Cash, leverage, debt, equity, and the difference between fake and real opportunity costs

Worth doing with cash

Many years ago when I spent more time on the travel hacking circuit, I heard a guest talking about a then-current Office Depot/OfficeMax deal. She exclaimed, “it was worth doing with cash!” This made such an impression on me that it’s stuck with me through the years, and has exerted a kind of gravitational pull of commonsense that not all travel hackers are naturally endowed with, myself very much included.

Longtime readers will recall that over the course of the merger between Office Depot and OfficeMax, the stores continued to be operated independently (Madison, Wisconsin, where I lived at the time of this anecdote, had an Office Depot on one side of town and an OfficeMax on the other), but they had synchronized their weekly coupons. A common promotion at the time offered a $15 discount off the purchase of $300 in Visa or MasterCard gift cards (depending on the week).

The promotion worked at both stores, but the stores had different inventory and sales policies: OfficeMax had fixed-value gift cards that could be purchased with credit cards (like Chase Ink cards that earned 5 Ultimate Rewards points per dollar) and Office Depot had variable-value cards that could only be purchased with cash and debit cards. What this meant was that most people were stuck buying two $200 fixed-value cards with their Chase Ink cards, paying two activation fees, and earning a small profit before credit card rewards and liquidation costs.

The speaker at this gathering was making the simple point that $500 variable-value cards were worth buying without earning any credit card rewards at all: you could earn all your profit up front by buying $500 variable-value cards with cash, and not face any purchase restrictions at all; she could clear the store out, write them a check, and walk out with $1,000 in profit (after liquidation). As I recall, in this iteration of the promotion purchasing three $500 gift cards would trigger five $15 credits, for a pre-liquidation profit of $54.15 per 3-card purchase.

I still use this anecdote as a kind of quality control check when I’m exploring a new technique, or a new approach to an old technique, because it helps me break them into individual parts: which parts cost money? Which parts earn money? Is there a way to skip the parts that cost money and jump straight to the parts that earn money?

A simple example is bank account signup bonuses. Doctor of Credit curates an endless list of these bonuses, which typically let you earn a few hundred dollars for setting up a direct deposit and sometimes leaving some money in the account for a few months. Some of these banks also allow you to fund your initial bank account deposit with a credit card, usually limited to a few hundred or thousand dollars.

You can imagine someone taking these two facts and deciding “the best technique is to use my highest-earning credit card to fund accounts with banks with the highest new account bonuses that accepts credit card funding.”

In this example the error is clear: you should sign up for the highest new account bonuses regardless of whether they can be funded with credit cards. Accepting a $200 signup bonus instead of a $300 signup bonus so you can charge $500 to a credit card that only earns 2% in rewards is the purest false economy — use cash and earn the $300 instead.

Leverage

If ordinary Americans ever encounter the idea of leverage, it’s in one of two places: the purchase of a primary residence, and the gutting of the industrial and commercial giants of the 20th century. The principle is the same in both cases.

Given any amount of starting capital (including $0), you can earn an excess return on any investment through the addition of borrowed money: $100,000 spent on a $100,000 house allows you to earn the appreciation on a $100,000 house, but $100,000 spent on the down payment of a $500,000 house allows you to earn the appreciation on a $500,000 house. If you can’t make your mortgage payments, or the house craters in value, you can walk away with nothing but a stern warning on your credit report.

Likewise, in the leveraged buyout of a stodgy old industrial firm, investor groups can borrow against the assets of a company and strip it for parts. If they are able to unload the shell to some greater fool at a profit, then they’ve earned free money on the exercise. If not, they haven’t staked any of their own money on it to begin with anyway.

This is the core of the ideology of leverage: stake as little of your own fortune as possible to secure an equity interest with unlimited upside.

Against opportunity cost

Many pillars of elementary economics, which is as far as most business and finance journalists seem to make it, rely on the conceit of rational economic actors who are constantly operating at an “opportunity frontier.” That is to say, all their resources are optimally allocated across all available opportunities at all times. When a new opportunity comes along, the economic actor determines whether and how many resources to allocate to it by comparing it to all other existing opportunities.

I like to think of this as the “bump off” fallacy: each new opportunity is evaluated to see whether it should bump a lower-earning opportunity off the bottom of the stack of available opportunities.

The problem, which I have only become more aware of as I have become more experienced, is that virtually no one operates anywhere close to the opportunity frontier. This is frequently parsed by malicious people as “this generation would rather eat avocado toast than save for a down payment,” but I am making a much more literal argument: most people do not hold even their long-term cash savings in accounts that earn the maximum rate of interest available to them.

They are not guilty of anything for not maximizing their rate of return. There are only so many hours in the day, and too many people spend too many of them between working and getting back and forth from work. You would be insane to blame them for preferring dinner, a beer, and a football game than moving money back and forth between high-interest checking accounts.

The flip side of that is that “opportunity cost” is an absurd way to describe the choices of someone who is not operating anywhere close to the opportunity frontier.

You only get to keep the difference

There is a commonsense logic behind the concept of opportunity cost, however, which I use when making decisions about using cash or debt for any given opportunity: you only get to keep the difference.

That is to say, if an opportunity comes along that lets you earn (pulling a number out of thin air) 19.6% APY (1.5% per month annualized), and you choose to finance that opportunity with cash that’s currently earning 5.01% APY, then you shouldn’t take credit for the full 19.6% you see in returns, but only the difference between that and the return you would have earned on your status quo ante, a “mere” 14.59%.

Obviously I’m being a bit facetious: that would be an excellent thing to do with your cash savings, if you had to. But if you didn’t have to, and you could keep the whole whack, you’d be even better off.

Administered interest rates on credit card debt make a lot of things worth doing with debt

Back in November I described my distinction between “administered” and “market” interest rates. Credit cards offer a curious combination of the two: an administered interest rate of 0% on loans of between 15 and 50 days (depending on when the purchase falls in the statement cycle and the length of your grace period), and a (high) market interest rate on loans after each statement’s grace period has expired. A credit card earning 2% in cashback rewards offers even more favorable terms, the equivalent of a 2% yield, rather than interest charge, on each new loan you originate each month, as long as you pay it back in time.

Let me illustrate this with an example present at this very moment in the real world. The Giant grocery store chain is currently offering 2 or 3 points per dollar on the purchase of Vanilla Visa prepaid debit cards. Their variable-value cards still cost $6.95 (while Safeway’s cards have gone up to $7.95 in my region), so each purchase yields a profit of $3.05 or $8.05 in grocery rewards ($10 or $15 in grocery rewards less a $6.95 activation fee), minus any liquidation cost. This is a classic “worth doing in cash” situation: the profit is present however you pay for the gift card that generates it.

But remember, you only get to keep the difference. If you did pay with a debit card linked to an account earning 5% APY and it took 5 days to liquidate the gift card back into your balance, how much did it cost you? About $0.33 in interest, bringing your final profit down by the same amount.

In this situation, the rationale for using a credit card is obvious regardless of any rewards earned: why sacrifice the interest earned on your cash when you have access to a costless source of credit?

Inverting the logic of leverage

The common examples of leverage I offered, residential home purchases and corporate buyouts, have in common the basic conceit that acquiring ownership of a productive asset with borrowed money lets you secure a larger future income stream than you would be able to afford with your cash on hand, while enjoying an unlimited upside and capped downside.

What I am telling you is that these opportunities do not only exist at the tail end of the duration curve, the 30-year mortgage or the 10-year airline turnaround or the 5-year electric car plant retooling. The precise same logic applies at very shortest durations, where administered interest rates make debt free or profitable to take on.

When and where that is the case, using capital rather than debt to pursue the same opportunities puts a drag, rather than a tailwind, on your total investment return.

Upton Sinclair, petty capitalism, and intrusive thoughts

“It is difficult to get a man to understand something, when his salary depends upon his not understanding it.”

I’ve been thinking about that line from Upton Sinclair’s campaign memoir “I, Candidate for Governor,” on and off for the last year, and I’ve come to believe it gets one thing very right and one thing very wrong.

