Conventional personal finance gurus like Dave Ramsey say things like
That may be true for merely conventional people.
If you are a conventional person who spends way too much money each month and “can’t afford” to get your 401k match, then I want you to do four things:
- Slap yourself
- Stop reading now
- Figure out how to stop wasting so much money on crap you don’t need
- Set a reminder to come back here in a few months and read on.
For the folks that are left, I assume you can handle paying your credit card bills in full each month. Keep doing so.
I’m about to tell you how to make $1000 per year with almost zero effort.
Credit cards are awesome :
- credit cards gives you “float”
- credit cards reward you with cash back, frequent flyer miles, or gift cards
Float is a term you normally associate with buoyant objects that refuse to sink in a pool or bathtub. In the financial world of credit cards, float is a term that describes the period of time between charging a purchase and subsequently paying for a purchase.
For example, I may spend $100 at the grocery store on October 7th (the first day of my credit card’s billing cycle). The credit card company will send me the bill with that $100 purchase on November 6th, and my payment will be due on December 2nd. The elapsed time between October 7th when I make the $100 purchase and December 2nd when I ultimately transfer $100 to my credit card company is a period known as “float”. In this case, the period of float is 56 days, or almost 2 months.
You won’t get 2 months of float on every purchase, but on average you’ll get around 1.5 months of float on your purchases if your purchases are spread evenly throughout the month.
Float is like a free loan from the credit card company. And who said credit card companies weren’t nice?
A quick calculation says for every $1000 in monthly spending you have, you save about $9 per month by graciously allowing the credit card company to give you a free short term loan each month ( $1000 * 1.5 months average interest free period * 7% opportunity cost / 12 months ). Do this for a year and you have saved $105.
On top of that, getting 1% to 5% in cash back or rewards points for your everyday purchases is simple with a variety of credit cards in the market today. $1,000 monthly credit card spending at an average cash back rate of 2% yields another $240 per year in cash back or rewards points ($1,000 x 12 months x 2% = $240).
To recap for those that weren’t paying attention. If you spend $1,000 per month or $12,000 per year on a credit card, you can save $105 from the float, and make $240 from cash back or rewards points. That’s $345 per year of free money that credit companies are begging to give you! All you have to do is spend $1,000 per month on a credit card.
Who only spends $1000 per month on a credit card?
The median household income in the US is around $50,000 per year. Some of that income goes to savings, some pays rent or a mortgage or taxes, some repays debt. What is left is mostly spent on goods or services that could be charged on a credit card.
Many families spend $3,000 per month or more on chargeable expenses. Some purchases can obviously be charged like:
- groceries and household goods
- automotive expenses like gas and maintenance
- medical and dental
- dining out
Put down the checkbook or stacks of cash and don’t overlook many other expenses that you could be funneling onto a credit card and getting big bucks from float and cash back rewards:
- home repairs
- house insurance and taxes
- auto insurance, license, and registration
- utilities such as natural gas, electricity, water/sewer, trash, cable TV, internet, and cell phone
- daycare, after school care, or summer camp
- private school or college tuition
- vacation rentals like mountain cabins or beach houses
I am certain I have overlooked some expenses that are customarily paid with check or automated bank drafts. So next time you are about to pay a bill out of your checking account, take two minutes to check the service provider’s website to see if they accept credit card payments instead. You can rack up some easy cash back or rewards points with very little effort.
As always, make sure you aren’t paying an extra charge or “convenience fee” to use a credit card. My county charges around 2% to pay with a credit card for example, so I pay using ACH bank draft from my checking account.
If you can save $345 per year while spending $1,000 per month on a credit card, a more typical family that spends $3,000 per month will save over $1,000 per year. That $1,000 is free money just waiting for you. Don’t miss out! Charge everything you can on a credit card, but make sure you pay it off in full by the due date to avoid interest charges.
But Credit Cards Are Confusing and I Don’t Know Where to Start!
I have compiled some excellent credit card offers that will allow you to implement the strategies I have discussed in this article. You should always get at least 1% cash back or the equivalent in rewards points. Some cards will pay more than that on everything, but may restrict redemption options to travel or gift cards. Other cards will have 3% to 5% cash back on specific categories like groceries, gas, or a changing set of categories. I personally love the 5% cash back on groceries and gas I often get since I spend a lot on those two categories and I can’t cut those expenses much more.
When you are checking out these credit card offers, pay attention to bonus features that might appeal to you. Many cards give you $100 to $400 as a sign up bonus, and some offer enough frequent flyer miles or hotel points to give you a free round trip flight or two, or many nights in a hotel.
Be careful, as some cards have annual fees that could eat into your savings from cash back points. It can be worth it to pay an annual fee when the cash back or rewards program is really great. We have paid an annual fee for the American Express Starwood card that rewards you with hotel points, as the rewards program is excellent, and it didn’t take us long to earn free nights.
Don’t feel like you can only have one credit card. You might to apply for a good basic 1% to 1.5% cash back, a card to get bonuses for specific frequent flyer or hotel programs, and a card or two to get the larger 3-5% category based bonuses on gas, groceries, or other categories of spending. You can do multiple applications at the same time, but be careful if you plan on getting a car loan or mortgage/refinance soon, as a large number of new credit applications can adversely impact your credit score short term.
And if you find cards that have great sign up bonuses, remember you and your spouse can apply for separate card accounts so that you each get the sign up bonus (free vacation for 2 anyone? 🙂 ).
We have multiple cards and label them with tiny sticky notes covered in clear tape that reminds us what categories of shopping to use each card for. Groceries and gas might be on one, Amazon.com on another, and then “Everything Else” on our third card.
For more details on credit cards I recommend, check out my complete credit cards recommendation page.
As with any financial transaction, review the terms and conditions carefully and make sure you understand what you are getting before submitting your applications.
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