Wednesday, October 8, 2014

Switching Strategy to Cash Back

Last week, I shared my parents' strategy of getting 5.5% rebates back for our day care. Now clearly, that post was just highlighting one example of a larger theory that can be applied for any non-bonused spending. But sometimes, I forget that not every one of my readers follows every subtle point of all this madness.

There are definitely people out there who would much rather just stick to a single credit card to use for all their spending. That's perfectly fine for those people.

But my father's obsessed with "optimizing" everything. I'd truly worry about him if his "hobby" didn't let us travel so frequently for so cheaply. He has our family using anywhere between 1-4 different cards depending on what store or what kind of purchase we're making.

Some of my readers have said they have a hard time keeping up with how my family decides on which points to earn / which credit cards to use. Here's a basic rundown:

1. Rent - checking account (no points)
2. Groceries - Amex Blue Cash card (5% cash back)
3. Restaurants - Citi Thank You Premier (3x Thank You points)
4. Cell Phone / Internet - Chase Ink Bold (5x UR points)
5. Domestic Travel
   a.  United Flights - Chase United Select (3 United miles)
   b.  Starwood Hotels - SPG Business Amex (2x SPG points)
   c.  Hyatt Hotels - SPG Business Amex (5% back + 1 SPG point)
6. International Travel - Citi Thank You Premier (2x TY points)
7. Other
   a. Amazon / Chain Retailers - Chase Ink Bold (5x UR points by buying retailer gift cards at Staples)
   b. Everything Else - ???

So before we starting re-thinking our points/miles strategy, the conventional wisdom was to use our SPG Amex for #7b (anything that wouldn't earn a special bonus). The thought was that if you don't get 2-5x, then you should just earn the "most valuable point currency" which was a SPG point (valued by many at 2.5 cents/pt). The other popular alternative was the Barclays Arrival+ card (earning 2.2% rebates on travel).

However, as we talked about last week, we could also earn 5.5% rebates on everything (4.2% cash and 1.25% flight rewards) by simply combining our Amex Blue Cash, Citi Thank You Premier and Paypal Debit cards. If you need a refresher, click here.

So essentially, if my father chose to spend $1 on his SPG Amex for non-bonus categories, he would be forgoing 5.5% of rebates (the opportunity cost). That actually means he is essentially "buying" 1 SPG point for 5.5 cents each. Given our typical SPG redemptions range from 2.5-4.0 cents/pt (including our most recent 5 night award stay at Westin Costa Navarino), we'd actually be better off by earning cash rebates and using that saved cash to pay for the Starwood hotel reservations directly.

Let me walk you through an example.

Imagine we need to spend $1,000 a month for daycare again. Since, it's not a bonus category, we'd most likely use our SPG Amex and earn 12,000 SPG points every year. That's enough points to book 1 night at a Category 5 Starwood hotel such as the Westin in Sydney, Australia (~$390 USD/night in November).

However, if we used our Amex Blue Cash card and bought 24 Paypal My Cash cards ($500 loads + $3.95 fee each card), we'd have $12,000 worth of Paypal funds and have paid $95 in load fees. For spending $12,095 on our Amex Blue Cash card, however, we'd earn $605 in rebates - or $510 of net profit (in cash). Then he'd also earn 12,000 Citi Thank You points for the actual daycare spend on his Citi Premier card, which he would pay off using funds from his Paypal Debit card.

With that $510 of cold hard cash, my father could just pay $390 for the 1 night at the Westin Sydney and still have $120 left over. PLUS, he would earn 3x SPG points for his actual stay and 2x Citi Thank You points for paying for the stay (another 1,170 SPG points and an additional 780 Citi Thank You Points). Here's a side-by-side comparison to help illustrate the point.

Yes, we know that a solid counter-argument could be, "Why don't you just spend on your SPG Amex, and then withdraw money from your Paypal account to your bank account.Then just pay off the Amex?" That's very sound logic in theory, but in practice, a constant loading of your Paypal and withdrawl to your linked bank account will almost certainly flag your Paypal account and get you shut down. The beauty of the "Paying Citibank with your Debit Card" is that it looks more like a "normal transaction" to Paypal's automated risk management system. The marginal extra value of an SPG point over a TY point isn't worth risking the entire gravy train over.

So back to our example. Assuming those SPG and Thank You points are worth 2.5 and 1.25 cents/pt, respectively, that's $29.25 and $159.75 of additional value. Then throw in the residual $120 of cash rebates left over, we have $309 of value when all is said and done after our 1 night hotel stay. Seems like a no-brainer!

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