Cultures are very good at reproducing themselves

It’s currently fashionable to claim that Americans are in a maelstrom of loneliness, but what I’m continually struck by is the astonishing plethora of civic organizations you can see on every streetcorner. You may suspect that the Elks, Eagles, Pachyderms, and Masons are aging and insignificant because you happen to not enjoy spending time with them, but whenever I visit small and medium-sized towns they’re the first places I see teeming with activity. I’ve gone to bingo at the VFW, sung the Montana state anthem at a Kiwanis meeting (“Montana, I love you!”), and danced lacklusterally in ballrooms at the Elks Club.

If you don’t like those examples, let me suggest you look at the stately manors lining the most valuable real estate in the most successful cities in America: note they all seem to have Greek letters outside, because they’re owned and occupied by the members of fraternal organizations that have managed to survive not by stringing along aging members into senescence or renting out their ceremonial halls for funerals, but by recruiting brand new troops of 18-year-olds each and every academic year.

These cultures adapt and shift over places and times, but the reason they perpetuate isn’t because of their adaptability, it’s because of the urgency of their internal logic. And, in fact, most human activities take this form.

The culture of petty capitalists is determined by the nature of petty capitalisms

If you have ever known someone before and after they acquire a rental property, you’re no doubt familiar with the sudden change in personality they undergo. Suddenly obsessed with trash pickup schedules, noise ordinances, and lawn maintenance, the simple act of holding a deed transforms your laid-back friend into the most annoying landlord you’ve ever met, overnight.

The same pattern repeats everywhere. Anyone who has bet money on the Superbowl can transform before your eyes into a specialist in NFL rules mechanics. Any piker who busts a hand in blackjack will suddenly be able to explain why the player to their right screwed them by making the wrong play and, really, that two of hearts should have been theirs, if you think about it.

I recently read an anecdote [I thought this anecdote was from Gay Talese’s memoir “Bartleby and Me” but I can’t find it there, so consider this hearsay instead] of a door-to-door furniture salesman from the 40’s or 50’s who explained to the reporter that the only thing worse than a customer who couldn’t make their installment payments was one who paid off their furniture early. After all, a late payment just added to their total interest, most of which went to the salesman as commission, but an early repayment meant cutting short the entire future stream of income from the exhausting work of closing a door-to-door furniture sale on installment.

What all these examples have in common is that they take an outcome you might otherwise be neutral towards (landlords versus tenants, Texas versus New England, furniture debtors versus furniture creditors) and, purely through the mechanism of self-interest, make you emotionally and morally invested in one side over the other.

This is a mistake, but it’s a very easy mistake to make, so one shouldn’t feel too bad about it, but rather strive to do better.

Prosper and the strange case of “prepayment risk”

If you’ve ever heard of “prepayment risk,” it was probably in the context of mortgage loans. Lenders financing long-term, fixed-rate loans live in the same terror as our door-to-door furniture salesman: if a loan can be repaid at any time, then it’s impossible to predict the loan’s future stream of income. If short-term rates rise, then the lender is stuck collecting below-market interest on their capital. But if rates fall, then the borrower can refinance the loan at a lower rate and force the lender to reinvest their capital at a similarly lower rate.

Since ordinary people borrow money to buy houses, rather than lend money to others to buy houses, most people understand that this is a feature, rather than a bug, of our housing finance system. Since financiers cannot live in houses, but people can, people should be free to refinance their loans as often as it’s advantageous while rates are falling in order to more easily afford shelter, but not be forced to refinance their loans when rates rise, since that would make their shelter less, rather than more, affordable.

What I was not expecting from investing in peer-to-peer loans with Prosper is the way it so closely mirrors the experience of a mortgage lender and the similarly intrusive thoughts it generates.

From a lender’s perspective, prepayment risk is the dominant risk on the Prosper platform. This should surprise you. After all, Prosper makes extremely risky loans. Here’s one offering a yield of 29.25% on a 5-year loan:

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This loan will probably not be repaid in full and on time, which Prosper itself explicitly acknowledges (the historical return on such notes is shown as 2.62% - 13.18%). If you had some way of only picking the 29.25% loans that would be repaid in full and on time over 5 years, you’d make a killing only investing in those notes. But you don’t, so some of the loans you pick will default and the more loans you buy, the closer your actual returns will get to the overall return of similarly-risky notes.

Prepayment risk is the flip side of default risk, because Prosper also makes extremely safe loans, and people with good credit and steady income have much cheaper alternatives for credit than unsecured Prosper loans. In the same way that people who just-barely qualify for Prosper loans can quickly slip into default, people who easily qualify for Prosper loans can quickly find more favorable terms from other lenders.

Since I started investing with Prosper again in January, 2023, 37 of my loans have been paid in full, compared to 488 in current repayment, 5 with late payments, and one charge-off. In other words, while investing in highly-rated loans, prepayments are a vastly more frequent occurence than settlements, bankruptcies, and charge-offs.

Why do Prosper lenders hate prepayments so much?

There’s something intrinsically funny trying to explain why Prosper lenders hate prepayments. Here’s a typical example of a prepayment. The loan was originally for 4 years at a 14% yield:

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The borrower made their first two payments on-time, then repaid the remaining interest and principal balance:

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I made a total of $0.72 ($0.77 in interest less $0.05 in Prosper’s “service fees”) on a $25 loan, a mere 2.88% total return, far from my promised 14% yield. But I made it in 2.5 months (October 23 to January 7), not 4 years, which through a little exponential arithmetic gives me an annualized return of 14.6% (this is not to be taken too literally; on small amounts over short periods each penny and each day shows up as a big difference in annualized yields).

There are essentially three reasons that I think Prosper lenders spend so much time fuming over prepayments. First is a sense of powerlessness. Prosper determines the eligibility of borrowers and the repayment term and interest rate they’ll pay. Lenders have to accept or reject the loan terms agreed on by Prosper and the borrower. Since the lender is subject to the whims of the Prosper lending algorithm, lenders have a sense that borrowers should be too. If a lender is willing to surrender access to their money for a full 5 years, why shouldn’t the borrower be locked into the same repayment period?

Second is a sense of scarcity. Once Prosper has determined the loans that are available, it feels to lenders like they’re doing valuable work sorting through those loans to determine the most qualified borrowers and most favorable repayment terms. Prosper invites this mania by listing obviously meaningless information like the borrower’s state of residence and information about their residency, credit history, income, and employment. The provision of this information mechanically instills in the lender the conceit that they can apply some novel combination of metrics to select the loans most likely to be repaid on time and in full, but not a moment sooner. If you’re carefully hand-picking loans and one of them gets repaid after just a few weeks or months, then you’ve not only lost that dedicated stream of interest revenue but you’ve also wasted all the time you spend hand-picking that loan.

And finally, there is a perfectly accurate sense that Prosper gets paid first, because they do: their loan origination fee (“1%-9.99%, depending on Prosper Rating”) is subtracted from loan proceeds before they’re distributed to borrowers. This means Prosper gets paid generously to process the churn from quickly-repaid, high-quality loans: the same $25 loan that netted me the $0.72 in interest over 2.5 months generated roughly $2.55 in revenue for Prosper (a 1% origination fee and $0.05 in servicing fees).

Of course, Prosper incurred expenses managing the loan, and I didn’t.

You cannot keep the intrusive thoughts out but you don’t have to agree with them

Hopefully I’ve given enough examples in this post that you recognize yourself or someone you know in at least one of them. The fact is, people succumb to moralizing when they are personally financially involved in a way they never would about identical financial transactions they don’t have a stake in. Once you become a realtor you are compelled to believe that a 3% buyer’s fee was handed down to Moses on Mount Sinai. Once you become a New York City apartment broker (a profession that everyone agrees does not and should not exist anywhere else) you are instantly convinced that one month’s rent is the correct and natural broker’s fee.

