Invest cash back: Tips for maximizing earnings

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 college education, retirement or a dream purchase in the future – and you might be surprised at how fast your money grows.

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%, 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:

• Create education opportunities. Many people 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. They contributed almost $5,000 just in credit card rewards over the first four years 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. A comfortable, worry-free retirement is a healthy financial goal. Investing cash back can be a part of the strategy to reach it.
• Build up emergency savings. Investing cash back can be a painless way to save some extra money for a rainy day and give yourself 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 car or taking a trip around the world.

Smart cash back investing

Are you sold on the idea of investing your cash back? It’s easy to get started. Here are six tips from savvy cash back investors:

Choose the right cash back card

Of course, any cash back card that fits your spending habits could be a good source of cash to invest. However, some cards have features that make them a good choice specifically for investing rewards.

Best credit cards for investing rewards

• Fidelity® Rewards Visa Signature® Card
• Bank of America® Premium Rewards® credit card
• American Express Platinum for Schwab or Morgan Stanley

Fidelity Rewards Visa Signature Card

Many cash back investors swear by the Fidelity® Rewards Visa Signature® Card, which offers unlimited 2% cash back – a generous rate for a flat-rate cash back card. The card 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 main benefit of this card for investing rewards is the automation of that process. You can earn cash back on your everyday purchases, and the card will send them to the investment accounts of your choice. According to Fidelity’s calculator, if you spend $1,000 on the card monthly, you can have around $10,700 in your brokerage account in 20 years.

Bank of America Premium Rewards Credit Card

With the Bank of America® Premium Rewards® credit card, you can earn 2 points per dollar on travel and dining purchases and 1.5 points per dollar on everything else. There’s a $95 annual fee, but it can easily be justified if you can take advantage of the up to $100 annual statement credit for airline incidentals.

The card provides options for rewards redemption, including redeeming for a credit to a qualifying cash management or 529 account with Merrill Lynch.

This card is a good choice for Bank of America Preferred Rewards members. The program is available to Bank of America and Merrill customers with at least $20,000 across their Bank of America and Merrill accounts. Preferred Rewards members can earn up to a 75% point boost on eligible cards, including the Premium Rewards card. For instance, Gold members can get a 25% boost, which turns 2 points per dollar on travel in dining into 2.5 points per dollar. Platinum Honors members receive a 75% boost and 3.5 points per dollar on travel and dining. With these rates, if you transfer your card rewards to your eligible Merrill account, you can add to your investments’ growth effortlessly.

American Express Platinum cards for Schwab or Morgan Stanley

Amex has created versions of The Platinum Card® from American Express specifically for Schwab and Morgan Stanley qualifying investment account holders. Besides offering premium benefits the Amex Platinum is known for, these cards also come with special perks for those with eligible accounts.

For example, the American Express Platinum Card for Schwab cardholders can get a $100 statement credit if their qualifying Schwab Holdings are $250,000 or greater. Further, they can receive a $200 statement credit if their qualifying Schwab holdings are at least $1,000,000.

Those with the Platinum Card from American Express Exclusively for Morgan Stanley get a special perk too: They can request a card for an authorized user for free. With other Amex Platinum cards, there’s a $175 fee – which only kicks in after four authorized users if you have the Morgan Stanley card.

Both cards allow redeeming points for deposits into eligible investment accounts.

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* 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® Customized 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. When he signed up for the Capital One Savor card, he 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.

Also, be sure to 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.

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.

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 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.

*All information about the Capital One Savor Cash Rewards Credit Card has been collected independently by CreditCards.com and has not been reviewed by the issuer.