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Cash back credit cards can make your purchases cheaper. But keep reading to learn how to make your cash back work harder. [[{“value”:”
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Cash back credit cards are incredibly popular — according to credit card research from The Motley Fool Ascent, 72% of Americans with a net worth under $1 million have one. It’s not so surprising — rewards that come in the form of points or airline miles are more complicated to understand and use. How much are those rewards worth in real money? It varies among different credit card companies, and it depends on how you redeem them — and generally speaking, turning them into cash is your worst option for value.
Cash back credit cards, on the other hand? If you earn a set percentage rate on your purchases, they’re incredibly easy to understand. With my grocery rewards credit card, I get 6% cash back on supermarket purchases — if I spend $100, that’s $6 back to me. And I redeem it as a statement credit, which reduces the cost of my next credit card bill, directly saving me money.
But what if I invested the cash back I earned from credit cards instead? Let’s take a closer look at this option for your credit card cash back — it’s one that can grow your money over time.
Watch your cash back grow
Most cash back credit cards pay out monthly — when your statement period closes. At that point, you have options. For example, with one of my cash back cards, I can redeem cash back as a statement credit, of course — but I can also use it to directly pay for purchases. Or I can have it sent as an electronic deposit to a linked bank account or have it sent to me in the form of a check. It’s these options you need if you’re hoping to invest your cash back.
Let’s say I earned $50 in cash back during a given month, and I decided to have that money sent to my checking account. If I then send it to a brokerage account, I can invest it. The S&P 500 has returned an average of 10% annually over the last five decades, but let’s be more conservative and assume I can earn an 8% return. What does $50 turn into over 10, 20, and 30 years?
All right, I know a 10-fold increase over 30 years is perhaps not so impressive on its face. But what if you funnel $50 in cash back to your investment account every month, and get this same rate of growth? In 30 years, you’ll have $68,473.06, assuming that same 8% gain — and you’ll only have put in $18,050.00. Compound growth and time will work for you to an even greater degree. If you struggle to find money to invest every month, using your cash back earnings could be an easy option for you.
You also have this option
To make investing credit card rewards even easier, you might consider opening a credit card that links directly to your brokerage account. Charles Schwab offers one of these cards, and it gives cardholders the option to invest their rewards points in their Schwab investment account.
Cash back credit cards are a worthwhile addition to your wallet, assuming you’re able to pay your balance in full every month — paying interest will more than eat up any rewards you earn. And if you have the option to redeem your cash back as a transfer to a bank account, brokerage account, or even as a paper check, you have the chance to maximize that money by investing it.
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The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.Charles Schwab is an advertising partner of The Ascent, a Motley Fool company. The Motley Fool has positions in and recommends Charles Schwab. The Motley Fool recommends the following options: short March 2024 $65 puts on Charles Schwab. The Motley Fool has a disclosure policy.
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