Credit cards are an incredibly powerful piece of plastic that nearly everyone has in their back pocket.
- Purchasing power & convenience: They allow you to purchase things without needing to carry around cash, especially for big-ticket items.
- Builds credit history: The more responsible you are with your revolving debt, the better your credit history and chances of qualifying for low-interest loans for your house, car or business.
- Perks and rewards: Some credit cards may come with perks such as car rental coverage, travel insurance, sign-on bonuses or a reward system.
My favorite types of credit card rewards are flyer miles and cash rewards. Today, I will be sharing how I reinvest my cash rewards.
In the past, I would redeem my cash rewards and upgrade my tech once I saved up enough cash rewards, but I was an amateur.
Now that I’m more financially savvy, I decided to make a game out of how much free money my free money can earn.
The Free Money Game works like this:
Step 1: Obtain a cash rewards credit card
- I have a number of credit cards that I assign for specific purchases to maximize my rewards. I will probably create a post in the future for which cards I own. For now, I make sure I earn between 2% to 5% back on purchases.
Step 2: Spend less than you earn
- If you spend less than you earn you will always have money in the bank to pay off your credit card. To me, having credit card debt that I cannot pay off is one of those “hair on fire” situations that you never want to get into.
- It is very easy to overspend with a credit card. You can just swipe and POOF! It’s yours. The dopamine boost can be pretty addicting. If you find yourself frequently spending more than you earn, I would suggest cutting up your cards until you can really control your spending.
Step 3: Buy things that bring you long-term value
- Only buy things that bring you value and that you would otherwise buy in cash.
- Even if you do spend less than you earn, you don’t want to spend money on something that you would eventually just toss.
- A spending habit exercise is looking around your room and estimating what everything costs. How much of it would you sell? Was it worth buying at the time? Doing this exercise can help you really think about how you spend your money.
Step 4: Pay off your credit cards on time
- Often credit card interest rates range from 12% upwards to 30% or more. This is especially the case for retail store credit cards. A late fee on a large balance can quickly wipe out any benefit from earning rewards.
Step 5: Build up enough cash to redeem your rewards
- I prefer building a lump sum so I don’t have to request a check or direct deposit every time it hits $20 bucks or so.
Step 6: Invest your rewards
- Deposit your redeemed rewards in a brokerage account and invest it as you desire.
- If you don’t have one yet, open a brokerage account that allows partial share investing. I use M1 Finance not only because it allows me to purchase partial shares, but it also allows me free trades!
- That means if you wanted to own a bit of Amazon, you don’t need to save upwards towards $1745 which is what it costs as of August 25, 2019. If you only have $100 to invest, you still buy a portion of a share with no trade commission fees.
Step 7: Watch the dough roll in
- Watch it rise. There will be times where it dips down, but don’t touch it. Unless there has been a fundamental change in the company or fund you invested it, the only reasonable action to take when the fund isn’t doing well, is to purchase more.
In August 2018, I open up an account with M1 Finance account and invested around $1,000 worth of credit card rewards from 4 different cards.
I could have invested in an index or mutual fund, but I decided to play it a little more risky. I bought shares of a single company, Microsoft.
Initially, the investment dipped down due to the decline into the bear market in October 2018, but you can see that my $1,000 investment has made a pretty good return as shown below.
I followed all the rules above. I only purchased things that I would’ve bought anyway with cash and I never missed a credit card payment. If I had not used my credit card, I would’ve left free money on the table. Now that free money is making me more free money!
As strongly as I like to promote the benefits of having a credit card, they are frequently used irresponsibly and can be a tool of financial destruction. If you are struggling to pay off your credit cards each month, it shows that you have bigger problems to worry about than earning a few percentages back on your purchases. As the famous line goes…
“With great power, comes great responsibility”– Stan Lee, Amazing Fantasy, #15, August 1962
Art is the founder of Flexcents, a blog created in 2018 to help others reach their fitness and financial goals through sharing insights as a physical therapist, personal finance nerd, and self-directed investor.