Tuesday, April 19, 2016

Turnover Tuesdays - Opportunity Cost of Earning Miles when Reselling

For those who are not familiar, I started a series a while back called Turnover Tuesdays. Every Tuesday I like to highlight one item that I have resold. This will include profitable and non profitable sales. I hope that there is always something to learn.

Disclaimer:  I am not a big traveler.  My family doesn't take too many vacations, especially long ones.  I am most definitely not a luxury traveler.  I just recently sat in economy plus on Air France for the first time (which was awesome!).  That's the first time I didn't sit in economy (outside of being bumped to Jet Blue economy plus, not sure if that counts - I'll let you guys weigh in on that).

Until now, I always used to say that I have a big family so when I use miles, I use a ton of miles so it didn't make sense to go in first class once every 4 years instead of economy every 2 years.  I might as well have more "free" travel.

Since I started reselling, my potential for earning miles and points has gone through the roof compared to when I did MS.

When you are putting $300,000-$500,000 (and some people are putting a lot more) a year on credit cards, many with the potential for category bonuses and lucrative shopping portals, your need for more points may change.  In addition, a more important question comes up.  The possibility of earning cashback is no longer a negligible amount which won't have an effect on your lifestyle/retirement.

I think that many people make the honest decision when MSing that they are never going to make more than 4 or $5k a year (that's very generous for most MSers).  Those numbers won't change their lifestyle much.  Why not get a few trips a year out of it?  That's logical.  Once you start to resell, that argument goes away, big time.  At least it does for me.

Cashback Possibilities When Reselling

If you are now spending $300,000 a year, that's $6,000 cashback on a 2% credit card.  That's assuming no category spending and no portals!

I've already shown how my Fidelity American Express is padding my retirement.

Well, that was before reselling.  Now, my Fidelity retirement money looks like this:

This is not all I am doing for my retirement.  I would be foolish to do that.  However, this account is fully funded via credit card cashback of 2 credit cards.  You can see that from January to April I was able to deposit almost $3,000 of cashback.  That's insanity!  Granted it includes quarter 4, but who cares.  Quarter 4 cashback is worth the same as quarter 1-3 cashback.

I don't think I can continue at that rate, but at that rate I would be depositing $10,000 for the year of cashback from my credit cards.  Unbelievable!

It gets better, much better:

This is what I've earned from Chase Ink in the last year:

256,000 points.  You know much that's worth?  Minimum of $3,200 towards travel and $10,000 at the Maldives, blah, blah, blah.  You know what else it's worth?  $2,560 in cold hard cash.

On Discover, I earned over $2,000 on one account and more than $1,500 on my other account (not counting the doubling).  That's another $3,500 between the two. I don't want to get into my other cashback cards.

What about Shopping Portals?

The majority of my online spending goes through portals which means a lot of portal cashback.  Between Top Cashback, Upromise, Shop at Home, and Be Frugal I earned $7,500 in cashback

Just keep in mind that shopping portals may not like you if you earn too much and you may get banned for being a reseller.

Add that to the $10k possibly earned over 1 year with a cashback credit card and you have $17,500!  Even I didn't realize before this post how significant these numbers are for me.

This is for illustration purposes and not for bragging.  Your numbers will be different but if you resell on a significant scale, the numbers will be big, probably bigger than you thought.

What Can You Do with an Extra $17,500 Annually?

Obviously, there is any number of things you can do with an extra $17,500 annually.  This is what I would do or should do (I haven't fully been doing this until now, but I may start after I saw how much it really is!).   I would max out mine and my wife's IRA.  That's $11,000 right there.

After that, I would contribute towards my 401(k) which is soon to exist.  I'm no accountant, but an IRA and/or 401(k) can have quite the tax advantages.  You can lower your total tax burden, your marginal tax rate and be "forced" to save for the future (via penalties for withdrawing).  If you know the savings are coming out of credit card cashback and portals, it makes it much easier to save.  Once again, this shouldn't be your main retirement savings, but it can be a nice adjunct.  An adjunct that might be more than most of your friends are saving for retirement.

What happens when you save $17,000 a year for 30 years and it is invested in a "safe" broad market fund like IVV via Fidelity iShares (no commission with Fidelity account)?  If you assume a conservative 5% annual gains (actual returns of S&P 500 are historically much better), this is how much it will be worth :

That's over $1,000,000!  Now, there are a lot of assumptions here and not all of them may pan out, but we are looking at the potential your cashback could be doing for you.

Adjusting for inflation:

Take a more realistic 8% and the numbers jump to:

That's almost 2 million dollars!

Adjusting for inflation:

I am not judging anyone's lifestyle choice.  If you think you would rather have an extra 1-3+ luxurious vacations a year rather than an extra $1,000,000 for retirement, that's fine.  Enjoy the vacations!  I'm all for it, especially if you are saving significant amounts from other sources.  Just realize that you are in fact making this choice.  It may not be the difference of a million dollars for you, but if you resell your opportunity cost of miles over cashback will be significant.

I'd rather regret not going a few extra vacations now if it allows me to go on a few extra vacations in retirement and I certainly don't want the thought of going back to work later in life because I didn't save enough.

You may want to conveniently ignore that choice so that you don't feel guilty going on vacations.  I'm cool with that too if that's what you want.

Just some food for thought...