What I am here to tell you is that you cannot resist thinking those thoughts, but you do not have to agree with them. We all know that there are good people, who resist the intrusive thoughts of their profession and adhere to a moral code independent of their income source. We all know there are normal people who are just trying to get by in whatever profession they happened to land in. And we all know there are bad people, who succumb instantly to the imperatives of their profession.

So, when you feel those imperatives, do you resist them, go along with them, or succumb to them? Do you think homeowners have special insight into the unfairness of property taxes just because you happen to be a homeowner? Do you think employers have special insight into the unfairness of the minimum wage just because you happen to be an employer forced to pay the minimum wage? You can’t keep from thinking such thoughts, but you are not forced to agree with them when they intrude on you unbidden.

Comparing Bank of America Preferred Rewards and US Bank Smartly relationships

For a good number of years, Bank of America has offered the highest cashback rebate on unbonused spend through their “Preferred Rewards” relationship program. Once you’re enrolled in the “Platinum Honors” tier, you earn 2.625% cashback on their Unlimited Cash Rewards credit card.

Recently, Robinhood began offering a 3% cashback credit card, which I doubted the existence of until readers assured me they had actually received their cards. I’ve been on the waitlist without any sign of movement for a year or so. If you’re able to get that card, then it’s a great card for unbonused spend. Since, for whatever reason, I can’t get it, I don’t have any practical insight to share about it.

On the other hand, I have an excellent relationship with US Bank dating back to my early teens, and have recently been getting ads in the US Bank app for the US Bank Smartly Visa Signature card. This card offers an unbonused 2% cashback (comparable to the Fidelity Rewards Visa, Citi Double Cash, and Barclaycard Arrival Plus), that increases to 3% cashback with $50,000 in qualifying balances and 4% cashback with $100,000 in qualifying balances.

There’s no point beating around the bush: that’s the best unbonused cashback rate you’re going to earn in 2025. But it’s not for everybody, and it’s still not for me, at least not yet.

Bank of America Preferred Rewards (re)qualification periods

There are two ways to qualify for Bank of America Preferred Rewards. You can qualify based on your rolling 3-month average balance, or you can open a new account with new funds above the qualification threshold. Last year I qualified by holding $100,000 across my Bank of America accounts, and when the 3-month average reached $100,000 (after 3 months), I triggered Platinum Honors status.

Requalification is simpler. According to Bank of America:

“No need to worry if your balances dip temporarily; you'll keep your Preferred Rewards program status for a full year. If after a year you no longer meet the balance requirement, you'll get a three-month grace period. If you haven't met the balance requirement after those three months, you'll be moved to a lower tier or lose your Preferred Rewards benefits, if you no longer qualify.

If you meet the balance requirements again within 24 months after losing your benefits, we’ll automatically reinstate your Preferred Rewards membership. If you meet the requirements after 24 months, you’ll need to re-enroll in the program.”

I’m not sure how this is implemented in practice; as I said, I only qualified for the first time last year, so my requalification/grace period is still a few months in the future. But what’s absolutely clear in both theory and practice is that you don’t need to keep large balances with Bank of America in order to retain your Preferred Rewards status. That status is based on a once-a-year check.

US Bank handles qualification differently.

US Bank Smartly qualification periods

US Bank’s qualification period for boosted cashback is seemingly based on a continuously-rolling 3-month balance:

“Combined Balances are based on the average daily balance of the previous 3 months (calculated monthly) (or, for account(s) open less than 3 months, the average daily balance of the applicable time frame).”

This means unlike Bank of America, your qualifying funds have to be moved over on a quasi-permanent basis if you want to continue earning the highest cashback rate on the Smartly Visa card.

This is perfectly fine if you have $100,000 in assets you want to permanently store with US Bank. I have no reason to believe they are any less competent a custodian of your assets than any other licensed brokerage, and 4% cashback on unbonused spend is not something you are going to find elsewhere, outside of spending towards credit card signup bonuses.

At the margin, another strong case can be made for people who have between $50,000 and $100,000 in investment assets. By permanently moving those assets to US Bank, they can trigger the 3% cashback tier, which is still comfortably higher than Bank of America’s highest 2.625% rate.

Conclusion

I keep repeating the word “permanently” because one of the biggest decisions an investor needs to make is which money is permanently allocated and which is available for what you might call “spontaneous” allocation. A high-balance IRA is a very valuable tool for spontaneous allocation, since it can trigger brokerage bonuses on an ongoing basis, and can trigger Bank of America Preferred Rewards on an annual basis, but that flexibility is sacrified if you’re required to maintain your qualifying balance on a permanent basis with US Bank.

That problem disappears as the amount money you have available to spread across such accounts increases, but that’s a restatement of the banality that the rich get richer; it’s not actionable insight into how to earn the most cashback on your unbonused spend.

Two years investing with Prosper peer-to-peer lending

For the last few years I’ve been scaling up my investments with the Prosper peer-to-peer lending platform. Since there is essentially no community information available (the Prosper forum on reddit has been silent for 7 years, and Bogleheads was even less help), I was accumulating datapoints from scratch. Now that I’ve spent some dedicated time on the platform, I want to share how investing with Prosper really works.

My investment parameters

As I mentioned back in May, I have Prosper’s “recurring order” function (not to be confused with “Auto Invest”) set up to invest in $25 increments in “AA”- and “A”-rated notes with yields of 10% and higher. This has two valuable functions. First, when I deposit cash in the account it is automatically invested as qualifying notes are added to the platform. Second, since interest and principal payments are added to the same cash balance, it keeps repayments from sitting idle and therefore contributes to compounding discipline. Whenever deposits or repayments result in $25 or more in my cash balance, it’s invested in the next qualifying note that’s added to the platform.

The ineffability of rates of return

At this point we have to make a digression into the metaphysical. Annual percentage yield (APY) is a common and useful metric of investment returns because, when properly calculated, it offers a like-for-like comparison between investment products.

If you read that sentence again, you’ll see “when properly calculated” is doing all the work, and in point of fact, APY is really only useful in a few specific contexts, like bank accounts and long-term zero-coupon bonds, where your entire balance earns the specified interest rate and interest payments are automatically reinvested at the same underlying rate. In other contexts you may calculate a sort of pseudo-APY to compare products, but it should not be confused with your actual, real-world rate of return.

This is obvious to anyone who thinks about it for a moment, so there are lots of alternate methods of calculating return which are useful in their individual contexts. The “SEC return,” which you often see in descriptions of mutual funds, is a set of formulae the SEC has authorized to be reported based on dividend payments. Likewise “dividend yield,” usually seen in stock and ETF listings, is a mechanical calculation based on the company’s most recent dividend payments and current share price.

Somewhat more exotically, you have the question of actively-traded funds and hedge funds which hold some of their investors’ money in cash. How should the return of these funds be calculated? Based on the total amount investors have committed to the fund, or on the actual investments the fund makes? Should investors count the cash held in a hedge fund waiting to be invested against their cash allocation or their investment allocation? Should their rate of return be calculated only on invested cash, or on the total balance held with the fund?

These questions aren’t mathematically hard, they’re hard because there’s no right answer: you should use the calculation that gives you the most useful answer for the question you’re asking.

This brings us to Prosper’s return calculation.

The Prosper return calculation

Before we continue, let me quote Prosper’s description of their return calculation at length. This return appears both on the app and desktop website (emphasis mine):

“Your Return is calculated using a formula where (A) the numerator is equal to the sum of all the interest received on active Notes, plus all late fees received on active Notes, minus all servicing fees paid, minus all collection fees paid, plus all net recoveries received on charged-off or defaulted loans, plus all net debt sale proceeds received on sold loans, plus all net sale proceeds received on Notes sold on Folio, minus gross principal losses, plus any investor promotions credited to your account; and (B) the denominator is equal to the sum of the amount of active principal balance outstanding at the end of each month since account opening. The results are then multiplied by 12 to get an annualized return. This gives us the ‘Return’ for your Prosper Notes.”

Within this paragraph we get a few answers to how Prosper answers the metaphysical questions I posed above. For example, we’re told that uninvested cash does not count towards the return calculation: only your invested cash (“active principal”) does. But the part I highlighted describes a different confusion you will encounter as you scale up your Prosper investments: invested principal counts towards your return calculation before a single payment is due.

