Tuesday, February 20, 2018

Piggybacking Cash Back Rewards On Routine Spending: How I Passively Earn An Extra 1-5% For Investing

A lot of people who are in debt tend to arrive at the conclusion that they should eschew all forms of credit and pay cash for nearly everything. This can be because credit of some kind got them into trouble (most cases), or it can be because of advice received repeatedly while growing up.

I pay with physical cash for almost nothing, and the above conclusion about credit is wrong.

Now, to start, I'm not saying that debt is necessarily good. You've probably heard before that there is good debt and bad debt. An example of a good debt is a loan that is taken out to acquire something that cash flows more than the debt costs, the typical example being a rental property. A bad debt is a loan taken out to buy something that "rusts, rots, or depreciates," a good example being the latest video game.

(I was going to go with "a pair of the latest-fashion shoes", but since a large number of you out there now are likely to be gamers...).


Good debt = makes you money
Bad debt = costs you money

But it's not debt that I want to talk about today, except to say that what I am detailing here does require that you stay out of it for this to really be effective. My topic this morning is strategic use of credit to earn passive income through your normal, day-to-day routine spending. This is something that I've been doing for years. How? With a budget and "cash back" credit cards.

Part 1: Cards

Rewards cards typically come in three flavors: cards that offer cash back, cards that offer "points" you can exchange for goods and services, and cards that offer airline miles.

What I do requires that a card offer cash back, either as a check in the mail or a deposit to my checking account, or as a statement credit (some cards offer a combination of the above three options, but unless I can get these two specific cash back options, it's a deal breaker).

As an example, I was approved for this card just yesterday:

American Express Blue Cash Everyday Card - Click here to apply!
This is the American Express Blue Cash Everyday card, which offers 3% cash back on up to $6000 spent in grocery stores per year (1% thereafter), 2% spent at U.S. gas stations and some department stores, 1% on all other purchases, and this card has no annual fee. Additionally, new applicants who are accepted can earn $200 cash back after spending $1,000 on the card in the first three months.

This card distributes cash back in the form of statement credits only. This is an important thing to keep in mind for later.

The reason I went for this card is that of the cash back card options I have at my disposal now, it offers the best cash back amounts of them all. I spend about $6300 per year on groceries, which means I can earn $183 on that expenditure (3% on the first $6k, 1% on the remaining $300). Between myself and my business, I spend around $3500 per year on fuel for my personal and work vehicles, which would earn me another $70 per year with the 2% cash back on that category.

Total that up, and I potentially could receive $253 in cash back in a year, which on my average annual expenditures in these two categories, $9800, is a "yield" of 2.58%. If I factor in the bonus I stand to receive in the first year, it brings the total to $453 in cash back and a "yield" of 4.62%. Not bad for cash that I wasn't going to invest because I was going to spend it anyway.

So this card is specifically for my grocery and fuel purchases, because its "general spending" cash back amount is just 1%. That's why for any other type of purchase, I use another cash back card I own that offers 1.5% on general purchases (which I can switch to after I exceed $6k in grocery purchases in a year on the Amex card to boost my cash back). That particular card is a business card, which you would not be able to apply for unless you have a registered business, so I direct your attention to another strategic cash back, non-business card I also have instead:

Chase Freedom Card - Click here to apply!
This is the Chase Freedom Card, a card I've personally owned for a number of years.This one offers up to 5% cash back on the first $1500 in purchases in categories that rotate each quarter (right now it's offering 5% back on purchases at gas stations and internet, cable, and phone services; the 5% category will rotate to something else on April 1st, then again in July, and again in October). Everything else purchased with this card earns 1%. Like the Amex card I selected above, this card also has no annual fee, and it also offers a bonus for approved applicants, $150 when you spend $500 in the first three months after opening an account.

This card offers the option to take your cash back as a mailed check, by direct deposit to your checking account, or as a statement credit.

For me, this card also offers an opportunity to boost my cash back by selectively using it at key times, all having to do with the rotating 5% cash back categories.

Right now, fuel purchases are the relevant example. As I stated above, on average I spend about $3500 per year on fuel. Because on this card the 5% cash back on this category is for three months only, one quarter of my annual fuel expenditure, $875, would get me $43.75 of cash back, $26.25 more than I would get with the 2% rate on my Amex card (purely in terms of the numbers; one of the tricks Chase is using here is to offer this category in the dead of winter when people are driving less, so the totals will be different; regardless, 5% is more than 2% no matter how much fuel you actually purchase).

Later in the year, this card typically offers 5% back for a quarter on up to $1500 spent at grocery stores, offering me another opportunity to temporarily rotate away from my Amex card for more cash back.

Because the categories rotate, you do have to keep an eye on them to know what they are and when they begin and end. If you just remember to log in to your account and activate your bonus category at the start of each calendar quarter it's easy enough to stay on top of. Additionally, Chase offers reminders that can be plugged in to popular calendar apps to help you keep track.

Part 2: Budget

Recall that I said before that this is about using credit, NOT debt.

Also recall that I said I almost do not pay with physical cash for purchases. I DID NOT say that I buy things with debt.

I buy things with cash that I have, but I "pass" that cash through cards such as the two I described above.

This is where budgeting comes into the picture. Basically, cash back rewards are meaningless if you spend more on a credit card than you have in cash and end up taking on debt. Why? Because credit cards charge interest on carried balances. If you allow this to happen often enough and long enough, any cash back you might have received will be negated by the interest you are charged.

