Q&A: Wait, Are We All Wrong About Zero APR Strategies?

0:00Joe, would it ever be a smart financial decision to put a vacation on a credit card? If you have the funds already allocated for travel and you have a great points program, maybe. Ooh. So you're assuming that you pay it off when you say points program. Are you assuming you pay it off within 30 days? Yes. Ah, all right. Follow up then. Would it ever be a good idea to put a vacation on a credit card and let the balance ride for 18 months? I feel like this is foreshadowing to a question we might be answering. Is that what's going on? Oh, how did you know? How did you know? Because I know that a bunch of people are thinking right now, how could that ever be justified?

0:44But we're going to answer a question from a listener who makes a case for it. We're also going to answer a question from someone who is pursuing financial independence, but wants to make some big shifts before they get there. And we're going to answer a question about whether Roth versus Trad is the right choice. All of that in one episode? All of that coming right up. Welcome to the Afford Anything podcast, the show that understands you can afford anything, but not everything. Every choice carries a trade-off, and that applies to any limited resource that you manage, your time, your focus, your energy.

1:19So what matters most and how do you make choices accordingly? This show covers five pillars, financial psychology, increasing your income, investing, real estate, and entrepreneurship. It's double I fire. I'm your host, Paula Pant. I trained in economic reporting at Columbia. Every other episode-ish, I answer questions from you, and I do so with my buddy, the former financial planner, Joe Salcihai. What's up, Joe? I am here and ready. I'm super excited to dive in this credit card question. Oh, man. Right? Well, let's hear it. Our first question comes from Anonymous. Hi, Paula and Joe. this is anonymous and I wanted to get your thoughts on a strategy I use often to pay for somewhat larger expenses.

2:05So let's take a vacation for an example. If I have a vacation I want to pay for instead of putting cash away each month and saving it up and then paying for the vacation, what I prefer to do is open a new credit card with a promotional offer such as, you know, 15 months or 18 months interest-free. And then I put all my vacation expenses on that card, pay it off slowly over the 15, 18, whatever promotional period months they've given me. And the way I see it is I'd rather invest my money today and pay my expenses later. And if these credit cards are willing to give me an interest-free loan to do it, it makes sense in my mind.

2:48Sometimes I leave the card open. Sometimes I close it. It all depends on whether there's an annual fee, whether I like the cash rewards or the credit rewards they're giving me and things like that. So I know other than the risk of identity theft and whatnot that comes with opening credit. Do you have any other advice on this type of strategy? I've been doing it for many years now. I do have a number of credit cards open, but in my mind, that also can be beneficial because it increases the amount of credit available to me and my credit score is over 800. So it doesn't seem to be an issue in that regard.

3:27I don't have a mortgage. I do have a car loan, but otherwise I've been very responsible financially. So curious to hear your thoughts. Anonymous, what a fantastic question. And before we answer, we first need to give you a name. I know who it should be. I think of people that are credit card spokesperson because this woman is clearly advocating for credit cards and using credit cards. So the most popular person on television right now is Jennifer Gardner, who's doing it for Capital One, right? That's right. Yes. So I think her name is Jennifer. Jennifer. All right. Well, Jennifer, fantastic question.

4:04You're fundamentally talking about credit card arbitrage, take out a loan at 0%, invest that money at some amount that is greater than zero and pocket the difference. Is she though? Because I didn't hear that she had the money already to pay the credit card off. I didn't hear the arbitrage piece of it. I did hear that it's at a low interest rate, but the piece where she's taking money and physically betting that she's going to do better with this money invested than elsewhere. I didn't hear that half the question, Paula. Well, I guess it depends on the interpretation of the question because what she had a line in there where she said something about, I'd rather invest my money today and pay for expenses later.

