How My Credit Card Spending Is Helping Me Save for Retirement

Don't assume credit cards are always going to hurt your finances. 

Credit cards have gotten a bad reputation, and many people believe that charging on their cards will doom them to a life of debt. In reality, though, credit cards can actually be a great way to help improve your finances if you use them wisely.

In my case, for example, every time I spend money on my credit cards, the purchase helps me save for a secure retirement. Here's why that's the case.

How my credit cards help set me up for my later years

When I signed up for a credit card, I chose one that provided me with cash back. The card issuer gives me the option to get my cash back as a statement credit, or to deposit it into a financial account. And I made the decision to have the cash back I earn deposited into an account at a brokerage firm that I am using to save for my retirement.

Now, the account isn't a tax-advantaged one, like a 401(k), as those types of accounts have an annual contribution limit. It's a taxable account, but it is one that I have earmarked to fund early retirement as many tax-advantaged accounts require you to wait until age 59 1/2 to begin making withdrawals.

Every month, when I spend on my credit cards, I earn cash back that is deposited into this brokerage account and that I can then invest in ETFs, stocks, or mutual funds. The money that I got for free from my card issuer for spending that I would have done anyway thus begins earning returns for me, which I can reinvest in order to take advantage of compound growth.

Since I spend a lot on my credit card, I earn tons of cash back each year, all of which can work for me over many years so I will end up with tens of thousands more in my investment account because of it. 

Should you invest your credit card rewards? 

Investing my credit card rewards works well for me. But it is not always the right option for everyone. If you don't pay off your credit card balance in full every month, then you may want to use your rewards to reduce your statement balance rather than to invest for the future. The interest rate on credit cards is generally higher than the rate you would earn by investing in the stock market, so you can effectively get a better ROI by using your cash back to reduce the amount of debt you pay interest on. In my case, this isn't an issue because I don't carry a balance anyway. 

Some people also like to use their credit card rewards to help cover the cost of vacations. There's nothing wrong with this as long as you are investing elsewhere for your future. In fact, it can be a better option if you were going to take the vacation no matter what and would have otherwise borrowed for it.

If you can make it happen, though, investing your credit card rewards is a great way to make the most of them and to enable you to use your card to improve your net worth over time.