Remember, Prosper makes individual loans to borrowers, and you are investing in a slice of those repayment-dependent notes. After a loan has become funded by investors, the money is distributed to the borrower. The borrower’s repayments start at least a month after you’ve put in your order for a slice of their loan. But until the first payment is made, your slice of the note counts only towards the denominator of Prosper’s return calculation.

This means Prosper’s return calculation will always be depressed by the amount of active principal not in repayment in any given month. This is a feature when it reflects a loan with late payments or that has been sent into settlement or bankruptcy, but it is misleading when it reflects an eventually-performing loan that simply has not begun repayment yet.

Your Prosper return gets more accurate as loans age into repayment

To illustrate this effect, I completely stopped making new deposits into my Prosper account in October, so that all my existing notes would have a chance to enter repayment (or become past due). Only money reinvested from repayments of interest and principal would affect the denominator of my Prosper return, and sure enough, you can see the return wobble depending not on the performance of my loans, but on the amount of my total balance that reflects new loans. This chart shows my Prosper return over 2024:

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Those returns are recorded as:

• January: 10.58%

• February: 10.52%

• March: 10.53%

• April: 10.02%

• May: 9.05%

• June: 8.23%

• July: 10.19%

• August: 8.18%

• September: 9.19%

• October: 9.53%

• November: 9.04%

• December: 10.16%

The essential thing to understand is that this wild range, from 8.18% to 10.58%, does not reflect any underlying economic reality. It only reflects the amount of new principal invested each month, which contributes to the denominator of the return calculation, but is not reflected in the numerator until months later.

Calculate your own return based on mature notes

Fortunately, Prosper provides detailed account statements, which are usually available in the mobile app around the 5th or 6th of each month, and on the desktop website a bit later. These statements let you calculate your own rate of return depending on the metrics that matter to you. My preferred method is to base returns on the previous month’s “Principal Balance of Active Notes.” All of those notes should have entered repayment by the end of the following month, so it lets me focus exclusively on the interest earned on mature notes, disregarding uninvested cash and notes too new to have begun repayment. Here are my 2024 returns based on that metric (each month is shown as an annualized rate of return):

• January: 17.2%

• February: 12.8%

• March: 13.6%

• April: 15.5%

• May: 13.8%

• June: 12.4%

• July: 13.6%

• August: 11.3%

• September: 12.8%

• October: 12.3%

• November: 11.2%

• December: 12.8%

As you’d expect, the biggest differences between the return Prosper calculates and the return I calculate take place in the months where I’m purchasing notes most actively (July-September), and the smallest differences occur in the months I let my notes age into repayment (November and December), but my Prosper return will always be below my own calculation because Prosper will only show your return based on the entire lifetime of your account, and I have had my account for many, many years.

The significance of the early years, when I liquidated my notes on their resale platform at a loss (I was broke and needed the money), will be diluted over time but will never disappear from my Prosper return calculation unless and until they update their formula.

A note on “tax efficiency”

I am now required by the conventions of financial journalism to say something about tax efficiency, the idea that you shouldn’t care about the actual returns you earn from your investments, but rather how much of those returns go to your local, state, and federal governments.

I consider this a deeply unhealthy attitude that causes people to do preposterous things with their money, but the wisdom of our ancestors is in the simile; and my unhallowed hands shall not disturb it, or the country’s done for.

Interest payments on notes held in Prosper’s standard taxable account are taxed at your marginal income tax rate. Return of principal (78% of my December payments, for example) is untaxed, and losses of principal (bankruptcies, settlements, and charge-offs) are deducted from your interest payments to arrive at your total taxable interest amount.

One approach to tax efficiency might be a tax-exempt municipal bond mutual fund. Glancing at Vanguard’s list of state-based tax-exempt mutual funds, current SEC yields range from 3.14% for California (VTEC) and 3.83% for Pennsylvania (VPALX). Those yields are much lower than my returns to date on Prosper, but you can imagine someone investing on Prosper with a 50% marginal tax rate and 50% default rate ending up more or less breaking even between the two. My marginal tax rate is much less than 50% and my default rate is much less than 50% so I do not consider this to be a realistic concern. A high-income person investing in the riskiest loans is free to reach their own conclusions.

An approach I have more sympathy for is making Prosper loans in an Individual Retirement Account, which Prosper is set up to faciliate. Only cash can be contributed to IRA’s, so you can’t move your existing notes into an IRA, but you can contribute up to your annual limit and I assume you can move cash in from existing IRA’s, although I’ve never tried.

Traditional IRA’s allow you to deduct your contribution from your taxable income each year, but much more importantly allow your investments to compound tax-free inside the account. I do not know of a single person in history who has literally sold off their investments to pay their tax bill, but if you’re that person, then having your Prosper investments compound tax-free will save you the trouble of finding investments to liquidate to pay the taxes on your interest.

Another reason to consider this is that most investments people hold in their tax-advantaged retirement accounts are already quite tax-advantaged. Vanguard’s LifeStrategy Growth Fund (VASGX) only issued 2.3915 cents per share (0.054% of Net Asset Value) in short-term capital gains in 2024; the rest was taxable at the heavily-discounted long-term capital gains rate. Holding those long-term assets in a tax-advantaged account is a waste of the internal tax-free rate of return, which is best spent on highly tax-inefficient investments like Prosper loans.

The flip side is the difficulty of liquidating Prosper loans, inside or outside of tax-advantaged accounts. Once you have reached your risk tolerance for such loans, then you’d naturally want to turn off the reinvestment features and start moving the resulting interest payments into other investment vehicles. But tax-advantaged accounts, unlike taxable accounts, make this process onerous and increase the drag on returns of your uninvested cash.

To summarize, an IRA is the ideal place to hold Prosper loans because of their inherent tax inefficiency and the benefit of internal tax-free compounding, but actually doing so requires a level of sophistication and diligence that the overwhelming majority of people should not be expected to demonstrate.

Conclusion

I have much more to say about Prosper, which I surely will at a later date, but that seems like enough to chew on for now.

As I mentioned in my earlier post, the three most important risks to consider when investing with Prosper are platform risk (Prosper declares bankruptcy and your notes become unsecured claims against Prosper, not the individual borrowers), underwriting risk (Prosper got something fundamentally wrong when underwriting notes and they are in fact much riskier than they are purported to be), and macroeconomic risk (the notes are underwritten properly but an economic crisis drives even well-qualified borrowers into default).

Those risks are real. If they were not real Prosper would not offer returns 3-5 times higher than the risk-free rate on US Treasuries. But Prosper does offer such returns, and if you’re willing to bear those risks, you’re able to earn outsized (pre-tax) returns, until one or more of those risks comes to fruition.

If that happens soon, you’ll lose some or all of your principal. If that happens a long time from now, or never, you’ll make a killing. And that, to me, is the essence of investing.

Two steps forward and one step sideways with Hyatt awards

I’ve seen a number of people write about two big improvements to the World of Hyatt award booking system: during the reservation process, Guest of Honor Awards (giving the guest Globalist privileges during their stay) and Suite Upgrade Awards can now be selected and applied online while make an all-cash or all-points reservation.

Previously, these awards could only be applied over the phone after a reservation had been made. Unfortunately, these awards still cannot be combined with each other or with Pay Your Way reservations, either online or over the phone. Let’s discuss.

“Pay Your Way” lets you use points, cash, and free night awards on a single reservation

I use this feature all the time, but it doesn’t offer any special value except convenience: most chains require you to “check out” and “check back in” when you move between different payment types and reservation channels, but as long as you’re booking through Hyatt you can combine points, cash, and free night awards however you like, as long as the same rate and room type is available for each night, saving you (or, God forbid, a loved one) a trip or two to the front desk during your stay to remake your keys.

That lets you use cash for the nights that are cheapest with cash, points for the nights that are cheapest with points, and free night awards for the most expensive nights (since Hyatt free night awards are classified by property category, not specific point values).