4:48So that to me implies that she has the lump sum and she is investing it at some amount that is assuming it's a 0 % APR. She's investing that money at some amount that is greater than zero. Okay. But you ask a good question, Joe, because I think the crux of the answer is going to be, is she arbitraging this or not? Does she have that lump sum or not? Yeah. And if it is a lump sum, is it dedicated toward these? Or is she saying, I'd rather leave my money invested toward things like retirement that I want or some other goal that I want and I'm going to then cashflow this, but I'm going to cashflow it in arrears.

5:30Right. Yeah. Because she also had this other line where she said, instead of saving cash, right? So I think the reason you and I have different interpretations of the question is because you probably heard the part where she said, instead of saving cash and paying up front. But there is a fundamental question right there. Yeah. Because that definitely is going to cloud, I can see already going to cloud Paula Pant's answer. Yeah, and Joe Salciha's answer, right? Oh, I think I'm going to be pretty clear either way about my answer. So if under the assumption, Jennifer, that you have a specific lump sum of money that is dedicated to nothing other than this one very specific expense, let's say that you're going to take a vacation that costs$10 ,000, hypothetically.

6:20We won't get hung up on the number. We'll just use that as an easy round number. Let's assume that you have a lump sum of$10 ,000 that is dedicated solely to the purpose of the vacation. So it is cash that you have saved up over time. Now it's a lump sum and you have two options. You can either use that money to pay for the vacation or you can put that$10 ,000 on a 0 % APR credit card while simultaneously taking the$10 ,000 lump sum and putting it into a high yield savings account. I'm going to be very clear. We don't want to expose this money to risk because this is a very short term, 15 to 18 months.

7:04So we're not going to put it in the stock market because the stock market is not a high yield savings account, even though in a bull run, it can sometimes feel that way. We're going to put it into a high yield savings account or into a money market account or into CDs, into some type of cash equivalent that has some interest rate that is nominally greater than zero, right? And then we're going to, after 15 to 18 months, pay off the credit card with that lump sum that is dedicated to no other purpose. In that case, assuming, in Know Thyself, assuming that you're not going to be tempted behaviorally to use that lump sum for any other purpose, I can see a case for this.

7:48I don't see a case for it. And the reason I don't see a case for it is specifically because what we're talking about doing is not just mortgaging my future income stream, because now my income stream has to be dedicated to paying off this debt. I want that free cash flow to really be free, to work toward my future goals, not towards stuff that I already did. Even if I have the money to do it already, I'm still in this strategy, dedicating future resources, my money in the future coming in the front door to pay down this debt that I had. I don't want to have a trip today. And for the next 12 to 18 months, I'm paying for it.

8:33I want that trip to be paid in full. And I'm a guy who's been there, Paula. I used to do this all the time and not this, by the way, I would do this a stupid way. Jennifer's doing it the smart way. Even though it's smart, I don't like it, but I did it the dumb way. I would just go, you know what? I deserve a vacation. And by the way, the worst words a broke person could say are, I deserve it. I deserve it. Yeah. And I totally, we go on vacation. I remember my honeymoon with Cheryl was all on credit cards. It was horrible. And I actually, it's funny. We have fun, but I even remember as I'm buying things going, I have no idea how I'm going to pay for this.

9:09I'll figure it out later. When we did then our first trip with our children, I actually did side hustles to put money away ahead of time. And I remember I bought this trip in little pieces. I would make enough money for the first hotel stay and I would then get the room. Then I do the next room and I gamified it ahead of time, Paula. And what was cool was when I went on that vacation, that was a phenomenal vacation because I owed nobody anything in the future. I came home and I was rested and I was ready to take on the future, not address what I'd done on the past. And I don't think this is as much about the money, frankly, as I do about the mindshare in the future.

9:52I want my mind to be focused on bigger and better and more for me, not based on what I already did. So between the money and the mindshare, I don't like it. The strategy doesn't work. Sure, it works. If you've got the cash set aside, you can do it. You can make a little money, Paula. I think you addressed that. Great. I just don't want to be focused in the rearview mirror with my future time. Now, I do agree about the mindshare component because as we say at the top of every episode, you have limited mental focus. You have limited cognition, right? You can afford anything but not everything. And that applies to your focus and your energy.

