On mental accounts, gift cards, and credit card rewards

One of the trends in the personal finance community is extreme frugality.  Included with that trend of extreme frugality is a suggestion of not using cash money to pay for gifts for other people, but to use gift cards gotten as gifts, credit card rewards, and so on.

From a strict economics perspective, this seems ridiculous.*  Money is fungible.  Keeping a credit card that gives you 1% rewards in gift-cards that “count” as not spending money on your PF blog makes way less sense than switching to a card that gives you 1.5% back directly to your bank account or credit card bill.

However, from a behavioral perspective, this type of budgeting can make a certain amount of sense.  Some people really do have problems with spending, and they may have problems with spending more on other people than they do on themselves.  For some, a little bit of spending can open the floodgates– if they’ve already dipped into the main account to give a gift, what’s the problem with giving a little more?

For these folks, having this forced budget with money that is outside of the regular income/outgo is an easy way to limit spending. Gift cards and cash-back rewards seem like extra money and can be put into a specific mental account that can help people control their spending.  Folks can drain the separate account without feeling like they’ve dipped into the main account, limiting additional desires to spend out of it.

It still doesn’t make sense for cards gotten from Swagbucks to “count” as not spending but money from a part-time job doesn’t count.  Being paid in cash vs. something less useful doesn’t have to be the dividing line for your mental accounts.

The problem occurs when you decide on purpose that you want the less useful form of compensation (or less remunerative form of side-work) because you’ll be able to spend that without guilt, or worse, you’ll have blog-cred for using it that you wouldn’t have if you got the cash back and set a separate gift budget.

And bloggers who brag about not spending any money on trips or vacations or shopping because they used “credit card rewards money” are being disingenuous.  Money is money.  That money could have just gone back into their account to pay off debt or save for a down payment or early retirement or whatever it is that their blog is about.  They chose to spend it, and there’s nothing wrong with that, but it still could have been used as, you know, money.

*Exception being one in which you would not use the card anyway.  For example, you’re in the situation where you have a $25 Starbucks gift card and you don’t drink coffee, but that’s the favorite coffee-place for someone you owe a gift worth at least $25.  From an economics perspective, it’s totally rational to count that $25 card as free money to you, assuming that reselling to get the cash value of the card is too much hassle.

32 Responses to “On mental accounts, gift cards, and credit card rewards”

  1. Miser Mom Says:

    Ooh, yeah. That totally confused me when I first saw people doing that. Of *course* money that you get from whatever source is still money!

    With your exception noted. For example, my husband used to do a humongous amount of traveling, so he accumulated lots of “miles” that he couldn’t/didn’t want to use on even more traveling. We gifted this to a pastor who was visiting third world countries. We actually got a nice charitable tax deduction for that — so we got money in our pockets that we otherwise wouldn’t have had, and the pastor got to travel to a place where he could minister to people in poverty. I’d say, win all around.

    But when I get “rewards” money from my credit card, that’s money I can spend, and spending it on other people isn’t the same as free.

    • chacha1 Says:

      When my sister and her wife wanted to get married (they live in NC), a friend of theirs gave them enough soon-to-expire airline miles to travel out here to CA. Good friend, they probably couldn’t take a charitable deduction since it was a donation to a friend and not to a non-profit!

      I use credit card “rewards” as an extra payment on the balance. Can’t imagine using that to do more shopping.

  2. No Mas Says:

    This has long been a peeve of mine with PF blogs, along with the “no spend” challenges where the person doing the challenge goes and stocks up their pantry, fills up their car gas tank, buys a case of toilet paper … and then brags about not spending ANYTHING for 30 days. It incredibly disingenuous.

    • Debbie M Says:

      I think the latter is still useful. There was certainly no impulse spending that month. But I agree–it would be better to call it what it is.

  3. Leigh Says:

    I personally count credit card rewards as income and whatever I spent the points on as spending. I don’t want to let them inflate my budget – especially the travel points! Because, as you as say, if I didn’t use them to book flights, I could just redeem them as cash (for a lower value). I don’t count them as income until I actually “spend” them though as that’s when I can calculate how much they’re worth.

    I also don’t think you should be “re-gifting” gift cards by using them to pay for other people’s presents. The person honestly gave it to you as a present!

    • nicoleandmaggie Says:

      Sometimes you get gift cards that are not presents. And really it is your business what you do with a card. Starbucks is a good example– if I get a card there I’m not going to use it, period, and people who know me well would never give me one. But both my husband and mother love coffee (as does #2), so I generally pass it on. No sense in them going to waste. Similarly, we got a lot of Target cards when DC 1 was born and we also needed to give target cards to friends who were having babies. It made more sense to pass the card on than to take our newborn to target to use the baby themed cards to buy new baby themed cards.

