Maximizing Your Credit Card Cash Back

by Kevin on July 24, 2009

We received our annual cash back from American Express on our last statement. In years past we had earned well over $400. This year through reduced spending and thankfully reduced gas prices our cash back is just $365.91.

When additional income comes into your financial life you have two options:

  • Blow the money by not tracking it in your budget
  • Strategically use the money to bring you closer to your goals

If you are like me your instinct is to go blow this money that just showed up in your account. Let’s go to the theater and have a nice dinner beforehand. Let’s just transfer the money to cash and not track how we spend it. Let’s go buy stuff.

How to Maximize Your Cash Back

But you don’t want to let your instinct take over. That money needs to go into your plan just like all your other money. It adds to your free cash flow for that month.

Remember income minus expenses = free cash flow. Free cash flow goes towards your saving goals.

So if you’ve got extra income for the month make sure your expenses don’t change significantly. The less change in your expenses the more money that ends up on the right side of the equation.

Wasting Free Money

The alternative is you could just waste every last cent of the money you’ve been given. I probably don’t need to give you an education on this. You can probably handle it on your own.

One of the easiest ways to waste credit card cash back is to ignore it. With my American Express the cash back is applied to your statement for the month. So our statement was showing $365 less than it should have. If you aren’t tracking your expenses very closely you could just think, Huh… that looks lower than it should. Oh well. Glad it is lower this month!

Ta-da. You just wasted $365. The money floats around in your budget before disappearing forever. Not tracking your income and expenses is incredibly stupid.

How We Tracked Our Cash Back

I knew we were going to get several hundred dollars back. I had checked the website and knew sometime in July it would hit our account.

I also track our expenses on a weekly basis in a spreadsheet. I add up all of our charges and put them in the “AMEX Charges” category of our budget. I deduct the money to put into that category from all the other categories.

If I spend $50 at the grocery store our process looks something like this:

  • Grocery category: subtract $50
  • AMEX category: add $50

Until I pay the bill no money really changes hands. I’m not paying the credit card on a weekly basis. Instead the money sits in my account — under a different category — until the credit card bill is paid.

Since I was tracking my expenses correctly I noticed that my AMEX category in my budget was $365 higher than it should have been.

Here’s where it gets tricky!

If my AMEX category is showing $365 more than it should, I need to “transfer” that money from the AMEX category to another category.

Our catch-all category in our budget for our monthly free cash flow is “Left at end of month”. I know. Very creative.

Essentially I do the opposite of what happens when I charge my groceries. Instead of subtracting from the grocery category and adding to the AMEX category, I flip them:

  • AMEX Category: subtract $365
  • Left at end of month category: add $365

See how incredibly simple that is? When I do the budget at the end of the month we will have $365 more than we normally would. I don’t have to think about it. It just shows up.

Since we already have a plan in place for our money left at the end of the month I also don’t have to think much about what to do with that. We just stick to the plan, and the money goes toward our various goals.

Using this system has saved me a lot of hard decisions. I don’t have to ponder what we might do with an extra couple hundred bucks. It is seamlessly integrated into our budget.

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This Week In Personal Finance – July 26
July 26, 2009 at 7:35 am


Kip Nickell July 25, 2009 at 9:35 am

There are cards which will automatically dump the money into a retirement account of your choice. Personally, I have my AMEX setup to automatically dump (2% rewards) into my RothIRA. This may be a good way of ignoring it to your benefit.

Looking back now, I have found that AMEX has deposited around $500 in my account so far this year. (I travel for work and I get to charge it all on my card). This is (wow) $500 that I would have otherwise not saved.

Kevin July 25, 2009 at 9:43 am

@Kip: Interesting. I was unaware of this feature. I’m okay with it landing on our statement because I know it is coming, and I know how to prepare for it. But for people that prefer the easier, automated way that is a good option. (I’d rather have the cash available in case I needed it for something else that month.)

Also, you would need to be careful to not put too much money in your Roth IRA. That is if you were planning to put in the maximum $5,000 for the year that is $416.67 per month… but an extra $500 coming out of the blue throws a wrench into the equation.

Golfing Girl July 27, 2009 at 7:39 am

Our Amex Blue Cash card annual cash back hits in December. Our homeowner association fees are due in January. As luck would have it HOA fees are $405 and our cashback reward is usually in the neighborhood of $400. It’s how we’ve now begun funding our HOA.

To keep track of cash back (and the spending for that matter) we keep up-to-date (daily) tallies of our spending and pay off the card approximately on a weekly basis. Each time I pay off the card, I calculate the cash back amount and carry it to the next page of tallied expenses. It’s a little tedius but it works for us and we’ve never paid a cent in interest by paying off weekly.

So I generally earmark $400 in the savings account for HOA on my financial spreadsheet and then when we receive the cashback bonus (and if it’s sufficient) I free up the $400 in the savings account to go towards the total emergency fund. I do the same thing for vacations and other large ticket items (earmarking on paper until they’re paid for).

Kevin August 2, 2009 at 1:34 pm

@Golfing Girl: Daily tallies? How long does that take?

The same system but on a monthly basis would work just as well, wouldn’t it? Plus you’d get the extra interest of keeping the money in the bank for a few extra weeks.

Golfing Girl August 3, 2009 at 7:02 am

We tried that for years (monthly payments) but it’s too easy to spend more than you have. Plus, I don’t consider the 2 cents/month vs. 6 cents/month losing much interest in my checking account. Really it doesn’t take long. Take out the receipts from your wallet, write them on the page and keep the tally going. It’s a sure fire way to pay $0 in interest. When we see we’re getting low on funds we simply stop spending or delay purchases till next month. A rewards card is not worth it if you end up paying interest so this is what we do to avoid that. Plus it’s fun the last week of the month to see if there’s anything left over and sweep it into ING.

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