How much do you pay for your miles and points?

Greg might have ruined miles and points for me yesterday.

In yesterday morning’s post about the Business Gold card, Greg made a comparison that I haven’t been able to get out of my head. Here’s the paragraph, with the key sentence bolded:

The Amex Business Gold card is the only transferable points option to earn more than 3X at gas stations (the Citi Premier earns 3X).  Still, since multiple cards offer 5% cash back at gas stations (found here), the potential to earn 4X is not so exciting.  If you forgo 5% back in order to earn 4X, that’s like buying Membership Rewards points for 1.25 cents each.  That’s not a bad price, but I wouldn’t personally pay this card’s high annual fee just for the privilege of buying points at that rate.

Am I the only person who read that sentence and felt like I’ve been over-paying for my points? It made me want to take a look at the cost of all of the various points in my pocket.

Tricky mental arithmetic

Just like anyone else in this hobby, I love transferable currencies. They allow me to unlock the best possible values and enable me to use my points for experiences I wouldn’t otherwise buy — like first class flights, fancy resorts, etc.

Of course, there is an opportunity cost to earning those miles and points — one could easily earn 2% cash back with no annual fee (or even better as Greg showed last week). For that reason, and because I generally tend to look for good sweet spot opportunities, I tend to value all of my transferable currencies at 2 cents per point for which mental math. Therefore, if a card earning a transferable currency is earning 3x for a purchase, I think of it as the rough equivalent of 6% back.

And I know I’m not alone in that mental fudgery with the numbers. In fact, if you go to our Best Category Bonuses page, you’ll see that we even list a column with an approximate percentage equivalence for transferable currencies based on our Reasonable Redemption Values for each point. As an example, the ThankYou Premier earns 3x ThankYou points at gas stations. Because our reasonable redemption value for ThankYou points is 1.82c each, we list the estimated value of the return on spend at 5.46%. That kind of number (or my mental math number which would value the return at about 6%) makes it easy to justify using the ThankYou Premier over a cash back card.

But Greg makes a great point that every time you have made that trade-off, you have almost literally bought a ThankYou point for 1.67c — because you traded away the chance to earn 5% back on that purchase. I think the words “opportunity cost” might soften the blow too much.

While I can’t realistically see myself giving up on transferable currencies any time soon, Greg’s concept of buying points made re-think it in many scenarios. I suddenly wanted to take a look at the cards that earn the best category bonuses and find out what price we’re paying to earn those points over cash back. It was a little trickier than I expected — and my points are more expensive than I’d considered.

Cost of each point

In the chart below, I picked out the card with the overall best category bonus from each of most of the categories on our Best Category Bonuses page (or when return was equal across several cards, I sometimes included more than one). I then listed the best alternative in terms of cash back and the cost per point.

Of course, this is a bit murky. For example, I list the Uber Visa as the best alternative for hotels since it earns 3% cash back. Of course, you could use the US Bank Altitude Reserve for 3x and then redeem your points for 4.5% back when used towards travel. Some people have certainly mastered the art of getting solid value out of those points. But then you can also  use Sapphire Reserve points at 1.5c each — but you’re tied down to using them for a specific category, etc. I tried to keep things simple in comparison.

It’s also worth mentioning that in some cases, I used a limited-time spending bonus for comparison, which you may consider unfair. In the case of US Supermarket spend, I compared against the Wells Fargo Cash Back Visa, which only earns 5% for the first 6 months and only on up to $12,500 in spend. Funny enough, the cost of a moderate plan for feeding a family of four is $239 per week according to the Internet (though those stats are a few years old), which conveniently comes out to $12,428 per year. If you were to buy grocery store gift cards during those first 6 months to max out the cap, you can likely effectively earn 5% back on a year’s worth of groceries (give or take). I felt like it was a fair enough comparison.

Here’s the cost of earning transferable points in the following categories:

Category Best Bonus Earn Rate Alternative Card Alternative Earn Cost Per Point Notes
Car Rentals Chase Sapphire Reserve 3x US Bank Cash+ 5% (up to $2K / quarter) 1.67c If you spend much more than $2K per quarter, cost per point decreases.
Department Stores Citi AT&T Access More 3x* US Bank Cash+ 5% (up to $2K/quarter) 1.67c *AT&T Access More earns 3x at most “online” retail & travel merchants, but only 1x in person.
Drugstores Diners Club 3x Wells Fargo Visa Signature Card 5% (for the first 6mo on up to $12.5K in purchases) 1.67c Diners Club hasn’t been available since they ran out of plastic like a month or something into issuing it a few years back.
Gas Citi Premier / Diners Club 3x Ducks Unlimited 5% 1.67c
US Supermarkets Amex Gold 4x (on up to $25K in purchases, then 1x) Wells Fargo Visa Signature Card 5% (for the first 6mo on up to $12.5K in purchases) 1.25c While the Blue Cash Preferred Earns 6% on up to $6K, I compared to the Wells Fargo card because of its higher cap, though note that the Wells Fargo offer is only for 6 months rather than annual
Hotels

