In episode 335 of the Dough Roller Podcast, Rob talks about why (and how) he invests the rewards from his cash back and travel credit cards. While this method requires some self-discipline, a little bit of math, and fairly regular use of credit cards, it can create a nice addition to your existing portfolio.
Table of Contents:
Why Would You Want to Invest Your Credit Card Rewards?
You might be thinking that you should just take your cashback or travel rewards and use them like you normally would–whether that’s a statement credit or booking a trip to Spain.
The short answer is simple – financial independence.
By putting small amounts of cash (or converting rewards to cash – more on this below) over time, you can build a nice little nest egg on the side.
In fact, in the portfolio Rob shows us in the podcast, his balance is close to $11,000–and he’s done this entirely through investing his credit card rewards over the course of about a year and a half.
How Do You Invest Your Credit Card Rewards?
So investing your credit card rewards isn’t as clean and simple as it sounds. It takes a bit of patience, creativity, and financial maneuvering.
Basically, there are two ways you can do this – transfer cash directly to an online broker or “pay yourself” instead of “paying the vendor.” I’ll expand on these below.
Transfer Cash Directly to an Online Broker
The first, and easiest, way to invest your credit card rewards is to transfer your cashback earnings directly into your online brokerage.
So, for example, say you have the Chase Freedom card. Chase Freedom gives you a $150 cash bonus for spending $500 in the first three months of opening the card, plus 1% cashback on everything else. It also gives you 5% cashback on rotating categories every quarter.
Say you opened a new Chase Freedom card (smart choice, by the way) and earned the bonus as well as some other cash from regular purchases. Afterward, you end up with $250 in cashback bonuses.
Many credit cards, like Chase Freedom, allow you to transfer this cashback directly into your checking account. So in this case, you’d simply transfer the $250 into your checking, then move that cash into your online brokerage.
If you have a brokerage that also has a cash account, like Betterment, you can actually move your funds directly into the brokerage–which saves an extra step and removes any temptation of spending that money.
Learn more Betterment’s cash reserve account here.
Pay Yourself Instead of the Vendor
The second method for converting your rewards into an investment is a bit less straightforward, and this is where you’ll need to use some creativity and self-discipline.
Example 1: A Cashback Card That Gives You a Statement Credit
The first example builds off the point above – a cashback credit card. But not all cashback cards let you deposit that money into your bank. They might require you to take it as a statement credit. Which is totally fine.
Say you have the Blue Cash Preferred® Card from American Express. An excellent card for sure, you’ll earn up to 6% cashback, plus a $250 statement credit after you spend $1,000 in purchases on your new card in your first 3 months.
So to invest the statement credit, you’ll effectively take the credit and pay yourself that money. Here’s how it works:
- Apply your statement credit. Say you have a balance of $1,000 – your new balance would be $750 with the $250 statement credit.
- Send the equivalent amount to your online brokerage. Instead of only lowering your balance, you’re actually going to send $250 cash from your checking account to your online brokerage.
So your balance might look lower, but you now have $250 less in your checking since it was sent to the investment account. This money is then invested.
Example 2: A Travel Rewards Credit Card
This is where you have to get really creative. Say you have a travel rewards card like the Chase Sapphire Reserve–which Rob mentions in the podcast as his preferred travel card. So let’s unpack that a bit.
To start, once you spend $4,000 in the first three months of account opening, you’ll get 60,000 bonus points–that’s worth $750 towards travel through Chase Ultimate Rewards.
For purchases, the Chase Sapphire Preferred Card offers more points for some categories – 2 points per $1 spent on travel and dining. Then, you’ll get 1 point per $1 spent on all other purchases.
But those are travel rewards points. Not cash. And you’ll get the most bang for your buck by exchanging those points for travel–particularly using Chase Ultimate Rewards.
So let’s say you earn the intro bonus of 60,000 points and you get another 5,000 points through regular purchases – giving you 65,000 total points. Using Chase Ultimate Rewards, that gets you around $812.50 in total travel rewards.
To make this example easy, the way you’d invest these rewards is essentially by paying yourself instead of the booking agent (in this case, Chase).
So say you book a trip to Cancun (let’s imagine we’re out of the COVID-world for a minute!) that ends up costing exactly $812.50.
You’d use your Chase Ultimate Rewards points to pay for the trip, but instead of just leaving it as a “free trip” you’ll actually pay for the trip by sending $812.50 from your checking account to your online brokerage.
This way, you’re basically paying for the cost of the trip with cash, then using those rewards as money to invest. It’s trading travel rewards for an investment.
What You Need to Think About to Make This Work
Now that you have a basic understanding of why you’d do this and how you can get it done, there are a few other considerations you need to make:
1. Use Credit Cards Aggressively, but Don’t Go Into Debt
Probably the most important thing you need to think about is how effectively you can use credit cards. To make this work, you have to be an aggressive user of credit cards–I’d go as far as to say using them for all of your everyday purchases without going into debt. That means paying your balance in full every single month.
If you can’t do this, or if you don’t trust yourself not to overspend or avoid getting into debt, stay away. Find another means of building up an investment portfolio, like rounding up transactions with an app like Acorns.
2. Choose the Right Card
This also doesn’t work if you don’t have the right credit card for your lifestyle. If you’re a heavy traveler and make a lot of travel purchases, going with a credit card like The Platinum Card® from American Express will benefit you far more than one that rewards you for grocery purchases.
3. Mind the Annual Fee
Something that can take a BIG chunk out of your rewards is the annual fee on the card. For example, the Southwest Rapid Rewards® Premier Credit Card is awesome if you use Southwest a lot–but it does have a $99 annual fee. So you’ll need to travel (on Southwest) enough to make the $99 fee worth it.
4. Be Smart With Your Investments (and Broker)
Until now, I haven’t even gone into investing these dollars much. But it’s the other, equally important, part of this equation.
First, you need to make sure you’re using a good online brokerage. I recommend one that doesn’t charge commissions, since your deposits will typically be small (i.e., the $250 example I used above).
Rob uses M1 Finance in the podcast, which I agree is a great option, but I’d also look into robo advisors like Betterment or Wealthfront, which both have cash accounts and do all the heavy lifting for you.
You’ll also need to choose your investments wisely. With such small amounts, I’d recommend sticking with an ETF or index fund until you build a sizable portfolio and want to pick individual stocks.
Watch the podcast. It’s short and gives some good information and honestly, I hadn’t even thought about this as an investing strategy until I heard Rob talk about it, so it will probably give you some fresh new ideas.
Until then, make sure you grab a great rewards card and open an account with an online broker that doesn’t crush you with fees, and you’ll be on your way to building your nest egg.