Credit Card Update

In my previous post about credit cards I talked about how the Fidelity card was the one card everyone should have. In addition to this card people should look for ways to continually improve on their situation. One of the best options to improve upon the 2% base offered by Fidelity was to use the Sallie Mae MasterCard, which offered 5% cash back at grocery stores, gas stations, and bookstores (which included Amazon). In December, Sallie Mae sent out a letter notifying their card holders of changes to their cards agreements, which would take place at the end of February. The new benefits include 2% cash back on grocery and utilities payments and 1% of everything else.

Basically the new Commence by Sallie Mae MasterCard is an inferior choice for optimum credit card efficiency.

 

This change has driven me to reevaluate all credit card options available. This post is summary of my findings and the path I choose.

As with all credit card discussions, none of this matters if you don’t pay your balance in full.

FIRST THINGS FIRST: EVALUATE YOUR SPENDING

Prior to looking into the various credit card options I collected every transaction my household has had in the past year and grouped them into categories (grocery store, gas station, and restaurant). The purpose of this is to identify the size of the opportunity in those various categories. Once you’ve identified a few categories that show the most promise you can begin looking for a few credit cards that can help you reduce your expenses.
Without a clear understanding of where your money is going it will be very difficult to correctly identify opportunities for improvement by using credit cards.

 

While evaluating my household spending several categories popped out that were high compared to others. In addition to being high value targets the spending was also eligible for credit card spending. When you graph the category totals you’ll find that you get a graph like the one shown below. For example, your rent maybe a high value target for cost reduction, but you can’t pay your rent with credit cards because it is against the terms of the agreement. The categories and optimal card I identified are listed below.

Grocery Spending

In the grocery category I identified the American Express Blue Cash Preferred Card. This card does require a $95 dollar annual fee. In order to calculate if this is a good choice you’ll need to know your annual spending in the grocery category. The American Express card offers 6% cash back on spending at grocery stores. This is a 4% difference between the American Express card and the base line Fidelity option. This means you need to have at least $2,375.00 in grocery store spending before you should consider applying for American Express Blue Cash Preferred Card ($2,375.00*4%=$95.00).

Gas Station, Restaurant, and, Costco Spending

Citi offers a credit card called the Costco Anywhere Visa. The perks for the card are 4% cash back at gas stations, 3% at restaurant, and 2% at Costco. The main drawback of the card is that it requires a Costco membership. If you already have a membership this card should be a slam-dunk, but otherwise you’ll need to consider that your spending in the categories of gas, restaurant, and Costco must overcome the base 2% cash back from Fidelity and cover the cost of membership generally $55 dollars. To check that multiply your annual gas station spending by 2%, your annual restaurant spending by 1%, and your annual Costco spending by 2%. Add those together if that number is greater than $55 then you can justify getting the Costco Anywhere Visa

Amazon Spending

Amazon now offers its own branded credit card for people who are prime members. Our household has a prime membership. I’ll be honest I’m always on the fence on whether is worth it. The 2 day shipping and streaming video selection have kept me on-board for the past 3 years and I anticipate we will continue to see value from the service. If you want to try it out please use my link for a free 30 day trial. The Amazon credit card simply offers 5% cash back on all items purchased from Amazon.

Please share your credit card strategy in the comments!

Just a reminder I am not compensated for any credit card recommendations here. I am an affiliate with Amazon and am compensated a small amount for each sale made by someone who uses my link. If you would like to do me a favor copy this link into your favorites and use it to navigate to amazon. http://amzn.to/2klSyPo

The HSA

The HSA

The Health Savings Account (HSA) is a tax incentivized account you are allowed to use when you participate in the high deductible health plan. I’ve been using an HSA for 3 years now and I recently learned that I have a unique strategy when dealing with my HSA. Before I get into what is different about my HSA strategy I need to explain the details of the HSA first.

What makes an HSA special?

HSA’s allow you to contribute pretax money to an account and then remove the money tax free if it is spent on qualified medical expenses. The IRS publishes a complete list of what is allowed and what isn’t. All the info HERE. So the HSA is similar to the 401k in that you get to put money in before you are taxed and it is similar to a Roth IRA in that the money you take out of it is tax free. It is really the best of both worlds.

HSA’s are different from flexible spending accounts (FSA’s) in that with an HSA you keep any money left over at the end of the year and when you change employers you also keep the money. With FSA’s if you didn’t spend all the money in it your account by the end of the year it was gone for good. For this reason, HSA’s are a MUCH better deal than FSA’s.

One other notable difference between the two is that with HSA’s the money belongs to you immediately after it has been contributed regardless of whether you or your employer contributed, whereas with a FSA if you quit your job you lose out on the money in your FSA. The money in an HSA belongs to you and the money in an FSA belongs to your employer.

The money within an HSA can be invested in any stock, bond, or index fund of your choice.

