PLOC Questions and suggestions

[Revelate]

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@Anonymous wrote:

PLOC is an amazing way to build your credit, but not in the way you expect. They are great because they can help guarantee you NEVER miss a payment. 

Use the PLOC or an account linked to it to set up an automatic monthly payment to the credit cards that you actually use, ideally paying the entire amount if your bank offers that service, or else a regular payment that is guaranteed to be above the minimum and ideally close to your ordinary spend. Then you make a second manual payment to top off the difference. Also have your utility bills, rent, car loan, mortgage, etc., all paid from the same PLOC or PLOC linked account. 

Then set up your employer to direct deposit into the PLOC itself. 

Now what happens is that you are guaranteed to be paying the PLOC in full every month because your salary hits it, then your credit card and other bills all pull out using the PLOC as necessary. If your salary goes in a few days late? Or you overspent a little? No worry, the PLOC has you covered. 

I have a PLOC that has a fairly unfavourable rate of interest (like 10% or something) but I don't care about that, it either never has a balance owing, or if it does, only for a day or two until my salary hits it, so the 1-2 days of interest is pretty insignificant. 

You will want to experiment with this before you set it up fully, I gather that not every bank will be OK with your PLOC having a large positive balance, which it will most of the time when your salary hits it. Obviously you get NO interest when you have a positive balance -- but it's just meant to be a clearing account when used this way. Any actual savings should move out of the PLOC into a real savings or investment account.

I think they are fantastic when used this way. I say they help your credit becuase once this system is running you are pretty much guaranteed never to have a missed payment, even if you got hit by a bus and you were hospitalized for two months -- the whole thing would tick along automatically turning you in the long run into a credit score rockstar. Provided you are actually spending responsibly it pretty much eliminates negative information because you just forgot what day it was, etc.

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How does this benefit you when you can auto-pay off a traditional checking account much the same way?  Well, admittedly you won't overdraw the PLOC unlike a checking account on a bill you can't immediately pay but living paycheck to paycheck is to be avoided anyway if at all possible.

[Anonymous]

It benefits me because I can maintain a near zero balance in my account and not worry about that causing any missed payments. Suppose my employer is late on the direct deposit to my account one month, and the payment goes in the day after all my bills are paid. With the PLOC that is a non-event, the money goes out of the PLOC and a day later is replenished by the salary.It also eliminates human error -- if you are constnatly trying to balance the account to ensure payments clear, then you might do the math wrong one day, and wind up $5 short. That could lead to missing a payment on your credit card, which flows through to a negative on your credit report. With a PLOC the consequence instead is you pay interest on $5, which is trivial.

I agree living paycheck to paycheck is to be avoided, but a checking/savings account at a bank is a spectaculalry bad place to save money. I have my savings with Vanguard, and I move money aggresively out of my bank accounts and into effective savings vehicles. 

Were I to need emergency savings it would take a few days to get the money out of my long-term savings and investment accounts at Vanguard, but I could spend from the PLOC for those couple of days until my funds arrive.

As such a PLOC in general allows you to optimize your finances by moving your money to where it's needed, without having to maintain large balances in low interest accounts. So long as over the course of the month everything balances out it just doesn't matter what order the transactions happen in -- whether your rent goes out before or after your salary is not something you have to worry about when you bank out of a PLOC.

[Anonymous]

For greater clarity, I organize my life like this:

-- Main bank account linked with a PLOC used as a "clearing" account

-- Separate bank account with a debit card for spending

-- Separate account with an investment firm for saving

Every month I have automated transactions that:

1. Direct deposit my salary into the "clearing account" where the PLOC lives

2. Auto-pay my credit card balance in full

3. Rent payment comes out

4. Auto-pay any loans, etc.

5. Transfer cash spending money to the acct I have a debit card for

6. Transfer my monthly planned savings to my investment account (i.e., Vanguard)

All these transactions sum to ZERO. If everything goes through the way it is supposed to, my account sits at zero most of the time. But around the 1st of every month there is a flurry of transactions as my money comes in to the account, then auto transfers out to pay my bills, fund my savings, and transfer spending money to another account.

Once this is set up my only "checkbook balancing" activity is to observe whether the PLOC has a positive or a negative balance. That will depend on whether I am over or under spending my budget on my credit cards. If I am over budget, the PLOC will start going negative, and then I need to scale back my spending. If I am under budget, the PLOC will still have a positive balance. I usually just let that ride because some months I spend a little more, some a little less.

But overall this ensures all my bills get paid without any accidents resulting in badies. I can't ever forget to pay my credit card, my rent will never bounce, etc., well at least so long as I remain employed and the salary is rolling in!

[Revelate]

I likewise don't advocate saving money in a checking account, but where do you stash your emergency fund?  In a money market account maybe you can get at it quickly enough in a real emergency, but you can't in any stock, bond, derivative, or other financial instruments.

There's always a use to have that quickly available, the fractional gains in two weeks (or whatever your pay period is) is pretty much moot from a long-term investing perspective... and generally I leave that in the account I wind up ACHing all my payments out of anyway.

[Anonymous]

I put a percentage of my savings in short term bond funds. I can get cash to my checking account within a week of starting the transfer process. The PLOC provides immediate emergency spending power as do credit cards. Note that I can ACH directly from a PLOC if necessary and l would pay down the balance on the card in full by transferring money from vanguard in time to pay the credit card bill.

What sort of emergency are you envisioning that could not be paid via a credit card or within the credit limit of a PLOC for the duration of time it takes to move assets out of vanguard?

For REAL emergencies I have a weeks supply of food and water stored in my home along with a modest amount of cash in paper money. For all other emergencies I have Amex and Visa along with the PLOC.

The daily value of the PLOC though is I can forget about the timing of payments through my account, everything will clear without me having to do any math or take any action. Think of it as a bank account where there is no issues going negative for short periods of time.