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.

How I'm thinking about money these days

Personal finance and travel hacking in the United States are almost always linked through the intermediary of credit cards, which unlike in most civilized countries are allowed to charge lightly-regulated fees which they rebate to customers in the form of cash, cash-equivalents, or alternative loyalty currencies.

These schemes are usually devised with the concept of “stickiness” in mind: you can offer almost anything to customers in the short term if it’s so hard to switch financial providers that they continue to give you business for years or decades after the initial “acquisition cost” has vanished off your balance sheet.

What travel hackers know is that nothing is as sticky as people think it is, so in fact they don’t need to change their spending habits at all in order to trigger many of the benefits financial providers think will lock in their business in perpetuity.

With all that said, here’s how I’m thinking about investment options these days, keeping in mind just how low those barriers really are in practice.

Rewards checking accounts

Rewards checking accounts typically offer above-market interest rates on balances up to a certain limit, as long as direct deposit and monthly transaction requirements are met. I usually search for the highest-earning accounts on depositaccounts.com, but here are the three I’m currently using:

• Pelican State Credit Union. 6.05% APY on up to $20,000.

• Andrews Federal Credit Union. 6% APY on up to $25,000.

• Consumers Credit Union. Up to 5% APY on up to $10,000 if you spend $1,000 on their credit card; otherwise 3% APY.

I primarily use Consumers Credit Union as a current account to manage payments and for ATM withdrawals, since it has a lower limit on the maximum interest rate but also rebates third-party ATM fees; I don’t mind if my balance falls below $10,000 on any given day, in other words.

Two other options I’ve looked at closely are the FitnessBank and Orion Federal Credit Union accounts, which offer 6% APY on up to $25,000 and $10,000, respectively. The FitnessBank requirement of linking a step-tracking device and walking an average of 10,000 steps per day feels too fidgety for me, although if you’re already tracking your steps and know you’ll easily meet the requirement then it seems like a fine option. The Orion FCU requirement for both $500 in deposits and $500 in debit card purchases would be easy to automate, but with such a low limit on the 6% APY balance it hasn’t been a priority for me to set up an account there yet.

Round-up savings

Blog subscribers knows about my long-standing affection for round-up savings accounts. Unfortunately, my 10% APY round-up savings account is no longer available to new members; in fact, the credit union that offered it no longer exists, although I was grandfathered into the old account structure during the aquisition.

I have experimented at length with this account, and as far as I can tell, I can make exactly 29 deposits per day in round-up transactions, which I plan to until the account reaches the $250,000 insurance limit or is closed for deliberate and flagrant abuse — whichever comes first.

Peer-to-peer installment lending

Peer-to-peer lending emerged in the 2000’s during the first wave of what today we’d call “distributed finance.” The idea was that instead of borrowing from the big banks you’d borrow from your fellow citizens; instead of putting your money in the anonymous stock market or a local savings account, you’d invest in individual home improvement projects or weddings or hospital bills. At the time, the two most prominent platforms were Lending Club and Prosper, joined by a few minor platforms like Fundrise and Kickfurther (and, I’m sure, many others I’ve forgotten or never heard about).

Lending Club and Fundrise have both pivoted into more straightforward banking and investment operations, but much to my surprise, Prosper is still chugging along letting you buy shares of individual promissory notes in increments as low as $25.

Unlike the high-interest accounts described above, lending through sites like Prosper comes with risk. Even worse, it comes with unknown risk. At the individual note level, there’s individual risk, but this is negligible: if you buy thousands of $25 loans, some of them will default simply because you’re exposed to the individual life histories of thousands of people, and shit happens even to healthy, employed, home-owning borrowers.

At the institutional level, Prosper’s credit-rating system might be fundamentally flawed: you might expect a 5% default rate from “AA” borrowers (Prosper’s highest rating), but the true number is 15% because some unaccounted-for variable skewed Prosper’s ratings too high.

Your borrowers may be also be exposed to an economy-wide risk, like a nationwide fall in housing prices, or a shooting war with a rival power, which eliminates the advantages of diversification: all of your borrowers might default at once if they’re drafted to go save Taiwan, whether they live in California or Oklahoma.

But these peer-to-peer platform loans have another risk, the financial solvency of the platform itself. In the case of Prosper, you are not actually lending any money to borrowers. You are buying a repayment-contingent note from Prosper, which originates and owns the actual loan to the borrower. As long as the borrower makes their payments, and Prosper pays its bills, then Prosper will transmit the borrower’s payments to the owners of those repayment-contingent notes. But if Prosper itself files for bankruptcy, the value of the loans will be assets of the bankruptcy estate, and lenders will be left with unsecured claims against that estate.

I personally used to consider this the main risk of lending through Prosper. I thought people would happily lend through them until the first economic calamity came along, then Prosper would be wiped out, the notes would be worthless, and the whole peer-to-peer lending experiment would come to an end.

That isn’t what ended up happening, and Prosper has survived and continued to both issue loans to borrowers and sell notes to investors. The website remains very primitive and it still takes me several clicks to find the simplest settings, so automating investments is essential.

I’ve found the easiest way to invest with the platform is not to use their “Auto Invest” feature, but the confusingly- and similarly-named “Recurring Order” function. The recurring order function allows you to specify loan characteristics to filter for (I chose “AA” and “A” graded loans, with yields above 10% APY) and then as those loans are added to the platform it will automatically buy them in the increment you specify (I chose the minimum, $25).