Chase Sapphire Reserve

Chase Ink Business Preferred

Citi Premier

3x Uber Visa 3% 1c Those with BOA Platinum Honors could earn 3.5% or the Altitude Reserve earns an effective 4.5% when used towards travel, which may change your cost.
Office Supply Stores

Chase Ink Cash

Chase Ink Plus

5x Amex SimplyCash Plus 5% (on up to $50K per year, then 1%, US only) 1c
Phone, Cellular, Internet

Chase Ink Cash

Chase Ink Plus

5x Amex SimplyCash Plus 5% (on up to $50K per year, then 1%. US wireless telephone servies only) 1c If you also use your card to purchase Internet services, the FlexPerks cards would provide the best alternative, but only earn around 3% back.
Restaurants Amex Gold 4x (US restaurants only)

Uber Visa

Capital One Savor

4% 1c Beginning in January 2019, the Citi Prestige will offer 5x.
Airfare Amex Platinum 5x (when booked directly through the airline) Uber Visa 3% 0.6c There are a number of travel rewards cards that earn fixed-value points that are worth more, but I used the Uber card as a simple cash alternative.
Other Travel Chase Sapphire Reserve 3x Costco Anywhere Visa 3% 1c There are a number of other cards earning 3% returns on travel.

How this complicates things

The chart above may not seem revolutionary — though truth be told, I’m not sure I’d be willing to pay north of 1c per point as is the case in several categories above. However, it complicated my math in other ways.

Yesterday, I did a little planning for my trip to Bora Bora next year. I’ll be flying into Tahiti, and flights from Tahiti to Bora Bora can’t be booked on miles. However, they can be booked through the Chase travel portal. Flights are in the $400’s round trip, which sounds very painful for a 50-minute flight (I was aware of the cost before I booked the trip). However, the options I was looking at cost around 29,000 Ultimate Rewards points when booked through Chase. Through Manufactured Spending techniques, I figured that my worst-case scenario was that I could generate the points for each person for about $185 — still expensive, but a much more manageable figure.

However, my math on cost only considered my MS costs — not my opportunity cost in earning the points over cash back in the first place. In that specific example, the best alternative is to earn 1c cash back, which isn’t materially different to me since the Ultimate Rewards points are also worth 1c in cash. Of course, my cost for those flights isn’t only $185 — it’s $290 since I could have redeemed those points for cash. Still a good discount over full price, but not as nice as it feels to say they cost me $185. The same obviously goes for hotel redemptions, etc.

But a more salient example might be something like using the AT&T Access More card for 3x at online department stores over the US Bank Cash+. I’ve transferred ThankYou points to Avianca several times this year to book one-ways on United within US Region 1 for 7500 points each way plus $30.60 in tax. Assuming I’d earned those points at 3x via online department stores, it would have required $2500 in spend for a one-way. That felt like a pretty solid deal. That same $2500 in spend on a US Bank Cash+ (split over two quarters since there is a $2K/quarter cap) would have earned me $125 – making my total cost for those award flights north of $150 one-way. While that still represents a slight discount over the cash price in my case, it’s less of a deal than it initially appears.

And the deal gets even worse if I were to use those points through the ThankYou portal, where I’d only get a maximum of 1.25c in value (since I have the Citi Prestige card also and pool my points). If I used those 7500 points to book travel that qualifies for the 1.25c rate, I’d only get $93.75 in travel — a loss of 25% over what I could have earned with the Cash+ card.

Furthermore, the chart above only takes into account using the card that earns the best category bonus for purchases. If you use a card that earns a lesser bonus, your cost goes up. For example, I used my Ink Plus card for gas yesterday (that’s right, even a blogger like me gets caught out there now and again without the right card in his wallet and without his Gear S3 watch for Samsung Pay). I earned 2x — but that comes at a cost of 2.5c per point since the Ducks Unlimtied card earns an uncapped 5%. I don’t have the Ducks card — but by choosing not to and choosing to use my Ink Plus, I effectively bought those points at a pretty steep price — much higher than I’d have paid if I were to take cash out of my pocket.

Restaurants are another area where cost per point can monkey with your value math. For instance, if you were to dine at a restaurant that does not accept Amex, you’d likely consider paying with the Chase Sapphire Reserve. Since that card earns 3x vs the 4% options on the table, you’re effectively paying 1.25c each for your Ultimate Rewards points. While you certainly can get more value out of them, if you were to use them to book travel for 1.5c each, the win just isn’t huge. A win is a win, but it’s important to keep it in perspective.