10:33And so the question is how much focus and energy is this draining? and where could those cognitive resources otherwise be allocated. But, and I want to be clear, I'm making the assumption, let's say that Jennifer is spending$10 ,000 on a vacation, and let's just assume that to save that$10 ,000, it takes her 10 months. Let's assume she saves $1 ,000 per month for 10 months. At the end of 10 months, she has a$10 ,000 lump sum, and then that entire lump sum gets put into a high yield savings account that is earmarked for absolutely no other purpose besides this vacation. And then if and only if that is the circumstance going into this, then I can see the case for it.

11:22But I can see the case for it to them. But then And my question still is, okay, now I had the money. I paid for it ahead of time. I feel good about that. The money is in a safe place. I don't have to worry about variability. I've checked all the boxes. Is all this rigmarole worth 400 bucks? Joe, you and I have been answering questions from our communities for many, many years. In the ZERP era, the zero interest era, we never really got this question because savers were not rewarded. The interest rates that you would get on a savings account, even a quote unquote high yield savings account back in 2018, was so laughable.

12:04The question never came up. I think the reason that this question is coming up now is because we are still living in a, historically speaking, a normal interest rate environment. But relative to the last 10 years, it feels like a high interest rate environment. And so assuming you can get a 0 % APY credit card, the bandwidth for arbitrage is there. And that's a new opportunity that was not there a few years ago. But the question to your point, Joe, is, all right, what does that actually translate to in dollars and cents? That spread, and this is a simple spreadsheet calculation, what is that spread and what in dollars and cents does that pencil out to over the span of 18 months?

12:51Because if this is an amount of money that is ultimately a rounding error, then is it worth the cognitive overhead? And I know that for some people,$400 is a lot of money and it certainly can have a nice effect on a month, maybe even a couple months of your lifestyle. I often go back to what would I do with that time? And even though it might take an hour or two hours, my answer then would be, yeah, okay, fine. You know what I mean? I don't know that then I really have an opinion. It's much more, yeah, okay. If it works for you and you put the money aside and it's not betting on the future. The only thing that I do wonder though, still, Let's say you put this money in a safe place and it's there for the vacation, but then disaster strikes the next nine months and you have to go and raid that fund for some other thing.

13:49It just feels like there's so much, Paula, that could go wrong. Yeah. The risk is behavioral, not mathematical. Yeah. The risk is that most people behaviorally will use that money for something else. If I take the vacation and then my dishwasher breaks three days after the vacation and I paid for the vacation ahead of time, I don't have these competing goals for my money. The question here isn't whether it works or not, because I know what Jennifer's opinion here is. It works. It's worked for me. And for me, that's not really the question. Does it work? Of course it works. it's given all of the other opportunities and all the other things that you have going on in your life.

14:33Is it, is it worth it? Is it worth all the things that could go wrong? I think a lot of that is going to depend on how demanding is Jennifer's career, how much room for growth promotions, raises does she have inside of that career? Does she have any interest in starting a side hustle or pursuing some other avenue that would yield her multiple streams of income. Those are all of the more lucrative avenues that she could be pursuing. But if those don't seem viable, I don't know the circumstances. I don't know what she does for a living. I don't know the circumstances of her work or her health. I think that cognitive bandwidth is the real trade-off here.

15:18You know, the variation of this question that we did used to get prior to the pandemic, but during that ZERP era, the variation of this were people asking the same question about car loans. We didn't used to hear this question about credit cards. Zero percent car loan. Yeah, we used to hear this question about zero percent car loans. This is back in like 2015, 2016, because, yeah, that was the arbitrage play back then. But the cost of a car, it was for most people, we're talking an amount of money that's under$20 ,000 for a lot of people, especially back in 2015, 2016. And so then the question became, again, how much could you really arbitrage that for?

