NEW YORK – I like rewards cards. Rewards cards return cash -- or something tangible -- in proportion to how much you use them. As long as you're using a credit card, you might as well split the profits with the issuer, right?
Let's get more specific about the rewards. Traditionally in the Millionaire Zone I like cash best. Cash is better than mileage points, which can go away and gain or lose value according to how redeemers price their wares. Then there's those blackout dates and fine print.
I've been a Discover Card fan for years. Discover returns 1% on most purchases and higher percentages on certain items or in certain places. It's real cash. You can get a check, or apply it to a balance -- saving real money. A few hundred dollars a year -- for doing nothing -- always works for me.
Here's the catch: you just have to pay your bills on time so interest charges don't exceed the reward.
Discovering a different type of reward
I recently became reacquainted with another type of reward card that's been around for a while. After rethinking the concept and rerunning the numbers, it makes more sense than ever: the 529 college plan rewards card. That's especially true if college is a long way off.
Instead of paying cash, rewards can be paid directly into a 529 college savings plan. So you get real savings in a tax free plan, which can grow over the years. That can be better than cash.
The Fidelity Investment 529 College Rewards American Express Card is today's premier example.
Make your routine purchases with this card, and up to 1.5% of the value of those purchases can be redeemed as dollar contributions to a Fidelity 529 account. There are no fees (and an Amex card with no fees is a rare bird) and no hidden costs.
There's a $1,500 annual reward cap, but I doubt most of you charge $100,000 in a year.
Running the numbers
Suppose you make the 529 College Rewards card your "household" card -- that is, you use it for most household purchases for the family, home maintenance, gas, back-to-school for the kids and so forth.
You charge $1,500 a month on the card, or $18,000 a year. One-and-a-half percent would give a reward of $270 each year. That doesn't sound too exciting -- but here's the big difference between the 529 reward card and cash rewards: you get tax-free compounding. Pretty powerful, especially if time is on your side.
Deposit $270 per year for 15 years in a tax-free 529 plan earning, say, 6%, and you'll wind up with $6,291 at the end of Year 15. Or, for 20 years you'll have $9,936.
Now, while these amounts won't pay all of your college costs, they aren't chump change, either. And, they are essentially free, so long as you avoid the 16.99% APR, cash advance and other fees while charging along the way.
Here's where the story really gets good: you don't have to stop with your own ordinary credit-card purchases. You could charge a big ticket item -- say, a college tuition bill -- ringing up another several hundred dollars for the account.
And here's another idea. Talk Grandma and Grandpa -- and anyone else who's willing -- into getting one of these cards, too. You can link as many cards as you want to a single 529 account.
So suppose you're able to crank the annual savings up to the $1,500 limit. With compounding, you could end up with $34,950 in 15 years or a whopping $55,200 in 20 years! Of course, that's if your spending is steady and your 529 investments cooperate.
Remember that there's no limit to the number of 529 plans you can have. And I'd check into the Fidelity plans to make sure their choices suit your needs -- for state income tax reasons, for instance, some plans work better for some families than others.
Every little bit helps, and if your circumstances are right 529 rewards could be more than a little bit.
Jennifer Openshaw is the author of The Millionaire Zone and CEO of Openshaw's Family Financial Network. She hosts ABC Radio's Winning Advice and serves as an adviser to some of America's top corporations. You can reach her at email@example.com.
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