TWiki . Edumacation . WhenShouldYouUseAWireToAvoidLostInterest	TWiki . { Main | Edumacation | TWiki | Test }
	Edumacation . { Home | Users | Changes | Search | Go }

Let's assume you have some money in an interest-bearing account on which you don't have check-writing privileges, and you want to transfer that money to another interest-bearing account.

You're presented with the following options:

• The first bank will cut you a cashier's check, which you can present to the second bank.
• The first bank will transfer the funds to the second bank using an automated clearing house transaction (ACH).
• The first bank will transfer the funds to the second bank using a wire transfer.

In most cases, the first two options are done at no charge to you, while there will be an outgoing wire transfer fee and possibly even an incoming wire transfer fee for the third option.

If the two banks are local, so that you can pick up the check at one bank and walk it over to the other bank, you have probably minimized the number of days when your money won't be earning interest. Even though you're presenting "good funds", the bank you deposit the money in may not necessarily give you immediate credit. This is how this can get frustrating.

However, if the check has to be mailed to you and/or by you to the second bank, this first option becomes considerably less attractive. An ACH transaction eliminates the mail delays, so even with the 2-3 delay of an ACH transfer, you're likely to significantly reduce the period of lost interest. But you can try to minimize the "limbo" period by initiating the transfer on a Monday or Tuesday so that it doesn't extend over the weekend.

When to use a wire

To decide whether to use a wire, you need to decide how much it will save you in lost interest. This depends on the amount of money to be transferred, what interest rate you won't be getting on your money, and how long you won't be getting it for. The formula you need to use to calculate the lost interest is:

interest = principal * rate * time

Let's apply it:

Assume the rate is 6% per year, the principal is $25,000 and the time of lost interest is 2 days.

Taking out my handy calculator, I multiply 25000 by .06, multiply the result by 2, then divide by 365. Rounding to the nearest penny gives me:

$8.22

In this example, a wire transfer makes sense only if the cost is less than $8.22. Usually, it's not. If you're dealing with enough money where a wire transfer might make sense, then I'd urge you to ask about wire transfer costs before you open the account.

Financial institutions spend so much money trying to bring in new money, promoting their high interest rates, but they don't get a lot of questions about how much it costs to get the money out until after people have opened the account, and as a result, there's little competitive pressure on the charge for outgoing wire transfers. If enough people opening larger accounts started asking about this beforehand, that could change things.

Topic WhenShouldYouUseAWireToAvoidLostInterest . { Edit | Ref-By | Attach | Diffs | r1.1 }

You must register before editing pages or using other extended features on this TWiki system.

Revision r1.1 - 08 Oct 2006 - 17:11 by EliMantel  Privacy Policy

Copyright © 2000-2005 by the contributing authors. All material on this collaboration tool is the property of the contributing authors. Collect email addresses here. Ideas, requests, problems regarding TWiki? Send feedback.