So I still save up cash to purchase things, but I do not hand the cash over at the register. I swipe my card (or dip the chip, as it goes now) and then settle up with the card issuer later, who then gives me some of that money back (and this approach can be paired up with store or manufacturer rebate offers, potentially bringing more of your cash back to you...)

Remember: cash back rewards are on purchases ONLY; you do not receive cash back on interest charges, late fees, balance transfers, or balance transfer fees.

Therefore, you must avoid excess spending with your credit cards at all costs. Whatever you charge to them must be backed by cash in your bank account so that you can pay the statement balance in full every month. If you do this, then your ordinary spending truly does net you a return. If you fail to do this, your return will be reduced, or even flip to a negative.

So you must have a budget of some form or another. How you do it is up to you (and this is how I do mine; if that works for you, great, but if not, use a method that works for you), but regardless of the particulars of it your expenditures cannot exceed the actual amount of cash you have available.

Part 3: Utilizing Your Cash Back Rewards

Recall that I said before that cash back comes in two different forms: checks in the mail or direct deposits to your checking account, or statement credits.

Between the two, I prefer statement credits. I know that receiving "free money" checks in the mail can be fun (same with direct deposits), but the reason I opt for the statement credit is that it saves some steps. Rather than spending time and money to drive to the bank or use a smart phone app to deposit my check, instead I "receive" my cash back by not having to send as much money to the card company as I've spent on the card.

Say for example that your monthly total on your card is $100, you have the $100 in your checking account (because you followed your budget), and your cash back is $5. What I do is apply the cash back to the balance as a statement credit, which reduces the amount I owe to $95, then I send the card company $95 from my checking account. The $5 that stays behind in my checking account is my cash back reward, essentially, which didn't require me to spend time depositing a check, and which I can then put to work for me in some other way that will earn me more money.

Part 4: What To Do With The Money (broke millennials, pay attention to this one)

Basically, whatever you want! If you've followed your budget and paid your cards on time, every time, then this really is extra money.

Personally, I like to put it to work in my investments. I keep a portfolio of fifty income stocks in an account I have at Robinhood, which as of this moment offers a potential 10.68% yield. So in the limited examples I gave above, if I maximize my cash back by strategically using those two cards that I own (and calculating my cash back on only those kinds of purchases, plus my Amex sign up bonus), I will receive around $515 cash back this year, which could be plugged in to my portfolio and become $55 of additional passive income per year from dividends.

Or you could go ahead and buy something that rust, rots, or depreciates, like that video game I mentioned way back near the beginning of this post.

But there's another use for these funds that could have a big impact on your life if you're like many people out there right now: by using them for reducing and eliminating debt.

It's in the news often these days that there are tens of millions of young people out there who are struggling under heavy debt burdens, particularly student loan debt. Many of you are unable to find work in the fields that your degrees pertain to, so they have essentially become the "bad debt" that I described previously, debts that cost you rather than boost your cash flow.

If this is you (or someone battling any kind of debt, it all counts here!), then chances are you're already having to budget things down to the penny, and that's good because that is key to making something like this work. And because it works by using a cash back card to purchase things you absolutely must purchase anyway, it does not require any additional funds at all. Your cash back can thus be used to pay down your debts faster.

Now, I know that some are going to balk at this and say, "but it's only $1 to $3 on every $100 spent, blah blah blah," or something to that effect. Correct, we're not talking huge sums of money here. But we are talking about more money than no money, zero, which is what you get back when you spend cash on the things you've already saved and budgeted for; something is better than nothing.

 (I put that in bold because this particular objection really annoys me. It's not at all a good counter argument to this idea, it's just laziness talking.)

Every extra penny you can bring to the fight is good. Every penny you can earn with no extra effort or expenditure of your time is better. The sooner you remove a debt albatross from around your neck, the sooner you can get on to other things in your life. Passive income is the greatest ways to do this, because in a sense it allows you to be in many places at once and to add time to your day by increasing your income while not increasing the amount of time you trade for money.

This is part of how I got rid of my student loans. I sent my final payment to "Aunt Sallie" last April.

The cards I mentioned above could be out of your reach at this point; you do need an adequate credit score to qualify for any card, after all. If these two in particular don't work out, try others, just be sure to keep an eye on the details of the rewards programs they offer. If no one will open the door, start by getting a secured credit card and use it to build up your credit score until you reach the point where unsecured cards with rewards become available to you.

Additionally, go for cards that do not have annual fees. Some cards with annual fees offer higher cash back amounts, but whether or not they are appropriate for you depends on how much you spend in a year and what the fee amount is. It makes sense to get one of these cards if the expected cash back minus the annual fee is greater than the cash back you would receive on a card with no annual fee. However, because having open lines of untapped credit can boost your credit score, personally I find it better to select cards that do not have an annual fee so that I can simply leave them dormant to keep my total available credit and age of accounts up there without them incurring any costs (not to mention that I have no idea if I'll still spend at similar rates in the relevant categories in the future - things change!).

That said, these practices can boost your FICO score, which down the road can get you the best interest rates on loans for really important things, like buying a home.

So, to wrap up, leveraging cash back cards to pass your budgeted cash-on-hand through for routine purchases can net you some additional passive income, you just have to be disciplined to make it work. Like I said, the cards I detailed above, cards I actually own, are a great way to make this whole thing go, but you can use others. Whether you use the extra cash to invest, get out of debt, or just have some fun, it's going to be more than you would have had otherwise, and every little bit helps.

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