Best Cash Back Credit Cards for 2011

If you have good credit, the opportunities this year are quite a bit better than the ones from last year. I recently found & applied for the two best cash back credit cards I've seen available in a long time.


Over 18 months ago Schwab offered a cash back card at 2% for a limited time and the window closed before I could apply.  It does not plan to re-offer the card and I've been hunting for a 2% cash back credit card ever since.  Fidelity is offering two amazing deals, including a 2% cash back card, for an unknown period of time; act accordingly.


(Drum roll) Here are the best cash back credit cards for 2011


American Express Fidelity Rewards: Earn 2% cash on everything.  Requires opening a Fidelity Cash & Brokerage account online here (<3 minutes, no deposit required). Cash back rewards are transferred to the Fidelity account which can be transferred to your checking or automatically invested in an IRA or college savings account.  Be sure to give Fidelity account # to representative if applying by phone.  App.


American Express Costco Business: Earn 4% back on gas up to $6,000, 3% on eating out, 2% on traveling, and 1% on everything else. They send a check out once a year with what you accumulated. App.


American Express Costco Personal: Earn 3% back on gas, 3% on eating out, 2% on traveling and 1% on everything else. They send a check out once a year with what you accumulated. App.


Amex SimplyCash Business: Earn 5% cash back on wireless service and office supplies , 3% on gasoline up $12,000 per year, and 1% on every other purchase. Plus, it is automatically credited to your statement each month. App.



American Express Additonal Benefits:
Extended Warrenty: Extends the term of the original manufacturer's warranty up to one additional year.
Damage/Theft Protection: Protects purchases against accidental damage and theft for up to 90 days from purchase. 
Other Benefits here half way at bottom.

American Express is the best card to use for all new purchases particularly because it extends the warranty for free for a year, which has a lot of value.  For example, extending the iPhone warranty 1 year costs an additional $70; an extended warranty on a new TV or other high end purchase is worth even more money.  A friend recently had the water pump on his hot tub go out;  it was outside the manufacturer's warranty by 1 month.  But it was covered by American Express, who cut him a check for $700.


Since American Express is not accepted at all places, particularly restaurants, there's value in also having a VISA Rewards card.


VISA Fidelity Cash Rewards: Earn 1.5% cash on everything.  Requires first opening a Fidelity Cash & Brokerage account online here (<3 minutes, no deposit required)). Cash back rewards are transferred to the Fidelity account which can be transferred to your checking or automatically invested in an IRA or college savings account.  Be sure to give Fidelity account # to representative if applying by phone.  App.


VISA Bank of America Rewards: 3% gas, 2% restaurants, 1% everything else plus $50 cash bonus. App.


Summary:  The difference between 1% and 1.5%-2% is  is 50%-100% more cash back.  It's the difference between a $500 (at 1%) and a $750 (at 1.5%) or $1,000 (at 2%) for simply using a better card.


Avoid.  Credit cards with "up to" language or that have rotating categories or other strings attached generally are games that lower total cash back at the end of a year.

Debit Cards.  While I strongly dislike debit cards because they are more difficult to deal with in terms of fraud protection and offer less fringe benefits, below is the best cash back debit card available:


Mastercard PerkStreet Debit Card:  2% cash back on everything provided you maintain a $5,000+ balance. Less than $5,000, the reward drops to 1%. App.


These are the best deals I believe are available.  If you're aware of something better, please let me know.

Emergency Funds 201

This is an email I wrote to the author of The Simple Dollar in response to his article detailing an approach I think builds on his idea but I feel is much better.

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I always enjoy your articles.  You're a good writer, your comments are relatively succinct, and spot on.

So this reaction is the exception.  I want to take issue with a comment in this article that I *strongly* disagree with.

"Also, never, ever have an emergency fund that consists of a credit line"

I think it's extremely prudent to have a line of credit in case something goes wrong.  I'm a fan of cash-like reserves, but the reality is, if you have any debt, instead of having cash sitting earning essentially 0-1% interest, you could be essentially earning that debt interest rate as a rate of return. 

For example, as a self-employed person, I believe strongly in having safety reserves -- I have more ups and downs than an average person.  However, as soon as I make money, I instantly use it to pay down whatever debt I have -- making sure that debt allows me to borrow back against it as soon as I need money again.  Now if the debt is such that it does not allow one to borrow back without fees (credit cards charge 3% fee for borrowing cash -- ick), that wouldn't make sense (and I have none of that debt).  But what I would argue would make more sense is to go to a bank and setup a 5-50k line of credit at 5-7% (very common, very easy to do, usually a 1x charge of $50 to setup).  Have it sitting there as essentially a cash reserve, and then use whatever cash reserves you have to pay off any debt.  This keeps liquidity that's essential for emergencies while optimizing for interest payments.  If your debt is at 5-25%, you're essentially investing your cash reserves at that rate of return, safe, with liquidity to pull it out at any time.  I've used this strategy for 6+ years very effectively.

