You’ve likely heard the adage, that a dollar saved is a dollar earned, or indeed two dollars earned, but how does this amazing phenomenon occur really, and is it ‘magic’ like compound interest, or something else entirely?
My $175 Lesson
Last year I signed up for the Amex Business Rewards Gold credit card with a 75,000 point offer. You should not apply for this card with an offer less than this in my opinion, even if your favorite blogger encourages you to do so…. The offer was great – 75K membership reward points for $5,000 in spend with no fee in year one. It doesn’t get any more ‘free‘ than that, right? 12 months roll by, and it’s time to pay the piper. I get a fee of $175 showing on my statement, for the year two onwards annual fee. What is a guy to do?
I set up my finances in a way that this card actually handles 100% of my andrewdoronin expenses, even office supply stores (I have a number of Inks in the name of andrewdoronin also, but don’t use them there). The reason is for clarity of accounting, paying a price at the origination of a transaction in exchange for saving work later.
The Business Rewards Gold is an example of me buying into a free offer, but in doing so accepting a future liability. When the 12 month arrives I need to work for my ‘Free’ points, what’s more, if I don’t allow it to take over my schedule and detract from the other things in my life (running a business, being a dad, and other important things) then I have to pay a price.
However, instead of thinking of this as a liability and burden, most people think of dealing with an annual fee as a successful achievement. You ‘saved’ $175 in exchange for:
A 10 minute call to retention dept who waived it for you
That would be epic, and not impossible, but in reality you’re more likely to strike out than get 100% of the fee waived. Even if you are successful, are you suddenly ‘earning’ an hourly rate of $1050 ($175*6). I disagree. The problem is not taking the ownership of the liability, and accepting that the future attempts to waive fees need to be priced into the original transaction.
Instead of looking at the moment where I’m about to earn 75K membership rewards for free, I should instead look at what it really takes to earn them:
- $5000 in spend (could be real, but even then requires shifting credit card providers for monthly payments in many cases)
- Future debt of having to address the fee.
It is critical to accept responsibility for the liability, and to price that into things. This notion of a dollar saved is a dollar earned really comes down to how you structure your life. For the most part, the people who accept a reward for ‘free’ upfront create a life filled with things that require unravelling later on, and you might soon come to a point where you need to make 5 calls in a day to try to navigate all the fees and problems created, and this comes at the expense of other things.
This is what the credit card companies are hoping for, it is the very purpose of a signup offer, to lure in a future debt. Even the savvy of us miss it and think we are ‘saving’ money by working to remove an annual fee that we ourselves created.
There are two ways to go to solve this
Pay the damn fee. You pay a fee to free your day, but can you really keep up with thousands per year in fees?
Reduce efficiency at the origin, churn everything, never tie a new card to a monthly bill. There is no single card that offers better than 2x on everything, but if you chase what you think is 100% efficiency at the origin of the transaction, you are simply losing sight of the future cost. By creating a tangled web of earning efficiency you are accepting the burden of unravelling it later.
For example, not using an Ink for telecom expenses frees us from the need to retain the Ink card in the following year. We could instead use it as pure churning for signup bonuses.
If you were to find a low level card (fee free) for recurring expenses, and simply apply, earn signup bonuses and later cancel other cards you could at the least reduce the friction created when canceling. The job is still there though, you are still required to ‘earn’ your respite from the fee, and even if you do get one waived, all you are doing is kicking the liability down the road somewhat.
So.. what do I do with my $175 lesson? Do I pay the fee, do I try to downgrade the card while keeping the account number, CVV and expiration the same? Do I cancel everything and switch all the bills that are on monthly draw to the next big offer, or do I find a fee free Business card… perhaps even a Debit card?