The platform seems to have a lot of loans, so the recurring order function hasn’t had any trouble finding qualifying loans for me to buy, but at some volume there presumably is a trade-off between loan quality, interest rate, and purchase size: if you are fixed on quality and rate, then you might have to buy more than $25 per loan in order to meet your demand for volume. I doubt I will ever hit that point and I don’t spend any time worrying about it.

Stocks, flows, risk, and compounding discipline

To the best of my knowledge, I coined the term “compounding discipline” to refer to the need to make sure that if you rely on your interest compounding over time, then you have to put in the work to make sure it actually is.

A $25,000 balance at Andrews FCU will earn about $120 per month at the Kasasa Cash rate of 6% APY. But a balance of $25,120 will also earn about $120 per month, because the last $120 earns only 0.5% APY. You can earn $120 per month forever, but if you want your savings to compound, then you have to exercise compounding discipline and move that $120 each month into the next vehicle you have available.

The way I’ve formalized this discipline is to split my savings into two broad categories: I invest bigger and faster in safe assets and lower and slower in risky assets; the returns generated by the safe assets pay for the investments in the risky assets. I’ve used the example of Prosper peer-to-peer lending, but I don’t think they’re better or worse or more or less risky than bitcoin or real estate or reselling on Amazon. If one of those is more attractive then you should do it instead. The point is simply to make sure you have somewhere to put the next interest payment so your assets keep compounding at the right mix of risk and return for your situation.

Conclusion

Sharp readers may have noticed I’ve left out the only savings vehicles most Americans have: their individual retirement accounts and workplace-based 401(k) and 403(b) savings accounts. I’ve also ignored the tax implications of the various investment vehicles available. The omission is deliberate: I don’t think about these at all.

If you maximize your annual contribution to your IRA and workplace retirement accounts, and select a low-cost, stock-heavy mutual fund, and make sure your dividends and capital gains are set to reinvest, then you’ll die a millionaire. There’s nothing to think about and it’s not especially interesting to talk about. Once you’ve got all the settings configured right in your payroll software (not always easy!) it shouldn’t take more than 15 minutes a year to make sure everything’s on track.

Manufacturing transactions is harder than you think

There are countless methods of manufacturing credit card spend, but the basic principles are simple: generate a credit card purchase (usually at some cost), liquidate the purchase back to cash (usually at some cost), and use the cash (plus any costs paid) to pay off the credit card balance. If you generate more in credit card rewards than you pay in costs, the technique is profitable.

In some cases these techniques are still profitable to the banks and merchants, and in others they’re unprofitable but travel hackers are too small a share of customers to be worth completely rooting out, so only half-hearted and incomplete efforts are made to remove the very hardest hitters.

A central feature of credit card manufactured spend is that it relies on spending as much as possible: more spend equals more profit. Debit card manufactured spend is often just the opposite: the goal is to generate transactions, not spend, and this creates surprising difficulties.

Why manufacture transactions?

There are a few main reasons you might want to manufacture debit card transactions. Some accounts charge fees for inactivity, and a $0.01 debit card transaction is enough to avoid the fee.

Other accounts, like the Consumers Credit Union Rewards Checking account that I use as my petty cash account, require a certain number of debit transactions to trigger their higher interest rates. Note that there are other, higher-interest-rate options available; I find DepositAccounts.com quite reliable for tracking them.

A product that, as far as I know, never took off in the travel hacking or personal finance community is the round-up savings account. These accounts have high interest rates but can only be funded by “rounding up” your change on debit card purchases. To achieve a meaningful balance in the account, it’s necessary to make an arbitrary number of debit card transactions with a cent value as close to 1 as possible, resulting in a 99-cent deposit.

Why is manufacturing transactions so hard?

I found it a bit counter-intuitive at first that manufacturing transactions profitably is as complicated in its own way as manufacturing spend. In both cases, the issues come from the fact that we’re using tools we don’t control for purposes they aren’t designed for. Here are some of the main problems I’ve encountered.

• Per-transaction costs. While many financial services have lower fees for using debit cards than credit cards, that’s primarily by charging flat fees rather than lower percentage fees, and flat fees make manufacturing transactions more expensive.

• Transaction minimums. A lot of options require transactions of at least $1. This is an obstacle to scaling, since even if you’re recuperating 100% of your transaction value, the larger each transaction must be, the more money you need to have tied up in the system at any one time.

• Processing rules. If a service processes your transaction as "PINless debit,” instead of as a credit card, then it may not count towards monthly transaction requirements. For round-up transactions, there may be rules about how far apart transactions have to be spaced.

• Closed loops. A lot of obvious options do work, but the money goes into a closed ecosystem where it has to be spent. Your Amazon gift balance can only be spent at Amazon, payments to your electric company have to be spent on electricity, etc.

• Automation. Arbitrage opportunities are so persistent not because they’re particularly complicated. Most of them could be learned by a person of average intelligence over the course of a light lunch. The reason they last so long is that most people already have a job and don’t want another one. Automation is a solution, but researching ways to safely automate large numbers of financial transactions is yet another job.

These constraints can interact with each other as well. Your cable provider might allow you to automate payments with a minimum of $1, which looks like a tidy solution until you realize that your cable bill can only be spend on cable, which puts a soft ceiling on the number of transactions you can generate with that method each month.