Again, this does not save you any money, points, or awards, as long as each of the nights is available on its own, although it may help you meet a minimum stay requirement during especially busy times if a property won’t let you book the nights individually.

Suite Upgrade Awards and Guest of Honor awards can be used online but can’t be combined with free night awards (or each other)

What many people have been talking about is the ability to apply Suite Upgrade Awards and Guest of Honor awards online at the time of booking. This is fine and good, but it’s only half the story.

As a reminder, Suite Upgrade Awards allow you to confirm an upgrade to a property’s entry-level suite, if available at time of booking. Previously, these awards had to be redeemed by calling into Hyatt. Now, there’s a radio button to click that lets you see if there’s an available suite and redeem the award for it during the booking process.

Guest of Honor awards give the guest (including yourself, if applicable), World of Hyatt Globalist status benefits during a stay, the most important of which are generally considered to be free breakfast, free valet parking (on award stays), waived resort fees, late checkout, and suite upgrades, if available at check-in.

So while it’s obviously not especially common, you can imagine a situation where you might want to apply a Suite Upgrade Award to a Guest of Honor booking, since the benefits are very slightly different. You want your in-laws to have free breakfast and late check-out but you also want to make sure they get a suite for their gazillionth anniversary instead of counting on hope or an e-mail to the general manager.

That’s not possible, since only one award can be applied to a reservation.

The problem and the easiest workarounds

That’s an extreme case, but a much more obvious situation is a Globalist or friend-of-a-Globalist trying to apply a Suite Upgrade Award to a Pay Your Way reservation, which happens to be the precise situation I found myself in the other week. I’d identified an upcoming Category 7 Andaz stay as a perfect redemption storm: a Category 1-7 free night award for the most expensive night and points for the cheaper ones, all made in a single online reservation through the convenience of Pay Your Way.

But as you’ve gleaned by now, it doesn’t work. You can’t apply a Suite Upgrade Award to a Pay Your Way reservation online, but Hyatt can’t apply it over the phone either.

How much of a problem this is depends on which nights you intended to apply the free night award to. Hyatt is better, in my experience, at detecting and combining reservations in advance, so if you’re using the free night award for your last night, you can just use the Suite Upgrade Award for the first nights of the reservation (booked with cash or points) and you’ll have a chance verging on 100% of simply being left in the same suite for the last, “ineligible” night.

This is less likely to work if the night you want to use the free night award on falls in the middle of your stay, but I suspect the odds are still pretty good.

I hesitate to venture a guess on how the billing would work out if you tried this with a Guest of Honor award, since many of those benefits are literally billed daily or nightly: breakfast, valet parking, resort fees.

Conclusion

World of Hyatt has been in a class by themselves when it comes to resisting the devaluation of their points and free night awards, and I am going to rely on them more in 2025 since I qualified for Globalist in 2024 for the first time since taking advantage of the Starwood-Marriott status match years ago.

But I’m not here to give them any more credit than they deserve: the system is still pretty annoying and I hope this post makes it slightly less annoying for the next guy.

Vermont, the ratchet of prosperity, the community of isolation, and the isolation of community

I recently spent a few weeks in Vermont during what they hilariously call “stick” season, the one between “leaf-peeping” and “ski” seasons (because the leaves have already fallen off but the snow hasn’t fallen yet), and the experience made a surprisingly profound impression on me, much like my bizarre trip to Galveston, Texas.

Vermont is a wonderful state, and I spent two memorable summers at Middlebury College’s Language School, so I have unlimited built-in good will for Vermont and Vermonters. But over the course of the trip I developed a kind of unease which I think is familiar to people who’ve read H.P. Lovecraft and his descriptions of the virtues of Yankee life.

Vermont is a very rich state

I think a lot of people intuitively understand that New England is one of the richest sections of the country, and therefore the world, mainly because it has been settled by capitalists for so long. There are lots of ways of measuring this, but they all tell the same story.

Besides the blip around Spring, 2020, Vermont has had an unemployment rate below 3% since 2018.

In 2023, Vermont’s GDP per capita income (in constant 2017 dollars, which is to say, actual per capita income is thousands of 2023 dollars more than this) ranked 23rd in the country, at $57,521.

If you prefer to judge the wealth of a society by how it treats its people, Vermont has performed better than the national average on NAEP standardized tests since they began administering them in 2002. Vermont also extended public health insurance to low-income adults under the Affordable Care Act in 2014. In 2020 it ranked seventh among US states for life expectancy at birth, at 78.8 years, placing it between Estonia and the Czech Republic among the social democracies and obviously well above the US average.

Besides the University of Vermont in Burlington, Vermont also is home to one of the finest liberal arts colleges in the country, in Middlebury, and a number of even smaller private colleges founded by various religious sects over the years.

This is a rich state. This is a virtuous state. But it’s also a state filled with people who behave like they are absolutely terrified.

New England newspapers are a national treasure

The first thing I do when I visit any place is grab the first newspaper I see, and keep grabbing until I leave. Over the course of my trip I managed to snag 5 weekly papers from 2 different publishing groups across several Vermont valleys. This is a bit of a callback to my conversation with Ted Fleischaker, publisher of a Portland, Maine, independent newspaper on a 2021 episode of the Manifesto.

There is something glorious about New Englanders that makes them simply mad for newspapers, but even Ted couldn’t compete with these things: 40-page tabloids with news, gossip, police blotters, classifieds, notices, and of course obituaries.

But as I read page after page of this loving-crafted, high-quality local reporting, a kind of unease crept up on me. What are they all so scared of? Don’t they know they’ve already won?

The Terror of taxes

What alerted me that something was wrong was a bizarre story in the Stowe Reporter about a fight over short-term rental registration fees. I don’t believe the article is pay-walled and I’d encourage you to read it for yourself before continuing here.

The core of the dispute was not, as it is in many communities, whether Stowe should regulate short-term rentals marketed through the lawless online marketplaces. That fight had been settled. The fight was whether the fee levied on short-term rental providers would raise too much money. At this point it’s necessary to quote at length:

“The selectboard last week wrestled for nearly an hour over how much to charge, to make sure the fees cover the extra cost the town will incur enforcing its short-term rental ordinance without fleecing owners just for the sake of bringing in extra cash…

“…Based on the idea that there are roughly 1,000 short-term rentals in Stowe, that fee would bring in $50,000 in revenue, which would cover the annual software cost of $40,000 and an extra $10,000 in staff time for the first year…

“…Board member Ethan Carlson said it would be better to err on charging more now and, in a future year, decide to cut back if necessary, instead of setting a fee that is too low and having to increase it later and having to face ‘a room full of people who are very upset.’

“He felt the estimate of $10,000 a year to cover the town’s administrative costs for running a registry was too low. But board chair Billy Adams said fees are rarely intended to cover the entire cost of doing business — for instance, fees for zoning permits, liquor licenses and dog registrations don’t fetch enough revenue to cover their respective administrative costs, he said…

“..Adams also worried about upsetting property owners who are already upset about paying high taxes to both the town and the state education fund. Adams, the lone no vote in adopting the $100 fee, instead suggested a fee of $40.

“‘One could say this is a little bit of double taxation or triple taxation,’ he said. ‘I think it’s reasonable to start out in a conservative place, until we get more information, and then move out from there.’”

After reading the article a few times, a lot of things started to settle into place. These are people who think every individual government activity — even activities they enthusiastically support, like regulating short-term rentals — should be financed by individual government agency assessments that exactly mirror that agency’s cost of doing business.

Why are hospitals organizing golf tournaments?

This creates situations that are genuinely absurd, to a non-Vermonter. Every issue of the Stowe Reporter and the Mountain Times (Killington) included two or three stories about local organizations holding pumpkin carving competitions, Halloween costume competitions, whatever. But then I found out about the golfing hospital. I will quote here only briefly:

“Sixty-eight golfers enjoyed sunshine, a light breeze, and perfect course conditions at the Copley Country Club for Copley Hospital’s 37th annual golf scramble on July 13. Thanks to 22 sponsors and the players, the event netted more than $26,000 for Copley’s Emergency Department.