    • Ana Says:

      “I also don’t think you should be “re-gifting” gift cards by using them to pay for other people’s presents. The person honestly gave it to you as a present!” I disagree. If someone gives you a gift card to a store that has nothing you could possible buy to give yourself enjoyment then it makes sense to use the card to buy a present for someone else, and then buy yourself something with the money you saves (or save the money, if that means more to you than buying something). For example we got some really late “baby shower” gifts that were gift cards for baby item stores. We already had everything we needed for baby so we used the cards to buy others’ baby shower gifts and just bought our son some books as the gift. I honestly don’t think a gift card giver cares, they gave you a gift card in the first place (instead of an actual item) so you could buy whatever you wanted/needed.

      • Leigh Says:

        Heh my mother’s (and her entire family’s) insistence on controlling what the gift receiver does with the gift is clearly rubbing off on me. I was raised that you write a thank you note for any gift and if it was a gift card or cash, then you buy something with the money and thank them for it. You also weren’t allowed to save any gifts… My boyfriend never spends his Christmas money to this day, just deposits it into his bank account and his family never asks what he did with it. A much healthier attitude towards gift giving! I am starting to learn now that once you give a gift, you can’t control what the person does with it, but that’s a slow lesson to learn.

    • chacha1 Says:

      I’ve been given a gift card that I wouldn’t have used – to Target. I don’t shop at Target. No philosophical reason, it’s just not convenient. So I gave it to a friend who *does* shop at Target. I didn’t call it a gift though. It was more “this is going to waste, can you use it” and a happy “yes please!”

    • Rosa Says:

      If it’s a gift, it’s yours to do with as you please! The only risk of regifting is that the recipient might know it’s a regift and have their feelings hurt.

      Though, most of the gift cards we get are either awful gifts (one person kept giving my husband gift cards to a store he never shopped at, that the giver liked, that my husband kept using to buy the original giver a gift at the next gift-giving occasion, for I think 2 years after we TOLD him that was what we kept doing with them because we never shopped there.) or they came from work or volunteer organizations, from employee-reward programs or managers showing appreciation. They certainly don’t care what we do with them.

  4. First Gen American Says:

    I think you are right. The best part of these challenges is that it helps set a spending limit on gift giving for those who have trouble budgeting. Thinking of it as windfall money or extra money can be dangerous as there is so much that falls into that category that can add up to be thousands of dollars. Tax returns, medical and daycare reimbursements, rebates, cash back, work bonus’s…etc, etc.

    The only challenge I regularly do is the pantry challenge and it’s mainly so I don’t have old food in the house. It’s a constant battle of what should be a staple and what shouldn’t. My coconut milk is starting to tell me it’s time for a curry.

  5. Debbie M Says:

    Whew, fortunately, I apparently don’t read (all of) the same PF bloggers!

    I take care of my psychological spending wackiness by making different categories in my spreadsheet.

    Rationally, it’s still handy to always make sure there’s enough of your regular income to cover your regular expenses (if possible–people who work for themselves may not have much regular income).

    Otherwise, this is why I’m here. I love your rational outlook. And I do have a 1.5% cash-back credit card. And I did pass on my Starbucks gift cards I got from work events. And I paid off my student loans from highest interest rate down, not from smallest balance up.

  6. Ana Says:

    I agree, I see it as a more a psychological trick to limit your spending to a set amount vs. a real money-saving frugal move.

  7. Cloud Says:

    I have to say, your posts about PF blogs don’t make me want to go read them. I’m sure that there are good blogs out there in that category (including some of the blogs I’ve discovered through your commenters!), but in general, it just doesn’t sound like my scene.

    Anyway… I usually prefer to figure out the underlying cause of a problem like impulse spending and address that rather than relying on tricks. But if it helps someone to use as a trick to keep their spending in check, who am I to judge? I’m sure I have similar tricks that I just don’t recognize as such. For instance, maybe it is akin my trick of eating a small amount of good dark chocolate after lunch and dinner as a way to keep myself from snacking? I could just figure out why I want to snack and address that, I suppose.