Playing Devil's Advocate.  The argument against this is what happens if the bank reduces the line of credit (I recommend having an amount higher than you need).  Or what happens if the bank closes the LOC all together (which is why I recommend having a line at more than one bank).  Neither of those situations has happened, but they're possible, and it's wise to have thought through and prepared for what can go wrong.  Obviously, another problem is what if the person is unable to control their spending (not a problem I have), then this solution would not apply to them.  This is designed for people who are not irresponsible.

Based on how I see it this solution of having a line of credit at a bank is inexpensive to create (usually $50-$150 one-time setup fee), offers much more safety than pure cash reserves (instead of 3-5k available for emergency, there's 5-50k), all your money is working for you at credit card interest rates instead of losing 3% in net inflation.

For a reader who has some basic credit card debt, and could get a simple LOC at a bank, your cash-only reserve solution is essentially costing readers 10-25% a year unnecessarily.  I think there's a better, more frugal, safer way.

As a huge financial perk, I would argue it also allows one to seize a killer buying opportunity if it comes along that might otherwise be missed.  If someone is gets desperate and needs to unload their car for 10k cash that's worth 17k, you could write the check and save (relatively) a huge amount of money.  You've now saved your family a huge amount of money (especially considering after tax dollars - a huge hidden perk of frugality).  And if you don't need it, you could flip it for easy profit.

Lastly, I would argue that the size of your emergency fund (regardless of cash or LOC) should also have "job stability" as part of the variable.  I think self-employed person, or someone with a high degree of stability risk should make sure they have access to more funds than say a tenure teacher.

I think the concept of Emergency Funds that you covered is very important.  Unexpected emergencies that one is unprepared for can take out years of hard work and otherwise perfect planning/work.   I think the elements of utilizing a LOC and ratio'ing the safety amount to stability also improve one's ability to succeed.

I'm open to other thoughts if you see a hole in my thought process.

Emergency Funds 101

The Simple Dollar: “Determining the Size of Your Emergency Fund” plus 1 more

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Determining the Size of Your Emergency Fund One common question I get from readers relates to the size of their emergency fund. Simply put, how big should it be? How much cash should they have saved in their savings account for those unexpected events life deals you? Before we even get started, it’s important to note that there are a lot of different theories and ideas about how big an emergency fund should be. The ideas that follow are largely based on my own experience and from the many stories that readers have shared with me over the years. Also, never, ever have an emergency fund that consists of a credit line. Your credit card is not an emergency fund. A line of credit is given to you by a bank and they have the power to revoke that line of credit or reduce it, often at the very moment when you’re facing an emergency and need that money. Do notrely on it. It is not an emergency fund. First of all, no matter what your situation, you should strive to have $1,000 in your savings account. If you’re trying to pay down debt, switch to minimum payments for a while and build up this level of cash on hand. $1,000 covers the vast majority of the emergencies we face in life. It can handle most car repairs. It can handle many medical emergencies, particularly if you’re insured with a deductible of $1,000 or less. It can handle lots of smaller situations that you didn’t quite expect. If you have high-interest debt, pay that off before building your emergency fund beyond $1,000. I would define high-interest debt as being any debt with an interest rate above 10%. If you are carrying a debt with an interest rate at that level, you need to get rid of that debt. It’s seriously hurting your finances if you let it continue to sit there and accumulate interest. If you have only low interest debts, I would move that emergency fund up to two months of living expenses for your family. I would consider two months of living expenses to be the base level of money I would keep in your emergency fund. What exactly is two months of living expenses? Sit down with your checking account and figure out how much you spend in an average month. The best way to do this is to add up all of your spending over the last year – all of it – and divide by twelve. That will give you your average spending for a month. Multiply that by two and you have two months of living expenses. Of course, if you’re ever in a desperate pinch, you’ll probably cut your spending somewhat and the money will last longer than that. That’s fine, but you never want to assume how your future self spends money. If you have dependent children, I would add another month of living expenses to your emergency fund for each dependent child. Of the items here, this is the one that I would most describe as personal opinion. Simply put, when you have young children, you need to do what you can to maintain a stable household for them. Children thrive in a stable environment. One big tool for maintaining that stable environment is a very healthy emergency fund. Don’t invest your emergency fund money into anything that might lose money. Many people are disappointed in the returns that a savings account gives and want to put their money into other investments with a higher potential return. However, investments that offer a better return tend to lose one (or both) of the two key factors that make savings accounts perfect vehicles for emergency funds. Savings accounts don’t have the risk of losing money over time (often at the moment when you need the money) and savings accounts are highly liquid, meaning you can withdraw the money whenever you need it without penalty. Yes, stocks might outperform a savings account over a long period of time, but on a given day, stocks can very easily be down significantly, which means that you may not have adequate resources during the very emergency when you need it. If you put money into something like CDs, where you’re not at risk of a loss and get a better return, you face the liquidity problem in that you can’t withdraw the money without penalty at the moment you need it. Stick with savings accounts for this purpose. When you do choose to use your emergency fund, your first priority should be to replenish it once you’re back on your feet. This might mean turning off other savings plans or investing plans for a bit as you replenish, but this needs to be done as quickly as possible to protect yourself against subsequent emergencies.