“‘At the end of the day, we announced the five teams with the lowest net scores and distributed prizes, but the big winner was Copley Hospital,’ Emily McKenna, the hospital’s executive director of development, marketing and community relations, said. ‘We are close to reaching the $75,000 goal to purchase bedside monitors for the emergency department. The Gravel Grinder on Saturday, Oct. 5, should put us over. I am so appreciative of our generous community and their continued support of Copley.’”

Let me put my cards on the table here: I do not think hospitals should be organizing golf tournaments to raise money to buy bedside monitors for their emergency departments.

The curious case of the public schools

The main issue rocking the state of Vermont during my visit was not fees on short-term rentals, or hospital golf tournaments, or pumpkin-carving fun runs, or when the resorts would start producing artificial snow (although there were a lot of conversations about artificial snow).

The main issue was property taxes, particularly “school” property taxes. This is not a post about school financing, it’s about Vermonters, so I will explain the system as I gleaned it purely from my newspapers.

Each community sets its own budget for public schools, presumably through interminable town hall meetings like the one depicted in Norman Rockwell’s “Freedom of Speech” (where the speaker is depicted opposing the construction of a replacement school for the one destroyed by fire). The Vermont legislature then determines what the property tax rates in that community should be in order to raise enough money to pay for that budget. Parts of the budget (like capital improvements) are paid for by the state and I believe there’s also a burden-shifting adjustment between wealthier and poorer communities.

This creates a strange gap, between the people who set the budget (the town hall) and the ones who calculate how to pay for it (the legislature).

Into that strange gap stepped a lobbying group with a novel theory: Vermont’s schools are too good.

The “you’ve had it too good for too long” theory of government efficiency

As mentioned above, Vermont’s schools are outstanding, and everyone knows it and likes it. They like sending their kids to nearby schools (especially when it snows and the highways are impassable), they like seeing them thrive, they like seeing them graduate, and they like seeing them go on to bigger and better things. So how do you convince them to cut their school budgets, and the property taxes assessed by the legislature to pay for it?

You promise they can have the same quality schools while paying $400 million per year less in property taxes.

Obviously, no one believes this. The authors of the report don’t believe it, the legislature doesn’t believe it, the parents don’t believe it, and the second-homeowners (who don’t send their kids to Vermont schools) don’t believe it. But if enough people pretend to believe it, they can lower their property taxes by $400 million, which is a powerful incentive to pretend to believe something.

Isolated communities and the ratchet of prosperity

I’ve gone out of my way to be as generous as possible both because I love Vermont and because I think there are both obvious and true explanations for this behavior. The zealots and slave traders who settled New England believe they carved out their little islands of European civilization through frugality and virtue, and they did carve out little islands of European civilization, so who’s to say they were wrong?

Since I have a lot of rich readers, I am fully aware they’re nodding their heads right now: that’s the way to run a society. The lowest possible property taxes to pay for a few things like volunteer fire fighters and expired textbooks, and then a few charity events every year when the hospital needs a new defibrilator or runs out of stethoscopes.

But as an outsider, it looks like cringing terror, and I wish Vermonters would realize they’ve already won. The only people coming to take away what they have won are the people promising austerity for generations to come in order to save a few thousand dollars in taxes on their ski chalets.

Robinhood never understood what their appeal was

[edit 11/25/24: a trusted reader in the comments has the 3% cash back credit card, so it does really exist]

I’ve written a number of times about Robinhood, the free stock-and-ETF trading app, over the years, and back in March I wrote about what I described as “one of the best all-in-one financial products out there.” I was wrong, so today I want to explain both how I was wrong and why it matters.

Recap: the Robinhood Gold pitch

When I wrote that post, I described the new $5-per-month Robinhood Gold service as consisting of two unrelated components:

• a 5% APY interest rate on uninvested cash

• and a 3% cash back credit card (this product, to the best of my knowledge, still has not been launched, so set it aside for now).

Some people pointed out that this product also includes $1,000 in free margin in your investment account, but as will become clear, that is not worth nearly as much as it sounds. I would go so far as to say it is worth nothing, or less than nothing if it causes you to enroll in Robinhood Gold.

Market rates versus administered rates

My first mistake was misunderstanding how Robinhood markets the interest rates on uninvested cash, which illustrates the difference between “market” rates and what I call “administered” rates.

A “market” rate is like the one set on your credit cards or adjustable-rate mortgages: your loan agreement specifies a particular market index reported in some reputable newspaper and says you’ll pay that rate plus-or-minus an adjustment based on your down payment, credit rating, or the phases of the moon. The point being, the rate will change but it will change in a specified way known in advance: when the published market rate rises or falls.

An administered rate is set by the policy of the institution offering the investment or holding your funds. It is also subject to change, but it is set to administrative change, not mechanical or contractual change.

For example, US government Series EE savings bonds have an administered interest rate of (at least) 3.53% APY: the bond is guaranteed to pay out twice the invested amount after 20 years. If interest rates rise above 3.53% APY while you’re holding the bond, you also have the option to cash it out (with a penalty) and invest in the higher-yielding asset instead.

The rate on those bonds is administered by the US federal government, but in fact a lot of institutions work this way, normally as a way to gain customers. A bank or credit union can lose a little bit of money by paying above-market rates if their new customers also move in their lower-rate deposits or, even better, take out higher-interest loans like credit cards. This type of account is often marketed as a “Rewards” or “Kasasa” checking account, and I keep an eye on them at depositaccounts.com (although I’m sure there are other sources; I have no relationship with that website, I just use it).

Robinhood offers bad market rates, not good administered rates

In my post on Robinhood Gold I said, “The 5% APY offered on balances up to a million or so dollars of insured deposits[…]is competitive, but it’s not best-in-class; Vanguard is paying 5.28% on uninvested cash in their own brokerage’s sweep account as of today.”

But while Robinhood was advertising the Gold product as offering 5% APY, that was not true. It was just advertising its current below-market interest rate, and when interest rates went down, its below-market interest rate also went down.

This has happened twice since my post, and Robinhood has continued to misleadingly advertise the product in this way: first “earn 4.75% APY on your cash,” and now “earn 4.25% APY on your cash.”

Vanguard’s default federal money market settlement fund has a 4.58% 7-day SEC yield as of November 22, 2024. In other words, Robinhood started out earning less than Vanguard, and instead of becoming more attractive as an administered rate it has rushed ahead of them to become less attractive as a (below-)market rate.

The Robinhood Gold fee is administered

Hopefully the problem is now coming into focus: Robinhood charges a flat $5 monthly fee, but pays a fluctuating rate on uninvested cash. At a 5% APY, it takes $2,400 in uninvested cash to break even with the monthly fee. At 4.25%, it takes $2,824.

As interest rates fall and fees stay steady, it takes more and more uninvested cash to merely cover the fees on the account, before it even makes sense to start comparing interest rates.

You cannot hold both uninvested cash and use margin

The final issue, and why I didn’t bother mentioning it in my March post, is that you cannot take advantage of the free $1,000 in margin offered as a benefit of the account while also taking advantage of the interest rate offered a benefit of the account.

You can think of this in two different ways:

• the first dollar of a stock or ETF you buy always comes out of your uninvested cash;

• and the first dollar you receive when selling a stock or ETF is always used to repay your margin first before it begins to earn any interest.

Conclusion: don’t sign up for Robinhood Gold for any of their advertised benefits

I like to think that what makes this site different is that I always try to be as honest, straightforward, and accurate as possible, so lest any of my beloved readers get misled: I plan to continue paying for Robinhood Gold.

I’ve been experimenting with Robinhood extensively and have found some specific uses (unrelated to investing) which I’m not able to describe in detail right now, but which I’m happy to pay $120 per year to continue experimenting with.

What I certainly won’t be using it for is to hold my uninvested cash: cash is too valuable to hold with people whose business model is to make sure you get as little value for your money as possible.