Here’s a roundup of the options I’ve looked into and some thoughts on each.

Plastiq (grandfathered)

I’ve used the Plastiq bill payment service on and off for years now. It’s changed so much that instead of using it overwhelmingly to manufacture spend, I now use it primarily to manufacture transactions. Under their old pricing model, using debit cards had a low fixed fee, so I scheduled twelve $1 payments per month until sometime in mid-2026. If I fall into a coma, at least my money will still be earning 3% APY.

As far as I can tell it’s no longer possible to get access to the old pricing, but this highlights the kinds of feature you want to look for as these services continue to pop up: low per-transaction price (I pay $0.01 per transaction, so $0.12 per month), easy liquidation (the $1 “payment” gets deposited into another account a week or so later), and long-term automation.

Peer-to-peer payments

I’ve had great success manufacturing round-up savings transactions with Venmo. They have a $0.01 minimum transaction and no fees for debit cards. The $0.01 has to go somewhere, and I’m not comfortable running multiple accounts and risking losing access to the tool entirely, so I send it to another person. This does generate a lot of annoying e-mails, so you probably want to set up some filters so those e-mails don’t drove you or your teammate crazy.

Cash App works as well, but has a $1 minimum transaction, which makes it a cumbersome way to generate round-up transactions. It works well for manually generating monthly transactions, so I do use it to meet the 15-monthly-transactions requirement on my Andrews FCU Kasasa Cash Checking account to earn 6% APY on up to $25,000.

Neither option has built-in automation. There used to be a way to interact with the Cash App ecosystem by text message, which would be a convenient way to automate transactions, but I couldn’t easily find any current documentation of that feature so my guess is they retired it at some point.

Store credit

I reload my Amazon gift card balance $1 at a time to meet some of my monthly transaction requirements, and I was pleased to discover that my $7 monthly Prime membership is charged first against my gift card balance, so I don’t need to worry about storing up too much unused Amazon credit.

I say store credit instead of Amazon credit because a lot of people have several services that have this feature. If you can load your transit pass, Starbucks balance, or cell phone balance $1 or $0.01 at a time then you can meet transaction requirements without the risk of locking up money you’ll never end up spending.

Conclusion

I understand that people feel themselves at a constant shortage of time and attention, even for the things that give them great joy and satisfaction. They are not only uninterested, but often almost offended by the suggestion they’d waste those precious resources on the essentially meaningless task of pushing buttons on their phone for a few minutes a day.

Believe it or not, I don’t find it especially fun or meaningful to push buttons on my phone for a few minutes a day either. But that’s a pretty high bar to hold every minute of your day too. I don’t find it especially fun or meaningful to brush my teeth either, but I’d like to still be chewing with a few originals by the time I’m 80 so I do it anyway.

Whether it’s earning the highest interest rate possible on my liquid cash in high-yield checking accounts, or dumping as much money as possible into my best savings accounts, I just don’t mentally categorize it as something that’s supposed to be fun. You fill out your timesheet in order to get paid, not because it’s going to bring about world peace.

Interest rates are starting to get more interesting

One of my favorite resources is DepositAccounts, which performs the simple, essential function of aggregating interest rates across a vast array of savings products. As you’d expect, the site is financed by ads and affiliate links, but in my experience the data is extremely accurate, so they’re a great first-stop when you’re exploring what’s the best place to put your money. All of that is just to say, most of the datapoints below come from DepositAccounts, not any original research of my own.

Yes, higher interest rates are passed along to (vigilant!) customers

There’s a stale cliche that when oil prices rise, gasoline prices jump immediately, but when oil prices fall, gasoline stays elevated. Of course there’s no mystery there: when gas prices rise satellite vans park outside gas stations doing live interviews with regular folks complaining about the price of gas, and when gas prices fall the media move on to the next crisis.

Most people are even less conscious of how prevailing interest rates change over time. If you only buy a few houses in your lifetime, your awareness of mortgage interest rates is limited to may four or five snapshots in time. Even someone who replaces a car as often as every 3 or 4 years has much less awareness of auto loan interest rates than they do the price of gas.

Finally, most people don’t shop around for higher interest rates on their savings even as much as they do for lower interest payments on their loans. That’s why whenever I hear people complain that banks don’t pay anything on savings anymore, I ask them, “have you checked?”

Series I Savings Bonds are already interesting

A lot of folks have written about this deal already (myself included), but to summarize, Series I bonds have their interest rate for the next 6 months set twice a year, in May and November, but each reset is known several weeks in advance. For example, we’ll know the November, 2022 interest rate on October 13, 2022, when September’s consumer price index reading is announced.

This creates two opportunities, in April and October, to know the interest rate you’ll earn on new Series I bonds for an entire 12-month period. My favorite tool, although I’m sure there are many others, for tracking these interest rate adjustments is the very primitive Tipswatch. There you can see the rate you’re guaranteed to earn for 6 months on all Series I bonds purchased through October 31, 2022 (9.62% annualized), and the 4 known monthly components of the November rate adjustment, which you’ll earn for the second 6 months of your first year.

I have mixed feelings about long-term holding of Series I bonds, but I have unalloyed positive feelings about using them for medium-term savings in April and October, when you know the interest rate you’ll be paid for the entire initial 1-year holding requirement.