16:02What would be the monetary value of that effort? And then how does that pencil out in terms of being worth your time and energy? So I think Jennifer's got it. There's your calculation. Yeah. And then I think every individual has to come up with their answer. Wow. Joe, you and I started with diametrically opposed answers and we seem to converge at the end. It's so annoying. I thought we were going to be opposite ends of the spectrum on this one, which we started off as. It's so, so annoying when we agree. But I do think that the assumption that this is a lump sum arbitrage play, that is the foundational underpinning of all of this.

16:45Because Jennifer, if you don't have the money yet and you're putting the vacation on a credit card with the idea that over the next 18 months, you will slowly save up that money, that's a different story. Don't bet your future mindshare. Exactly. Or your future income. Just don't bet your future income. Yeah. So I'm operating on the assumption that you have the lump sum before you take the vacation. This is why I like comparing the way we evaluate companies and the way that financial analysts evaluate companies to people. Because what I found was if you unemotionally look at your financial picture, the way that financial analysts look at a stock, you're going to make a lot better financial decisions.

17:35I feel like a lot of us, Paula, we go to work and we make very logical decisions and we come home and we make very emotional decisions about our money. And I think we need to have that board of directors look. If I had a board of directors and a balance sheet and quarterly earnings I had to put out, there could be negatives to that too, but let's go with the positive. Would I make this move if I had a board of directors to talk to? And what's the number one component everybody looks for? Free cash flow. And the reason they look for that is the company can pivot. The company can double down if something's going well.

18:11They have all of this opportunity. Free cash flow equals opportunity, not just for business, but for you or me. And then like we talked about earlier, then for us also, because we've only got one brain versus a company that's got tons of brains working for them. I need free mind share, which for me is also like free cash flow. Right. If I can free up my energy to think about whatever I want to and I'm not dedicating my brain to all these little things, I think that's pretty phenomenal. It's funny. There's a character in fiction in the old Sherlock Holmes mysteries. I remember Watson asking him in one of the very famous tales, there was something in the paper about some socialite and Sherlock Holmes goes, I don't know who that is.

18:55And Watson goes, you know everything. You know everything about everything. How do you not know who this famous actor is? I feel like I'm talking to Paula Pant, by the way. How do you not know who this actor is? And Sherlock Holmes said the best thing. He's like, I only have so many brain cells. I don't want to waste it on this stuff. I got to keep it free for the big things. And that is why I don't know any pop culture. No, no movies, no music. I never have any clue about what's going on. I'm Sherlock Holmes. You are Sherlock Holmes. You know, there's another example in Sherlock Holmes where Holmes doesn't know Copernican theory, Holmes doesn't know that the Earth revolves around the sun.

19:40Wow. He doesn't know the basics of the solar system. And it's for exactly the same reason. That's maybe stretching it a little bit too far. I do recommend that you should know that the Earth revolves around the sun. A little bit of science. Yeah, exactly. Yeah. But Sherlock Holmes's point was he's unlikely to use that information in solving a case. It is. I think Sir Arthur Conan Doyle is making a real point there. You only have so much. Free cash flow, free brain power. Watch how you use that. And I think that's the case for me with this strategy as well. Right. So Jennifer, thank you for the question and best of luck with whatever route you decide to take from here on out.

20:21You know, Joe, Molly and her husband are thinking about making these major, major career changes that come with a 50 % plus pay cut. We're going to talk to them at the end of this episode. But before we do. You know what I love about Molly's question too? Yeah. I went through this. Mid-career. Mid-career. About to make a bunch more money and decided to take a massive pay cut. Ooh. All right. We're going to have that discussion at the end of today's episode. But before we get there, we're going to hear from Vaughn, who has questions about Trad Accounts versus Roth Accounts. Vaughn is up next. The kids are back in school now, and I finally have some extra time to plan a weekend getaway for just us.

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22:29I've been using Gusto since 2017 or 18. It's been a long time. I remember I was living in Las Vegas at the time, and I brought on my first team member, a woman by the name of Erin, who ended up working with us for six years. That was when I got on Gusto, and I'm still there today. Try Gusto today at gusto.com slash Paula and get three months free when you run your first payroll. That's three months of free payroll at gusto.com slash Paula. One more time, gusto.com slash Paula, G-U-S-T-O dot com slash P-A-U-L-A. This Friday, the NBA on Prime tips off with their debut doubleheader. First up, Boston brings the action to the Garden as the Celtics face the New York Knicks.