As for investing with the account, I’ll be using $1,000 in cash and $1,000 in margin to partially or wholly offset the annual fee, as well as hold the free stocks they give me when people (very) occasionally use my personal referral link.

Venti pivots (out of existence)

As far as I know, I’m the only person who has written in detail about Venti, the weird high-interest travel savings program, so it falls to me to pass along the announcement of the end of their high-interest savings program:

“On December 31, 2024, Venti's partnership with Dwolla will be fully terminated. This means you'll no longer be able to deposit cash onto your Boarding Pass and earn points via interest payouts. To earn points on cash deposits, you'll have to bank with a financial institution that has partnered with Venti.”

I assume the last sentence is a reference to the program they announced in July whereby deposits at partner credit unions would earn Venti points in addition to the cash interest earned on those deposits. The program was of limited interest at the time because of the tiny number of credit union partners and the strict membership requirements they impose (congratulations to Georgetown University alumni and students).

Venti had one unique selling proposition and they couldn’t afford it

Venti’s website was terrible. Venti’s app was terrible. Venti’s airfare booking portal was terrible. Venti’s hotel booking portal was terrible. There was only one reason to use Venti, and that was the 9% APY (in the form of “points” that could be redeemed through the aforementioned booking portals) they offered on deposits.

This model relied on unredeemed points to finance it: since Venti was being paid for all the deposits they harvested, as long as the redemptions were small and few enough they could use the interest they earned on the entire deposit base to pay for the redemptions of that minority of users.

This model works extraordinarily well when it is adopted by firms that provide valuable services, like credit card companies. Chase earns interchange fees on every transaction, and interest on every unpaid balance, but only incurs the cost of rewards when they’re redeemed. Travel hackers may feel rich sitting on hundreds of thousands or millions of Ultimate Rewards points, but Chase feels even richer because they get to keep the money until we get around to redeeming them. This works for all the parties involved because Chase cards can be used to pay for goods and services, a valuable function in the modern economy. The fact that occasionally Chase is on the hook for the expense of a redemption is incidental to Chase’s view of the situation; Chase may well cheer us on when we score valuable redemptions, if it buys them a loyal customer for another decade.

Venti wasn’t like that. The only thing you could do with an account was put money into it, and the only thing you could do with the interest was book travel. In other words, there was no long tail of unredeemed points: the only people putting money into the system were people planning to make redemptions, forcing Venti to pay out a much higher percentage of the accrued points each month than Chase does in the example above.

Since interest rates are, in fact, below 9%, this situation could not and did not endure.

Conclusion

Venti has already redesigned their website to reflect their pivot towards a business-facing strategy. If anything comes of it, I’ll be sure to report back.

I’m not holding my breath.

Complete guide to all 3(+) Zillions/Zift card designs and Just4U earning

In Friday’s post I gave a breakdown of my experience with fixed value $100 “bonus” Zillions/Zift gift cards, which cost a flat $100 but have a $105 value that can be exchanged for egift cards, which can then be sold or used.

By necessity that was a post in real-time sharing my own experience to date. I wanted to put it up while the deal was still ongoing, and ahead of the frequent additional weekend bonus on gift card purchases at Just4U stores (Albertsons, Safeway, Acme, etc), which did indeed return on schedule last Saturday.

That urgency having passed, I want to share a more detailed look at the way these cards earn Just4U points and how they can be used. First, we must distinguish between not two, as I originally supposed, but three different subspecies of Zillions gift cards.

Fixed-value, tight variable, and loose variable Zillions cards

The three types of Zillions cards are distinguished by both the amount of money that can be loaded onto them and the merchants for which that value can be redeemed for egifts cards.

Fixed-value cards cost $100 and have $105 in value that can be redeemed at the merchants I listed last week.

What I call “tight variable” cards, can be loaded with between $20 and $500 and can only be redeemed for egift cards to the merchants listed on the front of the packaging. As with Gift of Choice cards, there are a bunch of different designs of tight variable cards with different combinations of merchants.

Finally, “loose variable” cards can be loaded with between $20 and $500 and can be redeemed for 176 different kinds of gifts cards (this works out to fewer than 176 merchants because some merchants are listed several times in different denominations). You can find a pdf document with all 176 options here.

Card type determines liquidation options

To determine the ultimate price you pay for the Just4U points this technique generates, you have to know how much value you get back for the card. The two most obvious ways to get value back from a card are to resell it and to use it.

This may go without saying for many readers, but you’ll always get the most value value from a card if you’re able to use it instead of the cash you’d otherwise spend for actual goods and services (discounted by the rewards you’d earn putting the purchase on a credit card). This will become relevant momentarily.

The highest resale value I found for fixed-value card options was Columbia Sportswear Company, which resold at 82% of face value on CardCash, or $86.10 for the $105 value of each card (the rate has dropped since then, a reminder that things move fast in this game).

The range of tight variable card designs has a few dozen often-overlapping categories. Nordstrom Rack was the best reselling option I found at 81.5% on CardCash. However, the options begin to get more interesting here, since several of the tight variable designs feature Amazon as a redemption. I doubt I spend much more than $100 on Amazon in a year, let alone $500, but I appreciate it’s extremely common for Americans to spend very large sums there, and using highly-bonused gift cards is a way to earn outsized rewards on those purchases, or on net make Amazon’s prices lower compared to other merchants

Finally, loose variable cards have the widest range of options (go ahead and check out that pdf now), and I was frankly astonished at the abundance. I do not find gift cards to be a particularly useful or pleasurable way to pay for things, and this is of course by design: un- and partially-redeemed gift cards are a feature, not a bug, to their issuers. What’s more, Just4U bonuses are often on the least-useful gift cards: it’s not uncommon to see every Safeway in the country advertising a bonus on Topgolf gift cards — a discount on the more-niche version of an already-niche hobby!

That’s not the case with loose variable Zillions cards. There are options that, in short, a normal person might use without changing their behavior in any way. A few that jumped out at me:

• Airbnb

• DoorDash

• Hotels.com

• Southwest

• Uber

• Uber Eats

If you ordinarily charge those purchases to a credit card earning, for example, 5% in rewards, then redeeming for these gift cards and using them as intended is equivalent to liquidating them at 95% — an astonishingly good deal.

The best reselling options I found among the loose variable redemption options were Staples at 83.5% and Home Depot at 84%.

Your earning rate determines your value proposition

All of the above is true completely irrespective of the promotion that was running last week. These cards are hanging on the rack all day every day, whether a promotion is running or not. What makes them worth buying is the bonus Just4U points, and yet again, the number of points earn varies by card design. Last week I collected 4 datapoints across three purchases and two promotions. Here are the results:

• On Thursday I bought a fixed-value card during the week-long 10-point-per-dollar promotion. I incorrectly reported last week that I had only earned 800 points, but I later realized my error: the receipt lists two values, “Points Earned Today” and “Gift Card Points.” At first glance I assumed the latter was a subset of the former; in fact they’re additive, so I received the full 1000 points I was owed in total.

• On Saturday I bought another fixed-value card and a tight variable card, and earned a total of 7,200 Just4U points, broken down into 6,000 Points Earned Today and 1,200 Gift Card Points, again for the full 12 points per dollar.

• Finally, on Saturday I bought a loose variable card and earned just 5,000 points, broken down into 4,000 Points Earned Today and 1,000 Gift Card Points.

Just4U gift card promotions are confusing because of the difference between the way they’re advertised and the way they’re processed internally. Most gift cards earn 2 points per dollar all the time, so when they advertise “4X points” or “10X points” they’re really saying you’ll earn 2 or 8 additional points on top of the base points. I believe those 2 base points are the Gift Card Points reported separately on your receipt, which suggests that all three designs earn base points all the time.

What seems to be happening is that the loose variable card earned those base points and the week-long additional 8 points per dollar, but not the additional 2 points per dollar during the weekend, but I can’t be sure because I didn’t buy a loose variable card during the week.

