Earlier this week, I went shopping at Costco, where I get a lot of my staple foods, paper products, cleaning supplies, gasoline, and other essentials. I knew that my “Gold Star” membership was expiring, and that I would have to pay $60 to renew it in order to buy the things I wanted to buy that day. When I went up to the Membership counter, I saw that they also have an Executive membership, which costs $120. What do you get for that extra $60? The main thing is that at the end of the year, they send you a rebate check amounting to 2% of your purchases over the year. There are other advertised benefits, but I don’t know that I’d be able to take advantage of any of them reliably, so I had to make my decision based entirely upon the rebate.
So the question is this: If I want to make 15% on my money, how much would I need to spend per month (on average) to justify getting the Executive membership instead of just renewing my Gold Star membership?
This problem has 3 steps. First, I need to find out how big the end-of-year rebate check should be to make me 15% on the extra $60 that the executive membership costs.
Then, I need to figure out how much I’d need to spend over the year to get a end-of-year rebate check of that amount.
Then, I need to figure out how much I’d need to spend each month (on average) to add up to that total annual amount.
Let’s get started.
First things first, make sure the calculator is using 12 Payments per Year.
N: 12 (I get the rebate check after one year)
I/YR: 15 (I want to make 15% on my money)
PV: -60 (I have to pay an extra $60 to get the Executive membership)
PMT: 0 (I only get the rebate check at the end of the year; checks don’t arrive in the meantime)
FV: (this is what I’m trying to find)
The answer to Step 1 is that my rebate check would have to be at least $69.65 for me to make 15% on my money. Note that due to monthly compounding, this number is slightly higher than 115% of $60.
2% of [total annual spending] = $69.65
2% is another way of writing 0.02
Therefore, [total annual spending] = $69.65 / 0.02 = $3,482.26
The answer to Step 2 is that I’d have to spend at least $3,482.26 over the next year to get a rebate check that large.
If I spend $3,482.26 over a whole year, that means that I spend $3,482.26 / 12 each month (on average).
The answer to the whole question is that I’d have to spend an average of $290.19 per month in order to get a rebate check big enough to get me 15% on the extra $60 I’d spent on the Executive membership.
I generally don’t spend $290.19 per month on staples at Costco, so upgrading to the Excecutive membership probably wouldn’t make sense for me unless I thought it likely that I’d be buying one or more big-ticket items there (like a computer, iPad, TV, etc.) in the next year. In that case, I’d adjust the amount I’d need to spend in the year based on that extraordinary planned purchase (for example, if I planned to buy $2,500 worth of iPads, computers, TVs, and other big-ticket items, my annual number would go from $3,482.26 to $982.26) and use $982.26 to determine my required average monthly spending to compare with my normal monthly spending. Obviously, I wouldn’t want to spend extra money just to get a 2% rebate, but if I’d already planned to do the spending, then setting up a rebate ahead of time might be a smart move. Does that make sense? Let us know what you think in the comments below!