The Intention of Irrational Personal Financial Choices
Plus optimizing credit card points, buying a home in San Francisco, and my review of Outlive, and more
Here’s the ultimate dream: a Tweet about an entrepreneur who uses credit card points to fund all of his living expenses.
To quickly summarize:
Yong-Soo owns a business that generates $5 million in expenses every year that can be paid through credit card.
His average credit card rewards rebate is 2.5%.
This amounts to $120K/year ($5 million x 2.5%) in credit card rebate which more than covers his yearly personal expenses.
It’s quite unique and a little funny at first. But upon further realization, figuring out how to maximize your credit card spending is equivalent to finding areas to cut expenses in your business.
At the extreme angle, it doesn’t make sense to run a business that does $5 million in revenue and then $5 million in expenses to fund a lifestyle off of credit card point rebates. But finding a 2.5% edge is definitely still worth something!
But is this really worth pursuing? Is leveraging credit card points just a quirky hack, or can it teach us deeper lessons about personal finance and making unconventional choices?
The Irrational Choice of Credit Card Churning
When most people discover credit card churning - they go through the four stages of disbelief. At first it sounds like a scam, then they get educated and excited, followed by being overwhelmed, until landing on a level of credit card management they’re okay with.
To quickly explain, credit card churning is the act of opening a lot of credit cards to take advantage of lucrative signing bonuses given by airline and hotel partnerships. For example, Chase currently has 5+ cards right now offering anywhere from 50K to 100K in points if you open up a new card. This is equivalent to $500 to $3000 in cash, airline, or hotel redemptions depending on how you maximize the redemptions.
Most churners, like myself, will open anywhere from 4 to 20 credit cards a year to maximize these points.
But the common argument against churning is not that it might lower your credit score (which is a myth), but why spend time tracking, managing, and spending money on different credit cards when you can allocate that time to figuring out how to make more money.
And it’s a fair argument because it is irrational to churn if you are the typical high earning demographic that the credit card companies are targeting. Why waste time on a points when you can spend that time working a little harder for that next promotion?
My reasoning for doing so, is because credit card churning allows me to go outside of my typical financial psychological reasoning.
I’ll give you an example, the gorgeous Alila Ventana hotel is an all-inclusive resort overseeing the cliffs of Big Sur that costs anywhere from $3000 to $4000/night in the summer.
Now would I ever stay there and pay $6000 out of my pocket to stay there for 2 nights? Absolutely not! In fact, I cannot justify spending more than $500/night right now for ANY accommodation. Just like how I can’t justify paying for business class when an economy seat costs 10x less on the same flight.
But can I give myself an irrational reason for doing so? If it feels like I earned this luxury experience for free by opening a Chase Ink Preferred card that delivers 100K points by spending $8K of normal business expenses within 3 months and then transferring my points over to Hyatt to redeem the hotel at 45K/night?
Yes - absolutely.
Buying a home is not a good financial decision?
I recently bought a multi-family home in San Francisco.
When I moved back to SF late last year - I was excited to find a new apartment that fit most of my needs as a single guy at the time. But when my parents visited, they also realized that some aspects of San Francisco were not as they seemed in the media and rather enjoyable! Notably the access to Chinese food, the ease of access to Golden Gate park, and the sunny weather in the winter. We ended up visiting a decent amount of open houses until finding one that accepted our offer.
Financially speaking - it is not the best utilization of my parents money or mine. While I’m living in the top floor now, they’re taking ownership of the rent controlled middle unit and future bottom floor living area. And currently the rent they collect from the rent controlled unit is almost the same as the property tax.
Some homes selling in San Francisco are currently priced at a 30x+ premium to renting. And so logically - this is a bad financial choice in the “buy utility rent luxury” argument. And there is so much, out there, about how, buying a home, is a bad financial decision.
But with parents, family, and generational living - there’s not as much rationale in the decision making as there is an understanding of how you want to craft your future. For one - the purchase allows my parents to pass down knowledge of what it’s like to own, design, and fix up a home, something they’ve always enjoyed given my dad built our home + farm in Camas over 20 years ago.
Additionally I think buying a home give me more focus to build a long term, tight knit community in one location. Going from renter to owner transitions me to a mindset of not being a typical SF transplant anymore. And it gives me the allowance of owning a piece of the Earth.
And lastly - it is giving my parents a reason to live closer to me long-term as now they have a reason to live in San Francisco for the winter season. Realistically, are they going to go to San Francisco and rent out an Airbnb for 3 to 5 months even if it’s the better financial decision? No - because there’s no forcing function for them to do so. But if they own property - they are behaviorally much more incentivized to go down to manage, take care of, and improve upon the property as an overall home, which coincidentally allows them to escape the winter in Portland.
So I think there is always some nuance towards how we spend and make financial decisions whether it’s trading time vs overpaying for property. Maybe this sounds like I’m justifying my decisions. But ultimately, while the most optimal financial decision almost always gives us the most flexibility, many times it discounts the non-optimal effect of moving your behavior into the direction or lifestyle that you want to live.
Will my psychology of spending $3000/night on a hotel change? Yes - but my net worth might have to be an order of a magnitude higher than what it is now for me to justify that decision. Can I get there by not spending more than a few hours a month thinking about credit cards? Not sure..
Optimal choices do not exactly mean optimal outcomes. Just like how giving cash is the most optimal gift according to economist, sometimes it’s actually the thought that counts.
Things to Share
This breakdown of credit card rewards pairs nicely. One thing to note is credit card companies shifted from making the most of their money off of low-credit borrowers who wouldn’t pay their full balance and accrued interest to now making money off of the interchange fees from high earners that are dedicated to one credit card. I remember when the Chase Sapphire Reserve came out in 2016 and how almost all of my friends signed up for the card. I’m curious to see how many of them also still have said card now - given it’s probably not the BEST maximization of what they could do with credit cards, but would be validation of the strategy Chase used to acquire them.
I finished Outlive this week and find similar metaphors to making financial decisions as you might towards optimizing to longevity. Yes, I learned how important it is to increase your VO2 max now to ensure a healthy lifestyle later on. Additionally how you can work backwards from how you might want to live in your 80s and 90s to figuring out what physical feats you need to accomplish today. But at the end of the day, if we try to make ourselves the most optimal at every moment - we miss out on the small things that do make life worth living. If you are strict enough to optimize your sleep every single night - it might prevent you from having the night of your life with your friends even if losing sleep is bad for you. There are obviously an endless amount of health optimizations - but it’s all a tradeoff.