Conclusion

From these observations we can create a simple hierarchy of the value of the cards under different circumstances:

• The highest value will come from using gift cards at merchants as intended (almost) regardless of earning rate because of the vastly superior liquidation rate. Naturally this will usually be loose variable cards, but if you have upcoming purchases at merchants included on fixed-value or tight variable cards (like Amazon), then keep in mind their higher earning rate.

• If you’re reselling gift cards, fixed-value and tight variable cards are superior when they earn 12 points per dollar and loose variable cards only earn 10, since that 20% boost swamps any potential difference in reselling rates.

• If you’re reselling gift cards, fixed-value cards offer the best value when the 5% boost in value offsets the lower liquidation rate compared to a loose variable card. This is usually the case, but the differences can be nominal: the 84% payout for Home Depot is 4.3% higher than the 80.5% payout for Adidas (a fixed-value redemption option), a difference that is lower than the 5% boost in liquidation value, making the fixed-value card is a better option, but only fractionally: 1.55 cents per Just4U point versus 1.6 cents per point.

For most people I suspect the hassle of liquidating $105 gift cards will probably outweigh the increased value for most people most of the time: after all, even at 12 points per dollar that’s just 1,200 points per card. If you’re planning to stockpile tens or hundreds of thousands of Just4U points (I’m not, but it’s not an unreasonable thing to do if you sign up for a Freshpass subscription to keep your points from expiring), then doing so in 5,000 point increments will give you a headache one fifth of the size.

Complete list of all 77 Zillions/Zifts bonus gift card redemption options

[edit 10/12/2024: added a correction to the conclusion]

Earlier this week I wrote about the return of my favorite Just4U promotion: bonus points on “Online Exchange” cards, which can be redeemed online for a variety of electronic gift cards, which can then be used or resold. If resold, the loss you take on the face value of the card is the price you pay for a stack of Just4U points and the value of the cards in credit card spend.

Since the last time this promotion came around, I noticed some new card designs at Safeway branded with various combinations of the words “Zillions” and “Zifts.” These cards are, like Online Exchange, issued by Pathward, N.A., and distributed and serviced by our old friends at InComm financial services. I heard these cards were earning bonus points during the current promotion (ending Saturday, October 12, 2024), so I popped over to Safeway to pick one up and see how they work.

The two designs in my store were a “Zillions” card with a variable load amount up to $500 and a fixed value card that offered $105 in value for $100. Neither card, however, listed the merchants for whose gift cards the value could be redeemed, and the redemption website ZillionsGift.com infuriatingly does not list them until you enter a valid redemption code, so for the sake of my beloved readers I picked up a fixed value card and found out for myself.

The first thing I found out was that these cards are not earning the full 10 Just4U points per dollar under the current promotion; I earned just 800 points for my $100 card. My lightly-informed speculation is that the promotion is coded to add 8 points per dollar for a total of 10 points per dollar, since most gift cards earn 2 points per dollar year round. Since these cards are new, they may not be coded to earn that base 2 points per dollar, so during the current promotion they’re only earning the promotional 8 points. Again, that’s just my speculation based on many years of taking advantage of promotions like this. It may be a regional or brand difference instead; find out for yourself and let me know!

Complete list of fixed-value Zillions of Zifts gift card redemption options

Having acquired a redemption code, I plugged it into the redemption portal. Here are the current options for redemptions (they say these are subject to change and I don’t doubt them):

• adidas ($5 - $500)

• Aerie ($5 - $500)

• Aéropostale ($5 - $500)

• AMC Theatres ($5 - $200)

• American Eagle ($5 - $500)

• Applebee’s ($5 - $500)

• Baby Depot at Burlington ($10 - $250)

• Baker’s Square Gift Card ($5 - $500)

• Banana Republic ($10 - $500)

• Bass Pro Shops ($5 - $500)

• Belk ($25 - $500)

• Blaze Pizza ($5 - $250)

• Bob Evans Restaurants ($15 - $500)

• Build-A-Bear Workshop ($5 - $500)

• Cabela's ($5 - $500)

• California Pizza Kitchen ($5 - $500)

• Carters & Oshkosh ($5 - $500)

• Paramount+ ($25, $50)

• Chart House ($10 - $500)

• Chico’s ($10 - $500)

• Chili’s Grill & Bar ($5 - $100)

• Chuck E. Cheese ($5 - $250)

• Columbia Sportswear Company ($5 - $500)

• Dickey’s BBQ ($5 - $500)

• Domino’s ($5 - $100)

• DSW ($5 - $500)

• Famous Dave's ($5 - $250)

• Fanatics ($5 - $500)

• Fandango ($25, $50)

• GNC ($10 - $250)

• GolfNow ($25 - $250)

• H&M ($5 - $300)

• IHOP ($5 - $200)

• KingsIsle Combo Card ($10, $20)

• Kirkland’s Home ($5 - $250)

• Krispy Kreme Doughnut Corporation ($5 - $200)

• L.L.Bean ($5 - $500)

• Lane Bryant ($5 - $500)

• Main Event ($25, $50)

• Maurices ($5 - $500)

• McCormick & Schmick’s ($10 - $500)

• Michaels ($5 - $500)

• Mix It Up ($5 - $200)

• MLB Shop ($5 - $500)

• Morton's The Steakhouse ($10 - $500)

• NBA Store ($5 - $500)

• NFLShop.com ($5 - $500)

• NHL Shop ($5 - $500)

• O’Charley’s ($5 - $500)

• P.F. Chang’s ($10 - $500)

• Rainforest Cafe ($10 - $500)

• Regal ($5 - $100)

• REI ($10 - $500)

• Saks Fifth Avenue ($5 - $500)

• Saks OFF 5TH ($5 - $500)

• Saltgrass Steak House ($10 - $500)

• Smashburger ($5 - $500)

• Smoothie King E-Gift Card ($10 - $100)

• Soma Gift Card ($10 - $500)

• Spa & Wellness Gift Card by Spa Week ($5 - $500)

• Sportsman’s Warehouse ($5 - $500)

• Stitch Fix ($5 - $500)

• Texas Roadhouse ($5 - $100)

• TGI Fridays ($5 - $500)

• The Children’s Place ($5 - $500)

• Ulta Beauty ($5 - $500)

• Under Armour ($5 - $500)

• Village Inn Gift Card ($5 - $500)

• Vudu ($25 - $100)

• White House Black Market ($10 - $500)

• Xbox Digital Gift Card ($15, $25, $50)

I did some spot checks on this list and found that CardCash buys Adidas gift cards for 80.5% of face value and Columbia gift cards for 82% of face value, which is relevant when deciding how much you’re willing to pay for your Just4U points.

Variable load cards have different options

When I first grabbed the bonused fixed value card I was hopeful that the variable cards would have the same list of merchants, but that doesn’t appear to be the case. Listed on the front of the variable cards are several merchants missing from this list:

Conclusion, and warning

[correction: I did not realize Bloomingdale’s cards have to be mailed in to CardCash, eliminating that as a liquidation option. The next best Gift of Choice card I’ve identified is Nordstrom Rack, which pays out 81.5% on CardCash.]

It’s good to stay on top of new gimmicks as they come along in this game, but for now these cards appear to be strictly inferior to the older “Gift of Choice” cards, at least if your plan is to liquidate them to cash through reselling. Both brands have an option that pays 82% on CardCash (Columbia in the case of Zillions/Zifts, Bloomingdale’s in the case of Gift of Choice). It’s true the $5 bonus on $100 Zillions cards increases your payout by a free 5%, but if Gift of Choice cards earn 10, 12, or 14 points per dollar then the higher rewards swamp the effect of the lower payout. If the rewards earned on both types were identical, on the other hand, then the 5% bonus would be decisive.

Finally, a word of caution: since I redeemed my $105 card this morning I have not received any communications from them, neither confirming the redemption nor, even more importantly, actually sending me the Columbia gift card I ordered. I can look up my order in their system, which has my correct e-mail address and the correct details for the order, so it hasn’t been lost, but it hasn’t found its way to me.

As always, if you can’t be without money as long as it takes to fight to get it back, then don’t spend it on travel hacking!