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Using Bank Account Bonuses to Jump Start Your Emergency Fund
There's no doubt that credit card bonuses can provide a strong earnings boost each year. And since the money is considered a "rebate," it is not subject to tax. With effective planning, you can reasonably expect to bring in a few thousand dollars annually, which is why these bonuses are the focus of most of my travel hacking posts.
Another, slightly more difficult form of bonus-hunting is bank account bonuses. There is still value if you know where to look.
What are bank account bonuses?
Exactly what it sounds like, actually. It's the process of signing up for a bank account (be it a checking or savings account) for the bonus the bank provides. You will typically see bonuses in the range of $150 - $500 depending on the bank and the rules involved.
Why is this more difficult than credit card bonuses?
There are a couple of factors that make the process more difficult. First, bank account bonuses usually require a fair amount of funding. You may be required to deposit $15,000 or more into the account to qualify.
This is a marked difference from credit card churning, in which you are trying to hit minimum spending requirements with organic spending (normal spending you would have already done) or manufactured spending ("spending" that involves moving money around without actually spending - I do not recommend this method as it involves serious risk to your accounts as it is essentially money-laundering).
Second, credit card churning is very easy to understand. You simply spend on the credit card to receive the bonus. Hit the spend, get the bonus - straightforward enough.
With bank account bonuses, however, there are rules about what counts as "new money" transferred in. If employed in a "W-2" job, you may need to change your direct deposit with your company. The process can sometimes take a few paychecks to take effect, and these bonuses require new money within a set time period (say, 60 days).
While it may be possible to move money from a current checking account and it count as a direct deposit of new money, this is not always guaranteed.
Case Study: PNC Virtual Wallet with Performance Spend
There are many factors to consider, including which bank you currently use, which bonus you want to target, and how much money you have available to "float" (tie up for a period of time).
There is far too much for me to break down every scenario, but here is the bank account bonus my wife and I are currently tackling: the PNC Virtual Wallet with Performance Spend.
Steps to our Process:
*There are other considerations for the PNC Virtual Wallet account, including a $25 account maintenance fee if you do not keep at least $2,000 in the account (or have $15,000 in total linked accounts). To safely cover the ten purchases made by the debit card, we moved over $2,020.
Since the actual bonus only requires a direct deposit of $2,000, I will not include my initial funding of $2,000 with a credit card in the calculations (this was done purely to help hit the card's MSR).
The $200 received will be reported to the IRS by way of a 1099-INT. If we assume the taxable rate to be 25%, this leaves $150 as the remaining bonus.
Compare this return with a typical return on spend (ROS) of a credit card, and you can easily see why the bank account bonus game is not nearly as lucrative. The true value lies in the purpose of this bonus. Thus, we return to the title of this post.
Jump Starting an Emergency Fund
In addition to other liquid options such as our checking account and credit cards, my wife and I decided that a separate "Emergency Fund" was a good idea.
Long-term, we want to park the funds in an interest-earning account, but the best interest rates are somewhere in the 2% APY camp.
In contrast, our 7% return as calculated above will require money to be tied up for 180 days. Therefore we need to do the math to compare apples to apples.
Actually, thanks to Wolfram Alpha, I don't have to do the math - 2% APY is around 0.98% return in six months. Even with the drawbacks of a taxable bonus and tying money up in the account, 7% return in six months versus less than a percent is phenomenal.
There are some who are knee-deep in bank account bonuses in the same way as I hunt credit card bonuses. As for the Frugal Firefly family, we will probably stick to a handful of bonuses over time because of the intense restrictions and high fund requirements for most bonuses out there.
Have you ever signed up for a bank account bonus? What was your experience? Was the additional bump to your account worth it, or was the banana-buying too much for you? Let me know below!