Before Frankie left his hotel, the hotel secretary checked his clothes. He was an American going to see a Celtic–Rangers soccer game, and she knew that if he wore the wrong colors he’d likely get beat up. Franklin Foer travelled the world, visiting some of the most storied clubs on the globe, and he came up with a theory. How Soccer Explains the World.
That book got me thinking. And the other day I was thinking about how gas stations explain the world. Maybe not the whole world, but at least two key personal finance components I’ve thought a lot about. While my goal in life (well–one of many–including owning all 7 Harry Potter books in hardcover, and teaching our golden retriever Lucy to bring beer and chocolate from the fridge) is to own an electric car; I still drive a gas-powered Honda Civic. Which means I have to visit gas stations a lot. And I think gas stations are a perfect analogy for two things: saving money with credit cards rewards, and timing the market when investing.
First, the credit cards. I love (I’m weird, I know), using credit cards to maximize my savings. I’m not talking about travel hacking, which is primarily about earning free flights through large sign-up bonuses. I’m talking about the day-to-day purchases, where I earn about 2-6% cash back/miles on purchases I make everyday, like groceries, and gas, and maximizing those earnings. If you want to learn more (general rewards), check out my previous posts on the subject (using 3 Chase cards to maximize rewards).
Critics of travel-hacking and credit card-optimization like to point out that no one ever gets rich off credit cards rewards points. And that is true. If you have to spend 98 dollars to earn 2 dollars back, well, that’s a terrible return on investment. Credit card rewards won’t help you get rich, but they will help you save money (if used correctly)! On the other hand, investing will help you get rich (if done correctly!). So how do gas stations tie in to these two basic principles of personal finance for me?
Gas stations are the perfect example of how I like to think about credit card optimization, because there are really so many options to optimize your spending. First, many gas stations have two prices: one if you pay with credit/debit cards, and one if you pay with cash. Usually, at least in California, the cash price is ten cents cheaper per gallon. Then, to make things more interesting (or way overly complicated if you prefer), so many different credit cards offer different cash back options at the pump.
Discover and Chase Freedom both offer 5% cash back at the pump during various quarters throughout the year on a rotating basis (in 2019, Chase gave you 5% from January through March; Discover then offered the same from April through June; and then Chase decided it was addicted to the oil biz and offered it again July through September). My Amex card gets me 2% cash back at all times, and there are various other cards from banks like Citi and Bank of America that range from 1-3% cash back at the pump.
So the question becomes, how do you pay for your gas? Well, it’s a simple numbers game. You might at first be tempted to take the 10 cent discount and just pay in cash. For me, the numbers don’t add up though. In California, gas is usually between $3.50 and $4 a gallon (woe us is! Good thing we have sweet beaches and plentiful avocados to make up for that pain). If we take $3.50 as an example, and I’m getting 5% cash back on my Chase or Discover card, I’m actually saving 17.5 cents a gallon every time I use a credit card! That’s against the 10 cents I save if I use cash! However, if one of my 5% cards is not on, and I’m reduced to getting 2% cash back with my Amex card, I’m only getting 7 cents a gallon. Then it does make sense for me to pay cash (although I’m usually too lazy and eat the three cents).
The point of this is not to give you a headache, although I’m sure I’ve succeeded admirably at that too. The point is to show how by choosing the correct way to pay at the pump, you can save yourself a lot of money. If you expand this all the various ways you pay for things (groceries, cars, rent, etc.), you can wind up saving yourself hundreds or even thousands of dollars per year, just by choosing the right way to pay for something and earn rewards points. Thus, gas stations explain credit card rewards.
Gas stations also admirably explain basic investment strategy (or lack thereof). What do I mean by this? I’m talking about timing the market. You don’t try to time your gas purchasing based on when prices dip. You buy when your tank is empty. In other words: regularly.
When people invest in stock (myself included), they are often tempted to try to time the market. Buy when they see something doing really well and ride that wave, and sell right before the market crashes, at the peak. As John Bogle points out in The Little Book of Common Sense Investing, most small investors (and experts too!) are terrible at this in the long haul. They too often buy as the peak is nearing (but before most people realize it’s a peak) and then sell after the crash, trying to minimize their losses. Ben Carlson over at “A Wealth of Common Sense“, gives a perfect example of this. He points out how even an inverted yield curve, perhaps the most reliable indicator of a recession for decades, doesn’t really help you time the market and sell your stock at the right time to maximize your rewards. If you can’t buy and sell properly even knowing when a recession is coming, how good can you really be at it??
The average driver, like you and me, doesn’t really know what the price of gas will do from day to day, if it will go up, or down, or just stay the same. And for most of us, that doesn’t really play into how and when we buy gas, we just buy gas when we need it! When that little “E” lights up on the dash, or maybe a little sooner for the responsible moms and dads out there. There are of course days we assume prices will go up, like during the summer, or on holiday weekends, but that doesn’t really change when we buy gas. The only historical constant has been that overall, gas prices have steadily risen. Likewise, the stock market has steadily risen over the course of history, and as John Bogle and other critics of Wall Street investing note, few people can accurately predict what those prices will do from day to day, but overall the prices of stocks goes up.
This is, of course a vast oversimplification of investing (and maybe even buying gas, although I didn’t know I was capable of such a thing). But I think the point still stands. Trying to the time the market is an impossible task for most of us, but buying assets regularly, like you would gas, will help you build wealth safely over the long run.
So remember. If you think about using rewards points think about how you buy gas at the pump. And when you think about building wealth by buying stocks, think about how you buy gas at the pump. And hopefully soon we will all have electric cars and gas stations will no longer explain the world!