Around the time my wife and I were starting to get know one another (~10 years ago), we touched on the topic of managing our day to day expenses. I discovered that she had a savings account to store some of her money. She then paid as many of her expenses as she could using cash. I was amazed that she didn’t have a checking account, and that she didn’t believe in using a credit card. My advice to her was to charge everything to a credit card, and she strongly disagreed.
The other 1% people don’t talk about
At the time, I wasn’t as well versed in the value of miles and points as now, but I had two credit cards – a United card which gave me 1 mile/$ spent and a Discover card that gave me 1% cash back. United miles are hard to value because of redemption options (see below), but cash is cash. By putting everything on a cash-back credit card and getting a minimum of 1% cash back, you could be getting 1% off everything you buy. That $1 coffee from McDonald’s is actually $0.99.
The full benefit of credit cards
Credit cards are amazing because they allow you to float expenses and you can get cash or other rewards back. The caveat is you have to pay your balance in full each month (unless you have a 0% APR for a period of time) and not pay any interest/financing charges.
In finance, float is well known in the insurance business. Consumers buy insurance, paying a monthly premium to an insurance company. The cash from the monthly premiums held by the insurance companies is known as the float. When a consumer suffers an accident, the insurance company pays for the covered costs from the float.
A good insurance company makes money two ways.
- Charge more in monthly premiums than the estimated future payouts for damages
- Invest the float from monthly premiums paid by consumers to earn a return
#2 above is the reason why Warren Buffet absolutely loves his investments in GEICO and Swiss Re. Every day, consumers give him cash. He needs to keep a certain amount in the “bank” to pay claims when they arise, but he uses the rest of the money to buy Government bonds. He gets to keep the interest he earns from the investment in those Government bonds.
Credit cards allow you to do a similar thing. If you charge $1,000 (you should charge everything) to your credit card on January 1, the billing cycle doesn’t end until January 31, and the payment isn’t due until February 15, then you have ~45 days between when you paid for your item and when you have to pay the credit card company for the charge. Had you paid for the item in cash, then $1,000 would have left your bank account on January 1. If you instead pay for the item with a credit card, that $1,000 doesn’t leave you bank account until February 15. For those ~45 days, the $1,000 remains in your possession and you earn interest income on it. For illustrative purposes, if the interest rate on the account were 5%, then you would have made ~$6 in those ~45 days. You would be $6 richer because you paid with a credit card instead of cash.
Now imagine you did this every month. You would come out ahead ~$72. The reality is interest rates in checking accounts are far lower than 5%.
Cash and Rewards
For every dollar you charge on your credit card, banks will give you points. Usually, these points can be redeemed for cash back or rewards. There are some cards, such as hotel cards, which only allow you to use points at its hotels or with its travel partners. Let’s assume for the below that the card we’re talking about earns points that can be redeemed for either cash for travel rewards (see the Chase Sapphire Preferred for example).
If you spend an average of $1,000/month on expenses and you were able to put them all on your credit card, you would earn 1,000 points, which could be redeemed for $10 each month or $120 each year. You get this money for doing nothing except running your expenses through a credit card instead of paying cash for them.
Some cards offer 2% cash back on all purchases, or 2-5% cash back on different categories such as gas stations, restaurants, etc. If you optimized your spending to match the expenses with the cards offering the best offers in each category, you could easily double the $120 to $240.
Through Float and Cash Back you could be ~$300 richer each year simply by charging $1,000/month on your credit cards.
If you do choose to use a credit card that has an annual fee, such as the Chase Sapphire Preferred, you would pay $95 annually (waived in the first year). That would net you ~$205. Alternatively, you could go with the a no fee card such as the Chase Freedom.
If you are using a credit card that offer the option to redeem rewards instead cash, the math changes a bit. By redeeming points for rewards, you could get more value out of them than for the cash back offered. Here are some examples of what I mean.
One-way, first class tickets on United used to cost 80,000 miles to redeem. We bought two of these tickets using points for our honeymoon flight to Tokyo. We had saved 80,000 x 2 = 160,000 points from spending and bonuses on our Chase Sapphire Preferred card, so we transferred those points to United to redeem them for the tickets. Had we redeemed the points for cash back we would have received $1,600. Instead, we redeemed them for two tickets that would have cost $22,400.
One night stays at the Andaz in Tokyo cost 25,000 points to redeem. We stayed here using points during our honeymoon in Japan. We had saved 25,000 x 2 = 50,000 points from spending on our Chase Ink Business card, so we transferred those points to Hyatt to redeem two nights at the Andaz. Had we redeemed the points for cash back we would have received $500. Instead, we redeemed them for two nights that would have cost $1,250.
Can you charge everything to a credit card?
We’ve been able to almost charge everything to our credit cards. For example:
Cell phone bill
Groceries and restaurants
Which card should I get first? Should I get more than one?
We have compiled a summary explaining the benefits of certain cards. Some cards are best for certain categories, while some cards may limit what you can redeem the rewards for.
Pay attention to the sign-up bonuses offered by each credit card. Cards can offer rewards worth between $150-$1,000 in cash bonuses after meeting minimum spends.
Some cards have annual fees, so be careful. The fees could be waived for the first year, so you could sign up for the card, earn the bonus, and cancel it a year later before you have to pay the fee. Other cards such as the Chase Sapphire Preferred and SPG Personal and Business cards have fees that are worth paying to have access to their benefits and features.
I have thirteen credit cards myself while QL now has eighteen. It’s important to keep track of the cards you sign up for and when fees are due. It’s also important to keep track of your expenses and spending. We use Personal Capital (review here) to track and organize everything in one place.
Do you prefer Cash over Credit Cards?