Cashback investments can complement your other investment efforts.
A refund credit card offers the opportunity to get your money back every time you use it and, unlike travel rewards, unlimited flexible cash. Of all the different ways you can redeem your cash, investing it can be a great way to complement your other investment efforts.
This is why investing your cashback rewards can be a great idea, how you can perform, and some pros and cons that you should consider.
How to invest your cashback rewards
Depending on the type of card you have, you may have different options in return for your cash, which will affect how you can invest. Here’s a quick breakdown of the different options and how you can leverage your rewards to invest:
Send money directly. In many cases, the card issuer allows you to request a deposit directly to your bank account. When you activate the redemption, wait until you receive the money in your account, then transfer the money to your investment account.
Check the paperwork. Some card issuers may offer to send paper checks in addition to sending money directly, while others may only offer checks. The process of investing your cashback rewards with paper checks is the same as for direct deposits, but you’ll need to wait a little extra time to receive the check by mail.
In some cases, a credit card may only allow you to redeem your cash in the form of a credit statement to your credit card account. If this is the case with your card, you can redeem your reward for a statement credit, then take the same amount from your bank account and transfer it to your investment account.
You can decide where and how you want to invest your cashback rewards. For example, you can choose to use your refund to contribute to your personal retirement account, build your health savings account or your child’s 529 plan, or you may want to open a brokerage account and use your rewards to buy and sell stocks and exchange-traded funds.
No matter how you invest your cash, the process is relatively simple.
What about investment credit cards?
There are several credit cards that make the process of investing in refunds even easier because they are offered by brokers or partnered with a broker.
For example, the Fidelity Rewards Visa Signature Card offers 2% cash that you can deposit directly into a brokerage account, cash management account, retirement account, or other accounts with the brokerage firm.
SoFi credit cards also offer 2% cash when you use your rewards to invest, save or pay off debt with SoFi and even offer the ability to use your rewards to buy cryptocurrencies.
Other cards, including upromise Mastercard and AmEx Platinum Card for Schwab, offer incentives when you use your refund to invest.
These cards can be great if you just want to invest the rewards earned by your daily spending. However, some will give you lower value if you exchange your cash in other ways. Also, if you get a broker’s credit card, you’ll be stuck with that broker unless you want to make the money transfer process to another company.
If you want big rewards but don’t want to be tied to just one option or redemption broker, you might consider a definite cashback card that allows you to invest a little more indirectly.
For example, Citi Double Cash cards can be a way to get flexibility with a high fixed reward rate. The card refunds 2% for all purchases – half when you make a purchase and half when you pay off.
If you want to maximize your refund amount across popular spending categories, the Blue Cash Priority Card from American Express offers outstanding rewards for groceries, streaming, and shipping, a 6% refund for select streaming subscriptions in the U.S., and for the first $6,000 spent at U.S. supermarkets. annually (then 1%), 3% return at U.S. gas stations and when shipping, and 1% back for everything else.
When you’re looking for the right refund credit card, think about your spending habits and which cards will bring you the highest return on your spending, as well as your refund preferences. In many cases, it may make sense to use multiple cashback credit cards in parallel to ensure that you are getting the best rewards rate for all your spending.
The pros and cons of investing your cashback rewards
There are many reasons to consider using refunds to build your portfolio, but there are also some potential downsides. Here’s what you should think about before deciding how to use your rewards.
Complement other investment efforts. The more money you can invest in your future, the better off you will be in the long run. While you won’t invest a lot of money each month with a refund, those small amounts can increase over time.
It doesn’t affect your budget. If you’re having trouble investing because of a tight budget, then using a cashback bonus can be a great way to get started without compromising your ability to pay the necessary expenses or move toward other savings goals.
Brian Stivers, investment advisor and founder of Stivers Financial Services, said: “It’s money you’ve never seen or had in your checking account, so it won’t have a negative impact on your budget.”
Refunds are not taxable. Unlike your income, the refund you earn with a credit card is not taxed, which can help you maximize your tax savings on contributions to your personal retirement account. That said, Michael Nelskyla, founder and CEO of Save, a fintech company that designed credit cards to offer investments instead of rewards, says that keep in mind that if you invest your rewards in a brokerage account, any profits you receive are taxable. In addition, future retirement withdrawals may be taxed, depending on the type of account you use.
Investment options are limited. Nelskyla says one of the limits of investing with cashback bonuses is the amount you can invest monthly. Your options may be limited to segmented stocks and exchange-traded funds, which are becoming increasingly popular but not all brokers are available.
It is difficult to diversify in small quantities. Unless you already have a diversified portfolio, it can be difficult to diversify your investments if you only invest with your refund. However, if you diversify well and have a long-term strategy, then short-term fluctuations in the market won’t be a big concern, Nelskyla said. You can do this by buying small shares of exchange-traded funds or diversifying your stock options across different sectors and companies.
It doesn’t help if you’re paying interest. If you focus more on getting your cash back than paying your monthly bills in full, you can do more harm than good. “The interest rate on balance will be much greater than the cash-back savings, so your real value will actually go down even though you’re investing the rewards due to the accumulated debt,” Stivers said.
Consider other use options
As with any financial decision, it’s important to consider all your options to decide which is the best approach for you. Here are some other potential ways you can use cash to improve your finances, lifestyle, or both:
Put it in an emergency fund.
Use it to help save for an upfront payment for a home.
Take it on a vacation.
Pay off high-interest debt.
Save for a big purchase.
Buy gift cards at local restaurants or retailers.
Finally, it’s up to you to decide on the best use of your cashback rewards. You can even alternate between different redemption options, depending on your situation and goals. It’s important that you take the time to consider how you can make the most of the rewards from your credit card, both in the short and long term.