month than a credit card can while leaving you access to your cash. This is probably the most important concept to think about with the MSA. You have access to all the money in the LOC as if it were in your checking account. And you don’t pay interest on it until you use it, like a credit card. Our book goes into more details about the math and details about this concept.
Here’s a quick example: say you have a $10,000 balance on your credit card at 18.75% that happened this month (no interest yet). Your LOC has a limit of $50,000 at 8.5% and a current balance of $5,000. You receive this month (business income or W-2 paychecks) of $8,000. Your first instinct is to pay off $8,000 on your credit card, the highest interest you have. But instead you think back and remember this post. Instead, you take $10,000 from your LOC, completely pay off your credit card and then place the $8,000 of income in the LOC as well.
The following chart shows the estimated daily interest cost of this scenario.
The total estimated interest of the credit card if you didn’t pay it off is $138.70 for the month. The estimated interest of the LOC for the same period is $42.85. A savings of $95.85 for the month. Now if you are doing this every month that nearly $1,200 per year. That is money that you aren’t paying to a third party, but keeping in your own pocket.
The first thing that most people say is “but I pay my credit card off every month, how will this help me?” In this situation, there isn’t much that can be done. My follow up question to this person is then, would you like to do more of X? Which could be travel, donate, invest, anything else that they have passion for. Then they would want to get into good debt to create more capacity to do the things they love.
- An MSA is a checking account and LOC or savings account at the same bank.
- You receive income and then “sweep” it into the LOC to pay it down and “sweep” it out to pay bills.
- You already have the pieces in place to start doing this now, today.
- This financial strategy is a method to keep more of your money in your pocket rather than paying it out to other banks or institutions.
I hope that you learned something new in this long post and that you will figure out how to implement this in your own personal financial landscape. This is both a simple and complex strategy to implement. To be perfectly honest, there are many in our investing and strategy groups that know the power of this and haven’t implemented after 4 years. Stating that this is hard, or too complex, or they don’t know if they have each and every step figured out so they don’t do it. It comes down to taking action. We didn’t know how this would work either when we first started. We didn’t have all the different transfers set up right, we missed some payments by accident and learned from them. But the worst thing that happened was that maybe a fee or two that we weren’t expecting. The gained knowledge made us that much stronger and took us another step closer to our goal of financial freedom.
Please join us!