Getting a good cash back card and investing the rewards can be a nearly effortless way to save for your child’s college education, your own retirement or a dream purchase in the future.
The editorial content below is based solely on the objective assessment of our writers and is not driven by advertising dollars. However, we may receive compensation when you click on links to products from our partners. Learn more about our advertising policy.
The content on this page is accurate as of the posting date; however, some of the offers mentioned may have expired. Please see the bank’s website for the most current version of card offers; and please review our list of best credit cards, or use our CardMatch™ tool to find cards matched to your needs.
Many cardholders view cash back as either a discount on their credit card bill or pocket change to blow on a new gadget, spa service or other treats.
But some savvy cardholders really cash in by growing a nest egg for the future.
Getting a good cash back card and investing the rewards can be a nearly effortless way to save for your kid’s college education, your own retirement or a dream purchase in the future.
And you might be surprised at how fast your money grows. Five years ago, Allan Liwanag, founder of The Practical Saver, started investing about $1,000 in cash back in a Charles Schwab account each year. Now the fund has grown to over $8,000, and he expects it to reach over $120,000 by the time he and his wife retire.
“That’s all free money my wife and I didn’t have to work for,” he says.
See related: How to use a cash back card as a savings tool
Tips for smart cash back investing
Why invest cash back?
Investing might not sound like quite as much fun as going on a shopping spree or getting a pedicure, but there are solid reasons to consider stashing your cash back in an investment account.First of all, investing may be the ultimate way to maximize your rewards. For example, imagine you invest $1,000 cash back this year, and then you go back to spending your cash back and never put another penny into the account.
In 30 years, at an annual interest rate of 8 percent, your initial investment will have grown to over $10,000. Here’s an investment calculator from Investor.gov if you want to play with the possibilities for your cash back.
In fact, certified public accountant Logan Allec, who writes about financial matters at Money Done Right, views cash back as superior to travel rewards because of the investment possibilities.
“You can invest and earn a return on cash back immediately, but you don’t reap the benefit of travel rewards for months or perhaps even years,” he says.
It’s also one of the few truly painless ways to save since the money doesn’t come out of your paycheck.
Investing your cash back can be extra rewarding if you have a specific purpose in mind for the money. Each person’s “why” may vary, but here are several goals you can achieve by investing your rewards:
- Give your family opportunities. Many parents invest cash back into a college fund. For example, Ryan Rollins of Teach Me! Personal Finance and his wife opened a 529 fund with Fidelity when their first daughter was born four years ago. They’ve already contributed almost $5,000 just in credit card rewards and they expect to build up to $20,000 in cash back alone by the time she heads off to college. “While we know we’ll have to invest more of our own cash over time, this gives us a huge jumpstart,” Rollins says.
- Boost your retirement. One big goal Liwanag and his wife share: a comfortable, worry-free retirement. Investing cash back is a small part of their strategy to reach that big goal. “We want to make sure we have more than enough to cover the knowns and unknowns in the future,” he says.
- Build up emergency savings. Investing cash back can be a painless way to save some extra money for a rainy day and give your family added security.
- Buy something big in the future. It may be true that you could get a new iPhone with your cash back now, but you may have your sights set on something bigger, like buying a boat or taking a trip around the world when you retire. “Travel is something we definitely want to do later in life,” Liwanag says.
See related: Strategies to maximize cash back rewards
Smart cash back investing
Choose the right cash back card
Look for a card that has no annual fee, or a low annual fee, so you can keep more of your cash, Allec recommends. Also look at your spending habits and crunch the numbers to pick the best card for you.
For example, if you spend a lot at the grocery store, it might be worth the $95 annual fee to get the Blue Cash Preferred® Card from American Express, which offers 6 percent cash back on up to $6,000 in spending per year at U.S. supermarkets – 1 percent thereafter. If you spend the full amount, that’s $360 to invest.
