You pull into gas station. The price is $2.45 per gallon to pay by credit card or $2.35 for paying in cash. What do you do? How do you pay?
Most of us have gotten very used to paying for gas by credit card, almost exclusively, in recent years. In the past few months, gas stations have started to charge a $.10 differential between paying by cash or credit card. I have a feeling that most people are continuing to pay by credit card, because that is what they are used to doing.
Like our approach to investing, before you pay at the pump, you should consider the evidence and make a rational decision. The additional $.10 charge to pay by credit card, at current gas prices, is a premium of 4%. So by using your credit card, it is costing you 4%.
Even if you are participating in almost any type of credit card reward program, you will probably not be able to recoup anywhere near this 4% added cost. Thus, you will save money by paying in cash and not by paying with your credit card.
This may require a change in what you are accustomed to doing. But rationally, it is the correct strategy.
For readers of this blog who are not currently clients of our firm, this is similar to an investor who has been using a traditional brokerage firm (and their “strategies”) and has not considered the academic evidence that supports our investment philosophy. They are used to what they’ve been doing and they are comfortable with it. It may not necessarily be in their best interest, but they haven’t considered an alternative strategy.
So the next time you fill up your tank, think about your choices…. and hopefully you’ll make the rational one.