One simple way to make $12000 in 30 minutes

Do not read this story if:

  • You are not currently using a credit card to make your purchases
  • If your credit card gives you 2% cashback

Now, here’s the gist — in less than 5 minutes, I’ll show you how spending 30 minutes now to upgrade to a credit card that gives you 2% cash back equates to ~$12000 in earnings over time.

The Math

Assumptions

  • Your current credit card’s cash back rate = 1%
  • Annual credit card spending = $12000
  • Time over which your savings compound (y)= 30 years
  • Assumed annual rate of return (r)= 7% (Inflation adjusted S&P 500 return over last 30 years = 7.9% — source)

Ok, with these basic assumptions, let’s dive in to calculate what your savings over time can be, if you upgrade to a credit card that pays you an extra 1% cash back (2% in total):

  • Extra amount earned every year (d) = 1% of $12000 = $120
  • At the end of Year 1 — you have $120 in your account.
  • This will grow to 120*(1.082³⁰) = $1276.44 after 30 years
  • At the end of year 2 — you have earned another $120.
  • This will grow to 120*(1.0832²⁹) = $1218.24 at the end of 29 years (since we have one year less on our timeline after year 2) …. and so on.
  • So we have this formula
Total earnings = d*r^y + d*r^(y-1) + d*r^(y-2) + ….. + d*r^(y-29) + d*r^(y-30)

If you plug the numbers we assumed into this formula and an interest rate of 7.9% (historical average), you will see that you earn~$14,400

I am assuming a more conservative 7% CAGR, which earns us $12,100.

How much extra time will it take?

This should take no more than 20 to 30 minutes. Seriously. Pretty much everything is done online and you’ll receive a decision almost instantaneously. Less time than it would take to drive to a Starbucks, wait in line and get a coffee.

Ok, how do I do this?

Currently, there are two credit cards that offer 2% cash back that I am aware of:

Fidelity Rewards Visa Signature Card

  1. Open a brokerage account with Fidelity at www.fidelity.com. I personally started a Roth IRA account. This way, the savings go into a retirement account and withdrawals will be tax-free.
  2. Apply for the Credit Card here.
  3. You get 2% cash back when you make a purchase.

Pro: Savings go into a tax advantaged retirement account.

Citi Double Cash Card

  1. Apply for your Credit Card here.
  2. You get 1% cash back when you make a purchase and another 1% cash back when you pay your bill.

Pro: Requires just one step to get started.

Recommendation: My recommendation is Fidelity — the extra step should take no more than 15 minutes (that’s part of the 30 minutes that I mentioned in the headline) and your savings:

  1. are directed into a long-term retirement account, which you cannot withdraw from easily
  2. If you opt for a Roth-IRA, your withdrawal will be be tax-free.

Note: I do not get referral/affiliate commission with either of these recommendations.

Risks

Overspending

Clearly, if you spend more when using a Credit Card, this is not a good deal. Hence, if you are not using Credit Cards currently, you probably should not start using them now.

Below average returns

The markets may have returns below the historical average of 7.9%. This means that your earnings will be lower.

Conclusion

If you are currently using a credit card with 1% cash back or equivalent in flyer miles, spending 30 minutes to upgrade to a 2% cash back card may be worth your while.

Disclaimer: This is not a solicitation. You should do your own research in the context of your financial situation before applying for a credit card. Past market performance is not necessarily indicative of future returns.