In the world of personal finance, small, consistent strategies can lead to significant results over time. One such strategy is using a 2% cash back credit card for all your family expenses, excluding rent or mortgage, and investing the cash back rewards monthly. When these rewards are invested in a reliable ETF like VOO (Vanguard S&P 500 ETF) with an average annual return of 10%, the results can be astonishing. Over 30 years, this simple habit can bring your retirement savings close to the median retirement savings for 65-year-olds in 2024, effectively doubling what many might save otherwise.
The Power of Cash Back
Cash back credit cards are a popular tool for savvy consumers. By offering a percentage of purchases back as a reward, these cards provide an opportunity to earn money on everyday spending. For a typical American family of four, expenses excluding rent or mortgage can range between $38,000 and $49,000 annually. At a 2% cash back rate, this translates to $760 to $980 per year.
Investing the Rewards
Instead of letting these rewards sit idle, investing them can maximize their potential. Historically, the S&P 500 has returned about 10% annually. VOO, which tracks this index, is a great investment option. By consistently investing the monthly cash back rewards into VOO, the compounding effect can significantly grow this small amount over time.
The Math Behind the Strategy
To understand the impact, let’s break down the numbers:
- Annual Cash Back:
- For $38,000 spent annually: $760 cash back.
- For $49,000 spent annually: $980 cash back.
- Monthly Investment:
- Monthly investment for $760 annual cash back: $63.33.
- Monthly investment for $980 annual cash back: $81.67.
- Investment Growth: Using the future value of an annuity formula, we can calculate the growth of these monthly investments over 30 years with a 10% annual return.
These calculations show that the investment would grow to approximately $125,015.46 to $161,204.14 over 30 years, depending on the annual spend.
Comparing to Median Retirement Savings
According to recent data, the median retirement savings for 65-year-olds in 2024 is around $200,000 (IraInvesting.com) (Edward Jones). By merely leveraging cash back rewards, a family can accumulate a sum close to this median figure, showcasing the power of this straightforward strategy. For many, this additional amount could nearly double their retirement savings.
Implementation Tips
- Choose the Right Card: Select a cash back card that offers 2% on all purchases without annual fees.
- Automate Investments: Set up an automatic monthly transfer of cash back rewards into a brokerage account to invest in VOO.
- Consistency is Key: Ensure all possible expenses are charged to the card to maximize rewards.
Conclusion
The “Cash Back Super Saver” strategy exemplifies how small, consistent actions can lead to significant long-term benefits. By running all household spend through a 2% cash back card and investing the rewards in VOO, you can amass substantial retirement savings over 30 years. This simple yet powerful approach can bring your savings close to the median retirement savings for 65-year-olds in 2024, effectively doubling what many might save otherwise. Start today and watch your small rewards grow into a considerable nest egg for your retirement.
For more detailed financial planning, consider consulting a financial advisor to tailor strategies specific to your needs and goals.