Credit Cards: Cash Back vs. Airline Miles

When you have good credit you can qualify for great incentives on credit cards. The two most popular rewards are cash back and airline miles. So which should you choose?

I don’t know a single person who doesn’t say, “I want to travel more.” So a travel card seems like a no brainer right?

Wrong.

When you accrue airline miles they just sit in your account. Airline miles cards also just promote more spending. When is the last time you took an inexpensive vacation? Never! Because there is no such thing. Travel by its very nature is expensive.

I’m not saying to never travel. What I’m saying is you want to travel on your own terms, not just because your miles were about to expire, or those were the only dates available when you went to use them.

So let’s look at a smarter way.

We use a cash back credit card and redeem our rewards check each month. Then we park that money in an Ally bank account where it makes roughly 1% in interest. Now our rewards are growing themselves, and we can still use that money to buy a plane ticket, should we choose to do so.

Should I Rent Out My House? A Guide to Investing in Real Estate

There is a whole new generation of investors is seeing the value in real estate but aren’t educating themselves before taking the plunge. A house is a huge, life-changing purchase so it is important to do the research prior to buying.

Robert Kiyosaki in his best-selling book Rich Dad Poor Dad, spends a lot of time talking about real estate as an investment vehicle. His strategy is to invest for positive cash flow as opposed to capital gains. Positive cash flow means you bring in more rental income than it costs you to have the house. Capital gains are the profit that you’d gain if you sold your house for more than you bought it for.

Buying and holding a house in hopes that the market will go up can be as risky as making an uneducated purchase in the stock market or gambling. Rather than taking this approach Rich Dad recommends that you do the math and ensure that after all expenses you are making money each month on the rental income. This way even if the home value goes down, you are still generating passive income.

Let’s look at an example...

As of this morning a local property management company stated I could rent out my house for between $1200-1450 per month. They charge 9% of the rental income plus a one-time setup fee of $250. The monthly mortgage is $1135.

Key Factors:
9% Management Cost
$1200-1450 per month rental income
$250 initial set up fee (Divide this by 12 to get $21 per month in expenses)
$1135 Monthly Mortgage Payment

With these factors we can now see how much I would need to rent my house for in order to make a positive cash flow. We remove all of the emotional decisions from this equation and just do the math.

I used 3 different figures based on the estimate from the rental company. 1200 on the low end, 1450 at the high end, and 1325 to split the difference in the middle.

$1200 @ 9% = $108 + 21 = $129   (expenses)
$1200 (rent) - $108 (expenses) = $1092 (Rental income before mortgage)
$1092 - $1135 (Mortgage) = -43
 

$1325 @ 9% = $120 + 21 = $141   (expenses)
$1325 (rent) - $141 (expenses) = $1184 (Rental income before mortgage)
$1184 - $1135 (Mortgage) = 46

 

$1450 @ 9% = $130.50 + 21 = $152  (expenses)
$1450 (rent) - $152 (expenses) = $1298 (Rental income before mortgage)
$1298 - $1135 (Mortgage) = 163
 

If my house were rented for $1200 per month, I would lose $43 per month. This is not a good investment. At $1325 I would make $46 per month. At $1450 I would make $163 per month but that is at the absolute high end.

So how do we use this data to make a decision whether or not to rent your house?

If you are at negative cash flow, it doesn’t make sense to rent the house as you are losing money. This is not an investment, it is a money pit. You will need to come up with an alternative solution. Potentially you could rent out by the room to tenants for higher prices than you’d get for the house as a whole, or bypass the management and do it yourself, however now you are adding several variables into the mix such as your time.

Caution On Waiting for Capital Gains:

You may be sitting on a property that has a negative cash flow just waiting for the market to recover. The real estate market does appear to be going up as more and more people are buying houses, however do not be fooled. The economic state of our country has not improved. Nothing has changed for the better to improve our financial situation; in fact it is the opposite because we continue to print money that we cannot pay for therefore devaluing our own currency. This model cannot withstand forever, so hedge yourself for the worst and hope for the best.

Additional Resources:

- Read Rich Dad Poor Dad
- Pick up a copy of the board game called “Cash Flow.” This will allow you to practice your real estate skills and make mistakes before your actual money is on the line. The game is expensive but you can usually find a used copy on eBay for an affordable price.

