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Earn Interest the Buffett Way

Unless you're really lucky, you won't get rich overnight. It takes most of us a lifetime of good habits and smart planning to reach our goals. And even though many of the ways we save money may seem inconsequential, a dollar here and 50 cents there eventually adds up to serious money.

You can borrow one method for saving more money from legendary investor Warren Buffett. He attributes much of the success of his Berkshire Hathaway (NYSE: BRK-A  ) (NYSE: BRK-B  )  to one strategy: using float to his advantage. On a much smaller scale, under certain conditions you can use float to earn more in interest from your savings.

What is float?
In managing your money, you want to accrue income as quickly as possible while putting off expenses as long as you can. That's one reason why retirement techniques like IRAs and 401(k) plans are so valuable -- they allow you to put off paying taxes on your earnings for decades.

But it also applies to your everyday life. When you get your electric bill or credit card statement, the due date is usually a couple of weeks in the future. If you pay right away, you don't have to worry about it -- but you also lose the interest you would have earned had you held on to that money during those weeks.

Of course, two weeks of interest on a $20 gas bill won't get you into your first mansion anytime soon. But when you consider all the bills you have -- mortgage payments, credit cards, and utilities -- you probably spend thousands of dollars each month. If you're paying those bills earlier than you have to, it could cost you hundreds in lost interest every year.

Free money from credit cards
Even if that doesn't seem like a big deal to you, it is to the credit card industry. In the past, grace periods -- the time you had to pay off your balance without paying interest -- were typically 30 days or longer. But now, many card issuers, including Bank of America (NYSE: BAC  ) , the Chase division of JP Morgan Chase (NYSE: JPM  ) , and General Motors (NYSE: GM  ) , have shortened their grace periods to 20 days. If you pay your bills in full every month, shorter grace periods effectively take money out of your pocket to bolster profits for your creditors.

But credit cards are still the best way to take advantage of float. Usually, in addition to the grace period, you get as much as an additional month to pay for things you buy early in your statement cycle. When you add that to rewards programs, using your credit card can be quite lucrative.

Be careful
It's important not to get too greedy, though. With late-payment charges ever on the rise, you have to make sure your bills are paid on time. Electronic payment options make timing your payments easier to manage, but you still have to pay attention so everything goes smoothly.

But over the long run, the money you save from using float to your advantage can add thousands to your net worth. It's your money -- shouldn't you keep more of it for yourself?

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Dan Caplinger
TMFGalagan

Dan Caplinger has been a contract writer for the Motley Fool since 2006. As the Fool's Director of Investment Planning, Dan oversees much of the personal-finance and investment-planning content published daily on Fool.com. With a background as an estate-planning attorney and independent financial consultant, Dan's articles are based on more than 20 years of experience from all angles of the financial world.

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