  8. Revanche Says:

    Hm, I do look at my miles and points redemption as “not spending” in the sense of “not spending my cash/saving cashflow”, and mentally categorize it as alternate income, because the point of not spending my cash is so that I can save the cash and still fund the trip that I might want to take. I don’t spend a hell of a lot of time thinking about it in convoluted circles generally, unless money is tighter, since I tend to keep a lid on my spending by looking at all spending as spending.

    Which card do you use? I only get 1% back on my Starwood card but the redemptions are usually high value targets for us and save us hundreds in cash at times.

    Now you’ve got me wanting to calculate the best possible value of every card in a spreadsheet…

    • nicoleandmaggie Says:

      Capitol One gives 1.5% back as one of their options. Let me dig up that post. I think there’s some deals with Citicard where you can get 2% back now as well. https://nicoleandmaggie.wordpress.com/2015/09/21/in-which-1-carries-a-lot-of-cash-to-las-vegas/ (sadly, no affiliate links)

    • Leigh Says:

      I primarily use a Fidelity American Express that gives me 2% cashback and auto redeems after I reach $50 in points. My boyfriend primarily uses a Citi Double Cash. I also have an old credit union card that is 1% with no foreign transaction fees (don’t really use it), the Amazon.com visa that is only used on Amazon.com these days, the Chase Freedom (currently 10% on Amazon.com!), and whatever I’m churning at the moment. The Citi ThankYou Premier gives 3% on travel, which includes gas and tolls, so I’m using that for those expenses until the annual fee comes due.

      For “shared” spending, my boyfriend has the American Express Blue Cash Preferred that gives 6% on groceries (with a $75 annual fee). The Amex Offers are pretty interesting – for each of our cards, we just bought a $60 Amazon gift card and got a $15 statement credit.

  9. frugalscholar Says:

    Many PF bloggers also say that they spend XXXX per year. However, many things don’t “count” in that total because “the business pays for it.”

    • nicoleandmaggie Says:

      True! Including travel to exotic places (*cough* Ecuador *cough* World Domination Summit *cough* etc.) that they then blog about.

    • Leigh Says:

      Yes! I can’t stand that. I tend to calculate my expenses with and without my mortgage (since it’ll be paid off and I do calculations based on that). I don’t post my grad school expenses, but that’s also mostly being subsidized by my employer…

  10. Rosa Says:

    sometime, would you do a post of PF bloggers you recommend (including the hate reads if you have them)? My old favorites have all devolved or disappeared.

    • nicoleandmaggie Says:

      I actually don’t think there are any I would recommend anymore, other than the ones you already know from our little grumpy rumblings community (miser mom, leightpf, agaishanlife, nzmuse, survivingandthriving, middleclassrevolution, clubthrifty, frugalscholar etc. Forgive me if I’ve missed anyone!) and even these don’t post about finances all that often. There are people on Ana’s blogroll (including Ana) who occasionally post about finances even though they’re not really part of the PF community.

      Do you have anyone? I guess I also still hit retireby40 on occasion and evolvingpf even though the latter rarely posts.

      I can add this to our ask the grumpies queue! We’re not GOMI though so you’re not going to get our hate-reads (especially since #1 has so leechblocked them from everything except the ipad).

      • Leah Says:

        The Pops! I loves them.

        I read FrugalWoods from time to time, even tho they don’t do money the way I would. Sometimes, they grate on me, and then I stop reading for awhile. Mostly, I’m in awe of their determination and happy for them that they’re making life work for them, but I don’t think they’re a good model that anyone could follow.

      • nicoleandmaggie Says:

        Of COURSE the Pop’s. How could I forget them? I love their location thingie at the beginning of each month.

        Stacking Pennies too.

        I wish engineeringcents hadn’t closed up shop. Hers was one of the best, I thought.

  11. J Liedl Says:

    I have to admit that I get a little thrill every month when my credit card statement comes along with the newest reward points total which I can redeem for gift cards. Said cards help keep university-attending daughter in toiletries and coffee.

    I rack up quite a bit on the card each month just for that purpose (and, obviously, pay the card in full each month otherwise, it’d be a net loss). I don’t consider it “not spending” so much as a kind of coupon-style rebate.

    It’s interesting to see how different some of these offers are in the states, however. I haven’t seen anything near the 1.5% you mention for a Canadian credit card offer. They’re mostly 1% with a few special add-ins (like the MC that’s 1% for everything except for grocery store purchases which get you 2% cashback). I’ll stick with my rewards card which gives me a slightly better than average rate of return on reward points thanks to a bank loyalty offer. But I’ll eye those US offers with admiration!

  12. Comradde PhysioProffe Says:

    Your posts about PF blogges are funny as shitte!


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