- I have a credit card that pays me cash back, and I deposit that cash back into an investment account.
- I'm adding hundreds of dollars every month to that account, and using it to invest in ETFs.
- That means my credit card spending is helping me build wealth.
I'm putting my rewards to good use -- and you could too.
Credit cards sometimes get a bad reputation because if you carry a balance and do not pay your cards off in full, you could end up paying a lot of interest. This can affect your ability to build your wealth.
But, rather than costing me money, my credit cards are actually making me wealthier. Here's how that's happening.
Building wealth through credit card spending
My credit cards are helping me build wealth because of the way my rewards program is structured.
I chose to sign up for a rewards credit card that gives me cash back on all of the purchases that I make. So, every dollar I spend earns me some money back -- and I charge everything I possibly can on the card to take advantage of this. That means I get a lot of rewards on everyday purchases of essentials that I would have to buy anyway.
When I get this cash back, I have the money deposited directly into an investment account. It never hits my bank account, so I don't even see it or remember that it is coming. The funds automatically get deposited with my brokerage firm, and I can then use the money to invest in whatever assets I want.
I've chosen to buy exchange-traded funds (ETFs) because I don't like picking individual stocks. Since I spend a lot on my credit cards and earn a reasonable amount of cash back because I get bonus rewards by being part of my card's loyalty program, I end up having hundreds of dollars per month deposited into my brokerage firm. All of this is then invested in an index fund that tracks the performance of the S&P 500 (a financial index made up of around 500 of the largest U.S. companies).
The S&P 500 has consistently produced average annual returns of around 10%. So each month, I invest hundreds of dollars into my brokerage firm with no effort on my part -- just from my credit card spending and the rewards I earn. I expect that over time, I'll earn about 10% per year on these effortless investments. And, as I earn returns, that money will be reinvested so I can benefit from compound growth.
This is going a long way toward helping me build wealth, because investing $200 per month in an investment that produces 10% average annual returns would leave me with an account balance of close to $400,000 after 30 years. All of this is money I will end up with just because I earn a lot of credit card rewards and invest that money for my future.
Could this strategy work for you too?
Using credit card rewards to invest will work for anyone who signs up for a cash back card that allows you to deposit money into an investment account. If your card gives you cash back in the form of a statement credit, then this can be a little harder since you'd need to have the discipline to manually transfer the amount of your cash back rewards into an investment account.
Of course, the amount you'll end up with depends how much you spend on your cards each month and how much you earn in rewards as a result of that spending. But, anything extra you can put into your investment account by using your credit card rewards smartly is going to help you improve your financial situation over the long run.
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