Thursday, October 21, 2004

Using Cash-Back Credit Cards to retire earlier

I received a few weeks ago a new Cash-Back credit card with no annual fee. This credit card gives 1% cash back on any purchase made with the card. No points to collect and exchange against useless (and overvalued) items, no restriction on what or where you need to buy to receive rewards, no balance to get the reward and no annual fee.

Now, I try to put as much as I can on my credit card. But to do so, one need to be much disciplined: you should keep track of what you buy (in order not to buy more that before) and you should always pay your bill entirely each month. You should not use your credit card to increase your survival debt.

I’ve calculated that I am able to put about 35% of my actual total yearly expenses on my card. Among things I cannot put on the card are: mortgage payments, city taxes and car loan payments. Groceries, furniture, restaurant, fuel, cell phone bills, etc., all go on the card. The ratio would be higher if I consider only my post-retirement expenses. At that moment, the mortgage should be paid, thus the higher ratio.

As a consequence, the total expenses I would be able to put on the card would be about 50% of all my expenses. That is, my expenses would be reduced by 0.5% when I will retire, thank to the cash-back plastic. That is a modest $80 at today money value, since my expected expenses after retirement (the amount I plan to withdraw each year from my portfolio) is $16 000. A small, negligible amount, you say? $80 a year for 51 years (up to my expected age of death at 80), inflation-adjusted (using 3% yearly inflation increase), invested in a bill that return a real 3% (say a nominal return of 6% - 3%), means a total saving of nearly $10 000 (today’s dollar). If you buy low-energy bulbs, you total savings reach over $20 000 using the same time span. This might be enough to retire some months earlier than planned.

Simple and small savings that bring no feeling of deprivation is one major step towards early retirement.


What is inflation? Inflation is the most pitfall ahead for your ER plan, make sure you understand what that means exactly.


Anonymous Anonymous said...

Interesting site. Congrats on your goal. I'm sure you've read "Your money or your life." If not, I highly recommend it.

Keep up the good work!


4:08 PM  
Anonymous Anonymous said...

You should also read the Book 'Keep what you earn' by Terry Coxon. It's a good book about keeping your money from "lawsuits, taxes, and other financial predators" :)

Its a good book, and sits right next to 'Rich Dad, Poor Dad' on my bookshelf. I'll keep this sight on my bookmarks list; I'm planning on retiring by 35 :p


6:29 PM  
Blogger Jack said...

Thank you both for the book suggestions.

7:10 AM  
Anonymous Drew said...

Hi, found the link on the site to your page.

This 1% cashback credit card ... which bank issues it? I have a CIBC no-fee dividend card, but it's not straight 1% cashback. It's structured from 0.25% to 1% depending on your annual spending. Your card sounds like a good deal. Would like to know more about this product.

Good luck!

9:46 PM  
Blogger Jack said...

Hi Drew,

There quite many credit cards that offer the 1% cashback.

Mine is a MBNA card deal with Belair, my car/home insurance company:

Unfortunately, I cannot find anymore the cashback card I subscribed to last august. Maybe it was a limited time offer. Good luck!

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