Loyalty to a Bank

A friend recently told me how proud they were to have been a Wells Fargo Customer for the last 15 years. Knowing that Wells Fargo is not competitive, I showed her the interest rates at her bank as well as their fee structure and then compared it to a local credit union. Now that loyalty felt more like she was getting taken...

Had she simply been at the credit union vs. her bank the $1000 she had would have made $61.37 per year instead of the 0.50 that she made at Wells Fargo. We can make more than that picking up change in a parking lot!

As far as banks are concerned Wells Fargo is one of the least competitive banks as far as taking care of their customers. Most banks fall into similar categories.

I know what you are thinking, “BUT I’VE BEEN THERE FOR SO LONG!”

This is irrelevant. It is a simple process to change direct deposit information and to switch over your accounts. You work hard for your money; don’t let the banks take it away without a fight. Don’t be lazy, make the switch.

The bottom line is banks have no loyalty to you, so you should not be loyal to them. I don’t care how friendly your banker is or how cute the teller is at the counter, if your bank is charging you fees and not paying a competitive interest rate on your checking and savings accounts, it is time to find another financial institution.

What to look for in a new bank/credit union:

-          Do they charge monthly fees?

-          What is their interest rate?

-          Do they charge ATM fees or have other hidden charges?

-          What is the minimum balance for the account?

Fees: Majority of credit unions do not charge monthly fees, maintenance fees, and refund ATM charges. If your bank has fees THEY ARE NOT COMPETITIVE.

Interest Rate: Wells Fargo pays… I’m sure their rate is around here somewhere. Oh, it’s buried under loads of fine print. You may have guessed why… THEY ARE NOT COMPETITIVE.

Minimum Balance: Some accounts only pay interest if you have a certain amount of money in the account. Be sure to check what the minimum is to ensure your money is making the maximum amount of interest. If they want something crazy like $2500 to pay you any interest, you guessed it, THEY ARE NOT COMPETITIVE.

So where should you bank?

These are my recommendations in order of preference based on the interest rates/benefit to customers:

People’s Community Credit Union
Twinstar Credit Union
Addison Avenue Credit Union
iQ Credit Union

(I am not a representative for any of these establishments however I have had accounts at all 4 CU's listed)

Note. You do not see any big banks such as BofA, Chase, or even COLUMBIA CREDIT UNION (That one is really popular for some reason even though they ARE NOT COMPETITIVE).

Want me to review your bank or credit union? Send me the link to their site in the comments box below and I’ll be happy to check it out for you.

How I Made $445 Out of Thin Air in 4 Months (Financial Experiment Update)

Am I magician? No. Am I really good with money? Yes.

Here’s how I did it.

I used a credit card offer to write myself a check for $5000 (This was a balance transfer offer, not a cash advance as the rates are usually better this way)

I put the money into a brokerage account and invested in an Exchange Traded Fund that correlates with the economy (SPY). Then I let it ride.

The overall position is up $605, I subtracted $150 for the 3% fee from the credit card company for the 0% loan for 12 months (5000 x 0.03 = 150). I subtracted another $10 for the commission to make the trade and buy the shares.

*I wouldn’t recommend doing this if you don’t have the money to cover losses you may incur or the time to check your account every few days. Once you have followed my other strategies and have money saved this is a great way to capitalize on some opportunities out there.

It doesn’t take money to make money, but having money makes making money a whole lot easier. So start saving today!

What I Do With My Tax Return

Come tax season I see a lot of frivolous spending in the community. Rather than see this as an opportunity to get ahead people see it as unallocated money that they can use for whatever.

Our society makes this seem like the norm, which encourages others to do the same. The reality is, not everyone takes a shopping spree during this time. So I thought I’d share what I will be doing with my tax return.

Step 1: Complete taxes using online software.

This saves me close to $90 instead of having a “tax professional” plug it into this same software for me.

Step 2: E-file taxes and elect to get my return through direct deposit. This ensures I get my money back as soon as possible and reduces the amount of “float” time.

Step 3: Leave money in my interest bearing Loyalty Checking account at 2.05% (http://www.peoplescu.org/) where it generate me more income.

Receiving unexpected money means you can reach your financial goals that much quicker. Take advantage of this opportunity to get yourself ahead. We are still in a recession and every dollar counts.

“But everyone spends their tax return,” is no longer a viable excuse ;)