Rewards Checking accounts for high rates, benefits, and liquidity

While I was cruising around DepositAccounts I checked, as usual, what rates they were reporting on Rewards Checking accounts. These are federally-insured, fully liquid checking accounts that, when you perform a series of requirements each month, offer elevated interest rates and usually a few other potentially-valuable benefits, like refunded ATM fees (which can be worth more than the interest during months you’re traveling extensively!).

I was immediately confused because my beloved Consumers Credit Union Rewards Checking account, which has been at the top of the list as long as I’ve been checking it, no longer appeared at all!

Thinking I might have missed an e-mail announcing they were no longer offering those accounts, I hurried over to Consumers’s website and immediately discovered the reason for the omission: the site had been updated with new, even higher interest rates, and the new page must have broken the scrubbing tool DepositAccounts was using.

The highest rate is now 5% APY on balances up to $10,000, which is not quite as high as the 5.09% on up to $20,000 the account could earn when I first opened it, but still higher than any other accounts we’ll be looking at today. The requirement for 12 debit card transactions and $500 in ACH credits or mobile check deposits, plus $500 or $1,000 in Consumers credit card spending for the highest two rates, remains the same.

The next highest rate listed is 4% APY on up to $20,000 at Elements Financial. Besides the usual gimmick of requiring 15 debit card transactions, there’s one huge asterisk: you’ll only earn that rate for 12 months, before it drops in half to 2% APY. If you have $20,000 you want to keep liquid and an easy way to automate your 15 monthly transactions, that may be worth doing for a year (no direct deposit is required), just be sure to set a calendar reminder for 12 months from the day you open your account!

Certificates of Deposit are on the verge of being interesting

Next I scooted over to DepositAccounts’s CD page, which besides scraping rates off countless bank websites, also groups them by term. You can see how obviously helpful this would be when building a CD ladder, since it makes it instantly obvious which CD-issuer you should choose for each rung of your ladder. One thing to note is the system does group CD’s into approximate terms. This is important because many of the highest-earning CD’s are of odd durations, but DepositAccounts engine sensibly lumps a 49-month “special term” CD in with the 4-year CD’s instead of breaking it out separately.

With all that said, let’s look at what’s going on with CD rates by looking at the highest rates offered in each of the DepositAccounts term buckets:

• 3-month: 3% APY at TotalDirectBank (note the very high minimum)

• 6-month: 4% APY at Sun East FCU (9-month also available at same rate)

• 1-year: 3.14% APY at Lafayette FCU

• 18-month: 3.75% APY at NASA FCU (15-month CD)

• 2-year: 3.59% APY at La Capitol FCU (26-month CD, includes option of one-time interest bump)

• 3-year: 3.55% APY at Bread Savings

• 4-year: 3.85% APY at NASA FCU (49-month CD)

• 5-year: 3.65% APY at Bread Savings

• 6+-year: 3.25% APY at Marcus, Evansville Teachers FCU, and Discover (terms up to 10 years)

A few obvious things jumped out at me here.

First, in nine term buckets, there are nine unique institutions, so if were purchasing CD’s for multiple terms from a single issuer, you would be virtually certain to be leaving some interest on the table.

Second, these interest rates are almost high enough to begin looking competitive with rewards checking accounts. Earning 5% APY on $10,000 in liquid cash is great, but if you have somewhat more money you’re unwilling to risk losing, and are willing to give up just a little liquidity, earning 4% APY on 6-month and 9-month CD’s from Sun East is at least worth thinking about long enough to decide if it’s the right move for you.

Third, this combination of terms and rates has a peculiar feature: the longest-term rates are lower than the shortest-term rates, while the medium-term rates hover in a tight range. I say it’s peculiar because commonsense would say that long-term deposits are more valuable to a bank than short-term deposits, so banks should be willing to pay more interest to lock in those funds for longer. Instead, over the longer term we see rates collapse.

The reason is simple: when banks guarantee interest payments on a deposit, they’re not just betting that they’ll be able to make a profit while paying that interest rate today, but that they’ll be able to make a profit paying that rate across the entire term of the deposit, in other words, on the future course of interest rates.

Since the cost of your money is fixed (the interest they pay you), the profitability of the deposit depends on how much it earns them (the interest their borrowers pay them). If interest rates go up, the cost of the deposit remains the same, but interest revenue and profits increase. If rates fall, then your deposit earns the bank less money, but costs them the same to hold.

Limiting the premium they’re willing to pay long-term depositors is a way of hedging that bet on interest rates. If banks expected rising interest rates over the medium and long-term, they’d reduce their hedge and be willing to pay more to lock in long-term deposits at today’s (compared to the future) cheap rates. The more worried banks are about falling interest rates, the shorter a period they’re willing to commit to paying today expensive rates for.

Treasuries may already be interesting in high-tax states

I was glancing over the Vanguard Fixed-Income page and was genuinely a bit surprised at how much rates had risen recently:

View fullsize

Over the short-term these rates are already close enough to compare favorably to CD’s, especially if you prefer to keep all your fixed-income in one place like a brokerage account rather than scattered all over the country.

But even over the longer term, remember that the interest treasuries pay, unlike CD’s, is taxable only at the federal level. In a high-income-tax state, a slightly lower interest rate may leave you with more disposable income after taxes.

Conclusion

To offer some quick takeaways:

• Both higher and lower interest rates are passed through to customers.

• Shop around. No one financial institution is going to have the best version of every product.

