by Dr Nice

Created on: February 13, 2007   Last Updated: April 13, 2007

The real value of Paypal is it's attractive interest rates and high liquidity on funds held in account.

In addition to being very useful for online buying, selling and money transfers it is a terrific place for idle funds to be parked. Because of the free transfer of funds between PayPal and your bank or credit union and the favorable interest rate that Paypal pays it is relatively effortless to use your money to make money by employing some simple strategies.

Strategy for building an emergency fund without taking any money out of your existing budget:

After depositing earnings into my bank account I transfer those earnings into my Paypal account. I then pay bills with a bank account credit card during the month. A few days before my credit card interest free period ends I transfer the needed funds from Paypal into my bank account to cover the credit card payment.

In the process I have accumulated a decent daily average balance in my Paypal account, earning interest on the money during the time I have held it, (and adding more points to my credit by using my card and paying on time or better). A key to making this strategy work better as far as building your credit score is to occassionally wait until an interest payment on the card occurs before making the payment, so the bank makes a little money on the card. This makes them want to give me more credit.)

By leaving all the earned interest and any windfall or extra money I come into during the year in my Paypal account, over time I have built up a comfortable emergency fund and am expanding that fund for making more agressive investments. At 5% (what Paypal is paying approximately at this writing) it would take almost 15 years for the money it the account to double, however, if I had kept that same money in the bank it would take 36 or more years to double. (If you don't understand the rule of 72 in interest matters, you need to google it and learn about it.)

Every person should have at least three months worth of living expenses in an "emergency fund" which is a highly liquid (you can get the money overnight if needed) and yet earns a decent interest rate. Paypal, like most money market funds, pays 2 to 3 times more in interest than a bank or savings and loan savings account and is highly liquid, making it an excellent place for your emergency fund.

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