My Unique Strategy

Many people just use their HSA as a way to get reimbursed for medical expenses at the time when those medical expenses occur. If you are doing this though you are missing an opportunity to keep money in your HSA. The money left in your HSA can grow tax free similarly to a Roth IRA.

In order for this strategy to be successful you have to be aware that the money can only be taken out of the HSA tax free if you have spent it on qualifying medical expenses. This seems like a relatively troublesome road block, but the IRS does not care when you spent the money on medical expenses (See Question 39 in this IRS bulletin for clarification). The is key to understanding the benefits of this strategy because you can spend money on medical expenses now and keep the receipt for them and down the road when your money has grown tax free for a long time you can turn those receipts into cash from your HSA.

SUMMARY

Keep your money in your HSA, let it grow tax free. Save your medical receipts. This is the best retirement account there is because it combines the benefits of a 401k and a Roth IRA.

A Bright Idea

UPDATE: Amazon is now selling flood lights for 2.50 a bulb

I’ve got a bright idea! We should all be using LED light bulbs. (Pun intended). I recently picked up a steal of a deal on amazon and bought 16 – 60 watt LED light bulbs for just under 32 dollars. At this price, I think it is outrageous that any one is still using an incandescent light bulb at all.

I’ve put together this pretty chart that shows how quickly you will be paid back in term of reduced costs on your electric bill if you replace your incandescent light bulb with an Amazon 1.99 LED light bulb. I assumed an electrical cost of 0.12 $/kWh. As you can see if you are using an incandescent bulb all the time you will be paid back your initial 1.99 investment in only 14 days.

light-bulb

If you are like me and had a huge stockpile of light bulb you purchased when they went on sale and think yea yea I’ll replace my incandescent bulbs when they eventually burn out.

WRONG! WRONG! WRONG!

In the time, you wait for that incandescent bulb to burn out you will spend enough in energy costs to buy 4 LED light bulbs! Fight your human tendency to loss aversion and toss them out today and upgrade!

In case you want to check the payback time on various light bulbs or you live in Hawaii and have crazy high energy costs here is link to my spreadsheet.

SPREADSHEET

My link to the light bulbs on Amazon is an affiliate link. I will get paid if you purchase the light bulbs there. I am intending to setup a win-win situation, where my mission to make the world a more efficient place and your desire to save a bit of money are nicely aligned. If you can find LED light bulbs at a better value elsewhere by all means get them there.

Roth IRA vs. Traditional IRA

In the personal finance world an often debated topic is whether to contribute to the Roth IRA or the traditional IRA. An IRA stands for individual retirement account. The two accounts are mutually exclusive. The IRS currently allows you to contribute 5,500 dollars per year to IRA accounts (6,500 if you are over the age of 50). The two account have different tax advantages. The Roth IRA allows you to withdraw earnings tax free but requires you to contribute to with after tax dollars. The traditional IRA differs in that the traditional IRA allows you to contribute with before tax dollars, but requires you to pay income taxes on the withdraws.

So how do you choose which account to contribute to? The first step is understanding the problem. The problem is that without using IRA’s you are being inefficient from a tax standpoint. What IRA’s do is help you defer your taxes until a later point. The value in this is that we live in a progressive tax environment where as you earn higher and higher amounts of money you pay a progressively higher and higher rates of tax on each dollar you earn. If you are able to spread out when you take income and pay taxes on certain amount of money you will be able to put more money into the lower tax brackets.

A Quick Example

Albert and Bob are both are average gold miners. They both earn 88,000 per year. Albert takes advantage of his traditional IRA to the maximum and Bob doesn’t use it at all. The table below shows how much difference there will be between the two of them in just the last ten years leading up to their retirement. In the example I’ve assumed they are both single filers and take all the standard deductions and exemptions.

tira-example

So using an IRA is clearly helpful. Albert saved $4,238.75 when compared to Bob.

Now to optimize between choosing a Roth IRA and traditional IRA I like to start with the best case scenario for how a person would go about minimizing taxes over their entire life. What would that look like? In the chart below I’ve shown the average college graduates income in two different cases. The first is the optimal income scenario and the second is the typical income scenario.  If you wanted to pay the absolute minimum amount of taxes you would take the amount of money you are going to spend over your lifetime and take it as income evenly over the number of years you are going to live, so from 14 to whenever you kick the bucket (average life expectancy in the US is 79 years). In the typical scenario I’ve shown what a typical college graduate’s income looks like over their lifetime. At first you have relatively little income and as you acquire more human and skills capital your earning potential increase.

life-time-income

Clearly the optimal case won’t play out very often, because no 14-year-old is going to have near the salary to get close to their average life time yearly spending. This ideal scenario does give us a helpful clue about where we should be hunting though.