• The interest rate structure shows that banks are betting on flat and falling interest rates in the long term. If you think they’re wrong and that rates will rise instead, then keep your money in higher-interest shorter-term accounts to take advantage of those rising rates. If you think they’re right and that rates will in fact fall, then lock in today’s relatively high rates for as long as possible.

How I would (and might) maximize the current Series I Savings Bond deal

There’s an interesting deal available right now for folks who have extra cash lying around they are sure they won’t need for a least one year, and ideally won’t need for five.

Fixed-rate inflation-adjusted Series I Savings Bonds

When I first learned about this deal at Doctor of Credit I admit I scoffed. The high interest rate he described is on an annualized basis, but you’re only guaranteed the reported rate for 6 months, meaning you don’t even get a full year at that rate; it could drop to 0% for the second half of the year before you’re eligible to redeem your bonds, meaning you froze up to $10,000 in cash in a security earning nothing for 6 months of the year!

But, the more I thought about the deal, the more I came to appreciate the potential possibilities. So let’s take a closer look.

Series I Savings Bonds have 4 curious features:

• When issued, they have a fixed rate of interest that is known at the time of issuance and lasts for 30 years or until the bond is redeemed;

• added to that fixed rate is a variable, inflation-adjusted rate of interest that is calculated in November and May of each year and applied to outstanding bonds every 6 months (so a bond purchased in January has November’s rate until July — this will become relevant shortly);

• bonds earn interest starting from the first day of the month they’re purchased, so bonds purchased November 30 will earn interest from November 1;

• with limited exceptions, they must be held for 1 year, and redemptions are penalty-free after 5 years (you sacrifice 3 months of interest if redeemed between 1 and 5 years after purchase. I’m genuinely unsure whether the 1-year holding requirement is to the calendar date or to the calendar month of purchase — if you know, leave a comment!)

Finally, you’re limited to $10,000 in purchases through Treasury Direct per calendar year. You can purchase an additional $5,000 in I bonds through your tax refund, although which fixed and inflation-adjusted rate you get will depend on when Treasury transmits the order to the “Treasury Retail Securities Site in Minneapolis,” so you may not be able to get November’s rates if you file for an extension or your refund is delayed for any reason.

Why do I keep talking about November’s rates?

The fixed rate on Series I Savings Bonds, the minimum rate you’re guaranteed to earn for 30 years, is 0% APY, and has been for most of the last decade. But due to the method Treasury uses to calculate the inflation component of the interest rate, bonds purchased from November 1, 2021 through April 30, 2022, will earn a guaranteed interest rate of 7.12% APY.

Now be careful to understand what’s happening here: APY is calculated on an annualized (that’s the “A”) basis, but you’re only guaranteed to earn that rate for the first 6 months you own the bond. After 6 months, the inflation-adjustment will change to May’s rate, and 6 months after that (when the bond is eligible for redemption with a 3-month interest penalty) it will change to the November, 2022, rate.

Series I Savings Bonds are a highly optioned contingent bet on future inflation rates

One way of assessing a bond investment is to look at its “yield-to-worst,” which refers to the yield you would receive if, for example, a corporation or utility exercised a call option at its face value on a bond to refinance its debt at a lower interest rate before the end of the bond’s term. For a fixed-rate, zero-risk, United States Treasury bond, the yield-to-worst is simply the yield on the bond.

The inflation-adjusted interest rate and possibility of early redemption essentially means Series I bondholders are making a bet on the future of inflation rates, but one in which they have all the power.

You may believe, as I do, that May, 2022’s inflation adjustment will be sharply lower than November, 2021’s. So, what’s the yield-to-worst? Since the inflation adjustment is never less than 0%, and the fixed-rate is 0%, you would earn 0% in interest during the second 6-month holding period. In that case, your yield would be 3.56%. That’s not a shoot-the-lights-out great investment, but it’s a solid return on a completely safe investment. After 12 months, you can pull the money out (sacrificing 3 months of 0% interest) and do something else with it.

But however much you think inflation (technically the CPI-U measure of inflation) will fall between now and May, 2022, it probably won’t fall to 0%. Say it falls to 1.9%, which was fairly common prior to the pandemic — now you’ve earned 4.035% on your investment (after sacrificing the last 3 months of interest), which suddenly starts to look pretty comparable to the rewards checking accounts I regularly write about and use.

Optionality is very valuable

When you take this exercise a bit further, you can see the possibilities are even more lucrative than I’ve suggested, since after one year, you always have three options: “letting it ride,” “trading up,” or “cashing out.”

Every November and May, when the fixed rate and inflation adjustment are announced, you can see what the composite rate will be for the next 6 months:

• Let it ride: if the inflation adjustment remains higher than your other investment opportunities, you can leave the money to earn for another 6 months until the next adjustment, bringing you 6 months closer to the 5-year penalty-free redemption threshold;

• Trade up: if fixed interest rates soar and inflation crashes, then you can redeem your current 0% fixed-rate bonds and buy new, higher fixed-rate bonds;

• Cashing out: if fixed interest rates stay low and the inflation adjustment crashes, you can redeem your bonds and do anything you like with the money.

Obviously this is just another way of saying money is fungible and Series I bonds can be redeemed after one year. What makes this interesting is that this series of options continues every 6 months for 30 years!

What’s the optimal strategy to maximize optionality?

