Can Credit Cards Add To Your Nest Egg?
One of the great quandries of life — and fodder for so many financial columns — is how to save enough money for retirement. Add yet another theory to the mix: credit cards.
Frank, author of the Milk Your Money blog, points out that your plastic can turn into some serious paper when handled carefully. He also points out that nobody paying interest on their credit cards should even attempt this strategy. “No [rewards] program will out accrue your current card’s interest rate,” Frank writes. It bears repeating: “No program will out accrue your current card’s interest rate.”
The idea of credit card companies is generally to turn a profit off you, not to help you get rich. That said, please approach this plan very, very carefully, if at all. If you are a savvy cardholder who pays your bill in full each month and keeps your debt to credit ratio well under 50%, read on and ruminate.
Frank and his wife use their credit card to pay for nearly 100 percent of their purchases and about half their monthly bills. It requires great discipline, Frank says, acknowledging the tendency to spend more when using credit cards. It also requires discipline to constantly pay the card balance off like they do, not monthly but several times a month.
Anyway, with a whopping $36,000 charged on the card in one year by Frank and his wife, it amounts to a $360 annual cashback reward at 1%. When deposited for 40 years in an account with 8 percent average return, it yields over $100,000.
A couple comments: Fortunately, most IRA accounts yield around 12 percent on average, so the yield would likely be even more when invested there. Secondly, with all of the discipline being exercised by Frank and his wife, I wonder why they didn’t go for a card with better cashback rewards? It might mean receiving a check directly instead of being deposited directly into an IRA, but would that really be a problem? It’s something to consider - if you’re gonna go, go all out, right?
If you think this plan might work for you, research your cashback cards carefully. Many have cut back their rewards programs recently during these tight times. Furthermore, some set limits on the amount of cashback rewards you can receive in any given year, or the payment method by which you can receive them. And as always, beware of annual fees.