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23:56Our next question comes from Vaughn. Hi, Paul and Joe. My name is Vaughn, and I have a question, or rather more of a comment, about Roth versus traditional retirement accounts. I've heard you guys discuss this topic on several occasions over the years, and whenever you list the benefits of a Roth account, you always leave the listener with the impression that a Roth will end up generating more spendable income in retirement than a traditional account because all of the growth will be withdrawn tax-free. It seems like you're implying that getting taxed up front on the contributions will yield more than getting taxed at the end after all of the growth has happened.

24:38But this is mathematically untrue. If the tax rates happen to be exactly the same in retirement as when the contributions are made, then a traditional account will yield exactly the same amount of spendable income as a Roth. For example,$10 ,000 contributed into a traditional account will grow to$174 ,494 in 30 years if invested at 10%. If this is then taxed at 20 % at withdrawal, you end up with a net spendable income of$139 ,595. With a Roth, that 20 % tax would be paid on the$10 ,000 up front, so the actual contribution into the Roth would be$8 ,000. And$8 ,000 invested for 30 years at 10 % grows to$139 ,595, which is exactly the same net spendable income as the traditional account.

25:39I apologize if I missed the point you were trying to make about Roth versus traditional accounts, but I felt it was important to clarify this particular fact. I love the podcast and especially enjoy the episodes with caller questions. Thank you both for all you do to promote financial literacy. That's probably because I'm on those episodes, Vaughn. Very certain. Vaughn, thank you for the question. And my answer is going to be brief. So in the hypothetical that you laid out, a person who is contributing to a Roth, in your example, contributes less money than a person contributing to the trad. So in the example that you laid out, the person contributing to the trad contributes$10 ,000.

26:19The person contributing to the Roth contributes$8 ,000. One of the many reasons that I love the Roth is because the Roth allows you to make additional contributions above and beyond the limitation with the trad. So if a person were to make a$10 ,000 contribution into the Roth, rather than the$8 ,000 as you outlined, in other words, if the person were to not reduce their contribution amount based on the tax payment, then they are effectively contributing more money than they otherwise could if they made a trad contribution. And by virtue of making that bigger contribution, that extra$2 ,000 over time that compounds into much bigger savings.

27:04So the benefit to the Roth is, as I see it, threefold. One is, yes, you get the benefit of tax-exempt growth, all capital gains, all dividends, all of that is tax-exempt. Number two, you get to make larger contributions than you would otherwise have the opportunity to make if you invested in a trad. And number three, there is the variability of not knowing what your tax rate will be in retirement, because on one hand, you likely will be making less money. On the other hand, there's a likelihood that the government might raise tax rates in the future, and we don't know what the government is going to do.

27:41So given the impossibility of predicting tax rates in retirement, particularly for anybody who's going to be retiring 10 years or more from now, we remove that variability. We remove that volatility by virtue of paying that tax bill up front. So we have added certainty and we have the opportunity to make a bigger contribution than we otherwise could when we choose the Roth account. I do want to emphasize one thing, though, just a dollar being a dollar being a dollar. If he's taking the path of a single dollar and tax rates remain the same, he's 100 % correct. So he is absolutely 100 % correct.

28:23But when you're choosing a vehicle, Paula, I like your interpretation, which is which one buys you the most. And I get that additional flexibility to put more money away into the Roth because I'm using the after-tax dollar. That gives me a fairly big upside. Now, it's on the eye of the beholder, right? I got to be able to take advantage of that. opportunity for that to work. But if I can, and I have that additional cash flow, why would I not go with that? I think there's a few others, Paula, to add to the ones that you like. A few other benefits? Yeah, a few other benefits. Sorry. A few other reasons why I would go Roth.