Due to the $10,000 Treasury Direct and $5,000 tax refund purchase limits, I believe the optimal strategy looks something like this:

• buy $10,000 in bonds by December 31, 2021 through Treasury Direct;

• in April, 2022, when the March CPI-U data is announced and the May, 2022, inflation adjustment is finalized, you’ll know the total annualized interest rate you’ll earn (6 months at November’s rate, and 6 months at May’s rate), and can decide whether to purchase another $10,000 through Treasury Direct based on that composite annualized rate;

• finally, by April 15, 2022, decide whether to lock in an additional $5,000 in bonds at the November/May composite rate, or file a tax extension and wait until October, when the November 2022 rate will be finalized, and decide then.

Obviously this represents a lot of corner cases and attention to detail, so it’s not for everyone. November’s rate is so high it would be perfectly rational to just lock it in with $10,000 this year and next year through Treasury Direct, and $5,000 next year through a tax refund. But since the genius of these bonds is their optionality, this is one way you can maximize that value.

Mixed (overall negative) changes to Consumers Credit Union Rewards Checking

I wrote recently over at my personal finance blog about my favorite high-interest checking account, the Rewards Checking account offered by Consumers Credit Union. In case any readers are as big of fans of the account as I am, I wanted to discuss some upcoming changes, and my reaction to them.

The bad: rates are dropping

I’m putting this first because there’s no sugar-coating these changes: each interest rate tier is dropping by one percentage point: the lowest tier from 3.09% to 2.09% APY, the next from 4.09% to 3.09%, and the highest from 5.09% to 4.09%. For an account with a maxed out $10,000 balance, this will drop your annual interest income by $100.

If you only meet the lowest tier requirements each month (or have more than $10,000 in cash savings), then you should seriously consider moving your balance over to a competitor like Western Vista, which offers 4% interest on balances up to $15,000 (for now).

If you’re meeting the highest interest tier requirements, then while the reduction in rates is painful, there’s little you can do about it: 4.09% APY is still significantly higher than any other current offers I’m aware of.

The good: deposit and transaction requirements are changing

There are a couple moving pieces here but all three changes are positive:

1. in April and May, you need only make 6, instead of 12, signature debit transactions in order to meet your debit transaction requirement.

2. Beginning immediately and going forward, your total signature debit transactions do not need to add up to $100 per month.

3. Beginning immediately and going forward, you can meet the $500 monthly deposit requirement through mobile check deposit, in addition to direct deposit.

The 3.09% and 4.09% interest rate tiers will still require $500 and $1,000 in Consumers CU credit card spend, respectively.

Conclusion

On balance, these changes are negative: the reason to use a high-interest checking account is to earn as much interest as possible, so any reduction in the interest you earn is a negative change!

But they’re not entirely negative: I meet my debit transaction requirement using the Plastiq bill payment service, which previously meant making eleven $1 payments and one $89 payment to reach the $100 monthly transaction requirement. Starting in June I’ll be able to make twelve $1 payments, which will make both my Fee-Free Dollars and my student loan balances last longer.

I use my Consumers Rewards Checking account as my primary bank account since it offers unlimited ATM fee reimbursement in addition to the high interest rate, and I’ll probably continue to do so for now, although I’ll continue to re-evaluate as the situation evolves, and will of course keep my beloved readers updated.

Money is fungible, but only if you funge it

Back in October, over at the Saverocity Observation Deck podcast Joe Cheung interviewed Noah from Money Metagame and they discussed a post Noah wrote last year asking the question, "Is Anyone Actually Saving Money By Travel Hacking?"

Read the whole piece, as they say, but rather than respond directly to him, I am going to be more proactive and explain how how you really can save money using the tools of travel hacking.

Money doesn't funge itself

Perhaps after opportunity cost, the fungibility of money is one of the most popular concepts from economics applied to travel hacking. If money is fungible, then it doesn't matter how you earn income: whether from employment, reselling, manufactured spending, or high-stakes poker, every dollar you earn goes into the same pot, out of which you make decisions about consumption and savings.

This is true as a description of money, but need not be true about your own behavior towards money.

Ringfence your profits

One way to turn your travel hacking into asset-building is to identify and isolate your profits from travel hacking and direct them exclusively towards long-term asset accumulation. For example, if you have a Fidelity Visa Signature card earning 2% cash back, you're already depositing your cash back each month into a Fidelity account. Instead of withdrawing it into your regular checking account, where it will funge with all your other money, put it into a separate account (I personally use a Consumers Credit Union Free Rewards Checking account that pays 3.09%+ APY).

The key point is that it has to be additive. If you already have an IRA housed with Fidelity that you would max out each year anyway, you aren't increasing your savings by depositing cash back rewards into it, you're just changing the funding stream. Instead, you could open a brokerage account and use your cash back rewards to fund investments in that account.

Buy travel from yourself (with a friends and family discount)

When I'm booking travel for other people, I normally charge them either the cash value of the points I redeem or the fairest price I can think of, for example one cent per mile for airline miles and half a cent for Hilton Honors points. Since in virtually all cases I would rather have money than miles and points, this is usually a way to get my friends and family big discounts and turn my stagnant balances into cash — a win-win.

I don't pay myself for travel I redeem on my own behalf, but you could! After all, if you treat a 25,000-point Hyatt redemption as "free," instead of costing as it does $250 in transferred Ultimate Rewards points, you might travel more than you really, objectively speaking, can afford to. If you instead sold travel to yourself (with the same friends and family discount you'd give anyone else) and moved money permanently into an investment account or other place you were sure you wouldn't spend it, you might develop a more tangible sense of the costs of your "free" travel.