When taxable income is low compared to life time average we should be looking to increase taxable income and when taxable income is high we should be looking to minimize taxable income.  I’ll spare you the math this time but the optimal point for when traditional IRA’s are better than Roth IRA’s is when your future spending needs are less than your current taxable income. When your future spending needs are less than your current taxable income you are better off delaying when you pay taxes on money until later in life when you are able to fit more money into a lower tax bracket. This is actually the case most of the time. There are only a very select number of years at the start of a person’s earning history when their future spending needs are higher than your current taxable income. This is because more than likely your spending needs now are similar to what they will be in the future and unless you happen to be going further into debt every year your income in currently covering your spending needs and some additional savings.

KEY ASSUMPTION AND MAJOR RISK TO CONSIDER

Stable tax environment. This is a safe assumption if you are a typical wage earner. Historically speaking, effective tax rates for the middle class have not fluctuated significantly. All bets are off if you are making enough to be in the top tax bracket. Then again if you making enough money to be in the top tax bracket you likely are ineligible to use many of the advantages of an IRA. If you think our current tax environment is unstable you may want to diversify between both types of IRA’s in case future tax rules are changed.

Limited liquidity needs. Both type of retirement accounts perform much better when held as equities for a long period of time. If you will need cash from your IRA in less than a few years an IRA might not be the best option for you.

KEY TAKEAWAYS
  • Forecast / estimate your future spending needs.
  • Compare that to your current taxable income.
  • If your future spending needs are lower than your taxable income, then choose the traditional IRA.

Most of the time, choosing a traditional IRA is the optimal solution.

The Roth IRA in my opinion is not a useful retirement account because when your taxable income is low compared to your future spending needs you won’t have the ability to save money because you are not as likely to have enough cash to fund your current spending needs, much less fund a retirement account as well.

 

Be Efficient with Capital – Review of Gift Card Resellers

By now I hope some of you have acquired some type of rewards credit card and have shaved off some years of your required working life. So today I’m going to give you a tip to help boost your savings rate or (1-expenses rate) even further.

Every year millions of dollars in gift cards go unused by people who don’t really want or need them. Some enterprising online companies realized this and setup a marketplace to help people sell their gift cards for cash. Where people previously used to leave their gift cards lying around gathering dust they can now liquidate them and put the cash to good use. This marketplace is a win for everyone because the seller is able to get cash out of their gift cards the marketplace owners are getting a cut of the revenues and the buyers are able to purchase gift cards they will use at a discount from the face value of the gift cards.

If you are selling a gift card expect to lose between 10 to 50 percent of the face value of the gift card. If you are buying gift cards, you can expect to buy gift cards at 1 to 40 percent off the face value of the gift card.

Raise

Out of all the options I like Raise the best. I regularly use their mobile app to buy gift cards and they arrive in my email inbox within a few minutes each time. I find this especially handy when I am in stores and know exactly the gift card amount I need to buy to make my in-store purchase. I can just go to the app and find a gift card for close to that amount, purchase it with my rewards credit card, and then use the gift card(s) a minute later when I checkout. I never have to carry gift card inventory because I always spend the entire gift card I just bought.

Some other users have complained about receiving gift cards with no balance on them. I have never had this issue, but Raise is very clear they will refund any money spent on bad gift cards. (The link to raise up top is a referral link. When you buy a gift card through raise using that link I will get 5 dollars.)

CardCash

I’ve only used CardCash to buy 5 Home Depot gift cards, but I was highly unsatisfied with how the transaction worked out. I was building a deck and when I needed supplies Raise happened to be out of gift cards, so I thought I would give CardCash a try. Unbeknownst to me CardCash processed my transactions like cash advances, which incurred rather hefty credit card fees that I was not expecting. Nowhere on their site do they disclose this fact. Cash advances also begin accruing interest expenses immediately, so I was on the hook for all the interest charges I racketed up before I reviewed my credit card statement and found out what had transpired. CardCash stated that this issue only occurs with cobranded American Express cards, but be sure to check with CardCash before you make a purchase or check your credit card statement immediately after any purchase.

eBay

eBay is always another option. It has its pro and cons though and is very different from the previous two websites/companies. When using eBay you will not get your gift card quickly through your email like you will with Raise and CardCash. Instead you will have to wait for it to come in the mail from the seller. eBay offers strong buyer protections; however, if you are going to buy a gift card from eBay I recommend you spend it immediately. The seller could potentially have all of the gift card information and spend the gift card when the seller protection period expires. if you are going to sell gift cards I would not recommend going through eBay. The buyer could claim there was no money on the gift card you sold and I do not think eBay has worked out a system to fairly protect the seller.

I don’t have any experience selling gift cards on any sites. I generally try to use my gift cards when I receive them, but I do have a gift card to the Star that I’ve been carrying around for several years. I think I’m going to use it this coming Thursday to celebrate with my wife when my MBA program is officially complete. What do you say Staci? Leave a comment if you are interested.

Title Image Credit: Raise.com