Many cash back investors swear by the Fidelity Rewards Visa Signature Card, which offers unlimited 2 percent cash back and automatically transfers your rewards to your Fidelity investment account each month. Fidelity offers several college, personal and retirement accounts that work with the card.
“The benefit is in the automation of the whole process,” Rollins says.
See related: How much can you really make with a cash back card?
Cash in on sign-up bonuses
Many cash back cards offer sign-up bonuses that can jumpstart your investment. For example, the Capital One Savor Cash Rewards Credit Card waives the annual fee for the first year ($95 thereafter) and offers a $300 sign-up bonus when you spend $3,000 in the first three months after opening the account. And the Bank of America® Cash Rewards credit card offers a $200 sign-up bonus when you spend $1,000 in the first 90 days.
Some cash back investors strategically open cards to bulk up their accounts with sign-up bonuses. However, it’s important to make sure you can easily meet the minimum spend required to get the bonus.
Scott Perry, a project manager and writer from Raleigh, North Carolina, regularly gets cards with sign-up bonuses to bulk up his investment accounts. He recently signed up for the Capital One Savor card and used it to pay a $2,000 medical bill from the birth of his baby. He then took the money from his health savings account to pay off his card.
“That got me most of the way to the sign-up bonus, and it didn’t even come out of my own pocket since I was reimbursed by my HSA,” he says.
Some investment accounts have a minimum opening balance of $150 or more, so a bonus could offer you the funds you need to open an account.
Use your card wisely
Studies have found consumers tend to spend more when using credit cards than when paying cash. Make sure you don’t cancel out your cash back by spending more than you would if you were using cash or debit for your purchases.
Make also sure you pay on time to avoid late fees, and watch out for international transaction fees. In addition, avoid interest at all costs by never carrying a balance on your card.
“Any rewards you get are not going to be worth it if you’re not paying the bill in full every month,” says Bobbi Olson, host of the CentsAble Chat podcast, who started using a Fidelity card and investing her cash back only after she got out of debt.
Make smart investment decisions
If you’re new to investing, you’ll have to decide how you want to invest. You have several options, including opening an online account with a broker, such as Charles Schwab, Fidelity or TD Ameritrade, or using an investing app such as Acorns, Robinhood or Stash.
One good option for new investors is to use a service like Betterment that offers “robo advising,” says Riley Adams, a CPA who runs Young and The Invested, a personal finance blog for young professionals.
In fact, he has three Betterment accounts: a short-term investment account to buy a house, a Roth IRA and another long-term investment account for his future. A “robo advisor” allocates your money automatically based on your age and stated financial goals, Adams says.
“You really don’t have to interact with it other than just contributing money on an ongoing basis,” he says.
Account for your goals
It’s also important to choose the right type of account and investments.
“Get clear on what your investment goals are first. Is it saving for college? A new home?” Rollins says. “That will drive the types of accounts and investments you pick.”
For example, if you have a short-term goal like saving for a home, you’ll want to choose an account that allows you to access your money quickly. And you may want to protect your money with lower risk investments, Adams says.
If you’re saving for college tuition, you probably want to open a tax-advantaged 529 plan account. And if you’ve got your eye on retirement, you may open an IRA or other retirement account.
For example, Adams has invested his house down payment money mostly in extremely low-risk treasury bonds, and he keeps it in an account that’s easily accessible.
“If you sell it, it takes a few days for the funds to settle into your account, then you can withdraw it and put it into your bank account,” he says.
See related: How do you redeem cash back rewards?
Watch out for investment fees
Before you choose a service provider and open an account, make sure you understand exactly how they make their money and what fees they charge, Adams says. Even with investing apps, small monthly fees can add up.
For example, Stash costs $1 a month, and Acorns charges $1 to $3 dollars per month, depending on the type of account.
“If you’re starting with just a little cash back, you probably want to look for an investment that keeps your fees as low as possible,” Allec says.
But the most important step is simply to get started. By starting to invest your cash back now, you can leverage your current spending power to easily and painlessly build a better future for you and your family.