A related issue arises when you redeem bank points like those earned with the BankAmericard Travel Rewards card, Capital One Venture, or Barclaycard Arrival+ against travel purchases: the redemption really does reduce your outstanding credit card balance, and so is clearly some form of "income," but you never actually see a deposit into a bank account. Instead, you simply don't pay off part of the credit card balance you incurred booking your travel. "Buying" travel from yourself is a way of dealing with this curious situation and converting hypothetical profits into long-term assets.

Liquidate into your net worth, not your bank account

I've written before about using Plastiq to liquidate tiny-denomination prepaid debit cards, like the balances left over on 5% Back Visa Simon Giftcards (you can find my personal referral link on my Support the Site! page). Plastiq has a lot of billers in its database, so you might be tempted to use it to pay monthly recurring bills, like your rent or utilities. But making those types of payments won't help you accumulate assets, they just leave extra cash in your already-funged checking account.

Instead, you could deliberately target those payments towards long-term debt reduction, like making additional payments towards your mortgage, auto loans, or student debt. That way, instead of replacing payments you are already making anyway, you're using travel hacking to pay down those debts more aggressively and both increase your net worth and reduce the interest you'll pay over the life of the loans.

Conclusion

The economics professors in my audience are welcome to tut-tut me for suggesting such degrading psychological tricks, but it seems crystal clear to me that if you don't use one of these or some other method of isolating and investing your profits from travel hacking, then it's exceedingly unlikely to actually improve your overall financial position. On the flip side, a few additional thousands of dollars invested in sensible low-cost index funds have the potential to turn your short-term travel hacking profits into long-term financial success.

The many flavors of negative-interest-rate loans

A negative-interest-rate loan is one which, over the course of the loan, requires the borrower to repay less than they originally borrowed. Such loans have received a lot of attention in the business press lately since countries like Germany and Switzerland began issuing bonds with negative yields.

But negative-interest-rate loans aren't just for industrial and financial superpowers anymore! Here are three flavors of negative-interest-rate loans available to the enterprising travel hacker (and one bonus flavor), sorted by the duration of the loan, and suggestions for how to maximize their value.

25-55 days: manufactured spend

Most people think of the profit from manufactured spending as coming from the rewards earned on their spend, and that's true if you liquidate your spend directly back into the cards used to manufacture it.

But when you manufacture spend on a rewards-earning credit card, you're also borrowing money that can be used for other purposes. If you manufacture and liquidate spend on the day your credit card statement closes, you may be able to use the funds for up to 55 days, depending on how long your statement cycle is and how many days your bank gives you to pay.

Possible uses: Besides short-term liquidity, you can get even more value from these short-term negative-interest-rate loans by funding bank accounts that require large deposits in order to trigger signup bonuses. For example, Citi is currently offering a $400 signup bonus for opening a checking account with $15,000 in new money, which has to be kept with Citi for 30 days. $15,000 manufactured on a 2% cash back card and 1% "all-in" cost will net $150 in credit card rewards and $400 from Citi. Since the money was borrowed, that's the equivalent of a negative 44% APR loan.

6-12 months: interest rate arbitrage

If you're anything like me, you're constantly getting balance transfer and cash advance checks in the mail from your credit card companies. For the last year it felt like I was getting two or three offers from Discover every week! The offers can take many forms, but usually include a promotional interest rate on the amount you write the check for, while charging a balance transfer or cash advance fee in the range of 2-5%.

These offers are very bad for short-term liquidity because those fees act as an up-front interest charge which can't be avoided by paying off the balance early, as is the case with manufactured spend.

Possible uses: for medium-term needs, these offers can give you the opportunity to swap out higher-interest-rate debt for lower-rate debt, while generating valuable liquidity. For example, if you have 12 months remaining on a car loan at 5% APR, and are sent a 12-month 0% APR cash advance offer with a 3% cash advance fee, you will not just save money on the total interest you'll pay, but also have the option to swap equal-installment car loan payments for 11 minimum credit card payments and a "balloon" credit card balance pay-off in the 12th month. That added liquidity can be plowed back into manufactured spend, reselling, or any other high-value investment you have available.

12-21 months: savings and investment

There are a range of cards available that offer 0% APR on purchases and/or balance transfers. When those cards are also rewards-earning credit cards, these act as longer-term negative-interest-rate loans. For example, a new application for a Chase Freedom Unlimited will earn 1.5 Ultimate Rewards points per dollar spent and charge no interest on purchases for 15 months. $10,000 manufactured with that card will earn 15,000 Ultimate Rewards points. If you redeem 10,000 points to cover your manufactured spend costs, the 5,000 remaining points are the negative interest on your 15-month loan.

Possible uses: Depositing the same $10,000 in a 4.59% APY checking account will produce another $459 or so per year, driving the APR on your borrowed funds even further below 0%.

This technique may also be useful if you don't have the funds to maximize your annual contribution to an IRA or other tax-advantaged savings vehicle: using negative interest rate loans to cover your expenses while deducting retirement contributions from earned income can generate valuable savings on federal and state income taxes.

Up to 20 years: federal student loans

Whether or not you think college students should have to borrow to pay for higher education, for many students there is in fact a stark choice between borrowing or not attending college at all. The good news is that as long as long as students borrow exclusively from the federal government's Direct Loan program, they're eligible for the income-based repayment plan, or IBR. Under an IBR plan, any principal and interest balances that aren't repaid after 20 years are forgiven.

