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Like many of you I was introduced to the practice of taking advantage of credit cards through a Luke Smith video a four years ago and over that period of time I’ve made a few thousand dollars through credit card rewards. This has been easy money and it has just been with two cards, if I had been churning cards like Luke and many other credit card maximizers do I probably could have made two or three times as much money as I have from credit cards over the last few years, maybe I’ll start doing that at some point, getting free money is not what this article is about, I want to talk about what to do with that free money because up until now I didn’t have a clue what to do with it.
While I have made some stupid purchases in my life I’ve never been bad with money, but I have gotten to a point in my life where I need to take my finances more seriously so I’ve been looking into a number of things and in doing so I discovered that Fidelity offers a credit card and that made something click in my brain. When you see Fidelity you don’t think bank you think investments and suddenly you see money not as something that sits there but something that grows.
At face value the Fidelity credit card isn’t very special, it is a zero annual fee 2% cash back on everything card, there are plenty of those out there, I have one from a different company sitting in my wallet right now and you probably do to, if you could only have one credit card that is the sort of benefits you should look for. The special thing about the Fidelity card is that that 2% reward can easily be transferred into a brokerage account and invested into the stock market to grow.
In the four and a half years I’ve been using credit cards I’ve made about $2,500 in rewards. Basically all of that money has just sat there because I haven’t known what to spend it on, I did use some of it to buy a new phone a few years ago, it was cool to be able to say I got a basically free phone but that was not life changing. The rewards have worked out to be about an extra 45 bucks a month for me which is nice but nothing that special.
Now let’s see what would have happened if I had invested that money instead, to make the math easier I’ll say that I made $50 a month from credit card rewards over a period of five years. If that $50 was put into the S&P 500 at the end of each month and we assume an 11% return rate (close to its average) then at the end of those five years I would have an extra $1,000 on top of the $3,000 that I would have without investing that free money. Still that isn’t that impressive, but compound interest gets more powerful over time, after twelve years of this $7,200 of credit card rewards points will have been put into the account but the total value of it will be nearly $15,000. After 20 years that investment would be worth over $43,000, after 30 years over $140,000, after 40 years it will be worth well over $400,000.
Some of you are probably reading this right now thinking, “This is just investing, it’s not that remarkable.” I don’t blame you for thinking that it is just investing, the special thing about this is that you’re not actively taking money from your pay check that you worked for and throwing it into the stock market, you’re taking free money (that you don’t have to pay taxes on) that your credit card company gives you and turning it into more free money. I can’t think of a better use for free money.
I’m in my late 20s, most people my age and younger know that investing is important but we don’t know where to start. The thought of setting aside money from each pay check and putting it in an account that shouldn’t be touched for decades is scary for someone who doesn’t have much to set aside. I never really knew where to start and I’d bet many of you didn’t either or still don’t know.
I’m telling you today that this is a great place to start (its not where you should finish but it is a great place to start). Get yourself a credit card or two with a decent cash back bonus, don’t spend more money than you usually would in order to get more rewards, ALWAYS pay off the entire ballance at the end of the month, then throw whatever rewards cash you get into a well diversified index fund. You don’t need to get the Fidelity card that I talked about earlier to do this but it does seem to be the easiest way to go about this. (Robinhood has a similar card that offers 3% cash back but it is more difficult to get) I don’t have the Fidelity card right now but I’ll probably apply for one soon so that I can have anything in one place.
From now on every penny I get from credit card rewards is getting invested. That money is not hard to come by, remember I’ve been getting around $45 a month in rewards with basically zero effort, now that I have a purpose for this money I’m motivated to do a better job at taking advantage of the banks. I don’t think an average of $100 a month in credit card rewards (over multiple cards including sign-on bonuses) is something that I wouldn’t be able to achieve, I think most of you can do it as well and some of you probably already are. $100 a month thrown into a decent index fund will build you some serious wealth, if that wealth came from credit card rewards then you would have built that wealth for free.
Don’t waste your free money on something you could easily save up for, don’t waste it by letting it sit somewhere it won’t grow. Invest your free credit card rewards money and turn it into more free money. Of course there is always risk involved with investing, I’m not your financial planner don’t sue me if you try this and it goes wrong, but there is no better money to risk than money you got for free. Don’t waste your opportunity to turn free money into more free money.
On a separate note, if you’ve never spent some time researching financial topics (or haven’t in a long time) to see what options are out there for places to keep your money you should, there are some amazing things out there. The Fidelity Cash Management Account is basically a checking account that you can earn two or three percent interest on. That blew my mind, I had no idea you could have something that functioned as a checking account that gave you interest like that. I’m not done researching all of this stuff, I may or may not (with the not option being more likely) share more of my findings and realizations with you, but you should do your own research on this stuff. All of us have been missing out on hundreds, if not thousands of dollars simply by having our money parked in the wrong place.
Also on the topic of credit cards, the Discover It card is a great card to accumulate rewards on, I learned about it from the Luke Smith video I referenced earlier, it offers 5% back on purchases in different categories throughout the year (right now it is 5% back on restaurant and hardware store purchases, next quarter it will switch over to 5% back on gas) it is a great card to have. If you don’t already have a Discover It card I have a referral link that if you use will give both of us $100 in rewards after you apply and make your first purchase. If you want that link send me an email and I can send it over to you and we can both enjoy an extra $100.