This too meets our definition of a negative-interest-rate loan: for borrowers whose repayments after 20 years don't add up to the amount they borrowed, the difference between the amount repaid and amount borrowed will constitute the negative interest they earned during the repayment period.

Possible uses: I don't know if there are actually any ways to leverage these negative-interest-rate loans, so just consider this an advertisement for the income-based repayment program and Federal Direct Loans.

On the other hand, no one should ever take out private student loans, which can be almost impossible to discharge in bankruptcy and offer few or none of the alternative repayment options the federal government makes available.

Conclusion

For now, we live in a low-interest-rate, low-yield world. Juicing your investment returns and reducing your interest payments with negative-interest-rate loans is one way to squeeze higher yield from a market that has run out of low-hanging fruit.

What's the return on a diversified portfolio of hip alternative investments?

There's a healthy overlap between people with an outside-the-box attitude towards funding travel and those interested in alternative approaches to savings and investment:

• Kiva has long been a (controversial) tool used by travel hackers and outside-the-box thinkers to earn miles, points, and cash back by making short-term loans funded with rewards-earning credit cards.
• More recently, Greg the Frequent Miler has been doing yeoman's work (followup here) reporting out the similar, albeit much riskier, possibility of funding Kickfurther (my personal referral link) "Consignment Opportunities" with credit cards to earn both credit card rewards and investment returns.
• At some point I must have signed up for a Fundrise account, and they've been badgering me to invest in their "Income" and "Growth" eREIT's for weeks now.
• Finally, if you listen to any popular ad-supported podcasts you've likely heard about Wunder Capital and their solar power investment funds.

Now, the last thing you want to do is put all your speculative eggs in one basket, so I got to wondering, what kind of return might you get from an equally weighted portfolio of all these investments?

Annualizing "target" returns

The first thing to take into account is that the investment horizon for each of these vehicles is different, so we need to adjust the various returns appropriately. I'll use $1,000 investments in each example for ease of comparison.

• Kiva loans funded with a 5% cash back credit card might earn more or less than 5% because of the varying term of Kiva loans. A recent search for short-term, high-quality Kiva loans returned 15 loans, all of which had a duration of 8 months. Assuming you wait to reinvest your Kiva repayments until all your loans have been repaid, and you suffer no defaults or delinquencies, you could invest $1,000 1.5 times per year, for a total annualized return of 7.5%.
• Kickfurther consignment opportunities funded with a 2% cash back credit card will yield 2% cash back, plus your total Kickfurther principal and interest payments, minus 1.5% of your Kickfurther principal and interest payments. In other words, a 12-month consignment opportunity offering a 16% return on a $1,000 investment will pay $20 in cash back plus 98.5% of $1,160 ($1,142.60), for a total annual return of 16.26%. Assuming the four currently available consignment opportunities are typical in both length and rate of return, we can mechanically compute an average annualized return of 14.65%.
• Fundrise works a little bit differently since you're investing in eREIT's which are designed to be held for the long term and which pay out throughout the life of the investment and then return remaining (potentially appreciated) principal at the end. Under the "accountability" tab for each eREIT, you can see the returns Fundrise seeks from each investment fund. For the Income eREIT they will charge no management fee if the annualized return is less than 15%, and for the Growth eREIT they'll pay a penalty if the annual return is below 20%, so we can use those as the "target" returns for each fund.
• Finally, Wunder Capital is currently offering a "Term Fund" with a target return of 8.5% and an "Income Fund" with a target return of 6%.

Building a diversified hip alternative investment portfolio

If I were interested in building a portfolio of these alternatives, my model would be diversifying across the four platforms somewhat like this: by putting $1,000 in as many suitable Kiva loans as possible, $1,000 across as many Kickfurther consignment opportunities as possible, $1,000 in each of the two Fundrise eREIT's, and $1,000 in each of the Wunder Capital funds.

That would produce a $6,000 investment with a target annualized return of 11.94%.

This would be a very stupid thing to do

There are at least two questions worth asking about such a diversified portfolio of hip alternatives:

• How likely am I to make more money with this portfolio than I would with conventional investments?
• How likely am I to make any money at all, versus losing some or all of my principal?

The first question speaks to the question of whether the higher target return you're seeking will adequately compensate you for the added risk you're taking with these bizarre, untested investment vehicles. After all, Vanguard will sell you a low-cost mutual fund invested in corporate junk bonds any day of the week. Why buy untradable junk from strangers when Jack Bogle will sell you relatively liquid junk?

The second question is whether you'll be compensated at all, or whether an economic downturn, poor management, and/or fraud will wipe out your investment completely with little or no warning.

But, gambling is fun

There's a painful irony to the fact that these alternative investment vehicles have been legalized and are being aggressively promoted at a time of low interest rates and pessimism about future returns in the stock market, because those conditions have retail investors desperately fishing around for investment opportunities with a higher return than their passively managed index funds. Frantically taking bigger and bigger risks makes the problem of low returns worse for all the investors who pick the wrong alternatives to invest in (and there are a lot of wrong alternatives).

On the other hand, for the dwindling number of investors with a secure path to retirement and enough money left over to gamble with, these alternatives seem like they'd be fund to play with. And who knows? You might even make some money.