Bottom line

Those are just a couple of examples to illustrate that those category bonuses don’t always come cheaply. While you’ll still catch me paying for groceries with the Amex Gold and using a CSR at restaurants that don’t take Amex, I’ll be more carefully crunching numbers on redemptions. Last week, Greg mentioned his gradual lean towards cash back simply because his transferable balances dictate that it’s time to diversify. While I don’t feel like I have nearly as many transferable points as I’d like, I think the cash back alternatives are an important consideration that I probably need to think about a bit more. I lied a bit at the top of this post — Greg didn’t really ruin miles and points for me. I know there are plenty of spots where I can get outsized value out of the points. But he definitely made me consider the cost of category bonuses more carefully, and I think that’s a good thing.

About Nick Reyes

Nick Reyes is a (fairly) regular guy with an animalistic passion for maximizing the value of miles and money to travel the world in comfort and style. There is little in life that he loves more than finding a fantastic deal and helping you shop smarter & harder to achieve your travel dreams.

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Rob
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Rob

Good points. This analysis sort of confirms for me that my approach to optimize redemption value as the more sensible approach for me. As opposed to targeting a strategy that minimizes cash outlay of every aspect of a trip. It is definitely not as impressive to say I got this trip for much less than it would have cost, as it is to say I got it for free, but in the end, I think I will do much better saving miles for high value redemptions. Then again, my family really enjoys the splurges like a Ritz Carlton over a Marriott or Hilton, or a first class seat as opposed to coach, so it makes sense for us to save the miles for those 19 thousand dollar round trip first class tickets to Asia and just paying cash for things like $400 captive type flights like you describe.

Blue
Guest
Blue

I think this is an argument for figuring out what point balance you want to maintain in the transferable currencies and after reaching that level switching to cash generation. For example, I’d like to have about 200K TYP, 1M UR, and 1M MR. After that top ups are all that’s necessary and cash generation makes sense.

Blue
Guest
Blue

Edit: Also a few twists, of course. Pure cash on cell phone, for example, means you aren’t getting cell phone insurance.

Steve
Guest
Steve

You can put your cells phone bill on the chase ink and cash those points back for cash at 1cpp.

Lucinda
Guest
Lucinda

Not only is there an opportunity cost to acquiring points and miles, there’s an opportunity cost to stockpiling them. If you had cash back, you could stick it in a savings account earning 2%. Miles and points are depreciating assets subject to devaluation.

Blue
Guest
Blue

There’s an option value to having a point balance, though. Having 500-1M MR points gives you a ton of options. Having another 1M MR points doesn’t add much additional option value.

Lucinda
Guest
Lucinda

It would be VERY interesting to price these points using a call option pricing formula.

Kate
Guest
Kate

I probably pay too much for my miles, particularly when I overpay for items in order to qualify for an Amex offer! On the other hand, I’m looking forward to my ANA first class to Tokyo, and my upcoming first time ever in Singapore Suites. Certainly adds a little spice to the trip!

R Johnson
Guest
R Johnson

Good analysis Kate. I think your point is probably shared by many, well, at least one old guy in Minnesota. Been saving points and miles for Hawaii. Costs? Sure…but there’s a cost for everything.

AlexL
Guest
AlexL

Sounds great especially the SQ Suites! Enjoy!

MSer
Guest
MSer

Never overpay for items just to earn points – it’s almost as big a cardinal sin as paying interest on your credit card purchases.

DaninMCI
Guest
DaninMCI

It’s like a scene out of Madmen. You aren’t buying cash back or miles or even points. You’re buying an experience.

This is a prime example of how airlines (not hotels so much, yet…) are ruining a great loyalty factor. To many it’s about what the points or miles represent not even the best value. When I look at my airline balances or hotels points I see travel, trips and experiences I wouldn’t always afford otherwise.. When I look at my CSR UR points I mostly see cash value. So even if I could earn say 2 or 3% back instead of 1 or 2 miles I’d rather have the points. As airlines limit business and first class award availability or devalue so greatly it drives us to transferable currency as a safe haven. The problem is that once we do that we aren’t loyal to that airline anymore even for cash purchases. While with leisure travelers this may not be so important. Many of us buy a lot of cash tickets for business travel or even influence others on business cash travel. Even bloggers drive business to airlines, hotels or location. Just look at a place like Iceland. Sure they did some great marketing but 10 years ago nobody wanted to go there. And if we did we didn’t want to use airlines miles or buy cash tickets to get there.

Ryan
Guest
Ryan

But assuming you want premium redemptions, cash back is going to take waaaay longer to earn the same flight or lodging. Also the welcome bonuses for point/miles earning cards ramp up your critical mass much, much faster…cash-back welcome bonuses tend to be relatively small and don’t put you closer to premium awards much faster.

Chucks
Guest
Chucks

>But assuming you want premium redemptions
Even if you do, it doesn’t change the fact that there’s this substantial opportunity cost that exists because you chose points. The premium reward might still be worth it to you, but it comes at this opportunity cost of hundreds to thousands of dollars.

Signup bonuses are definitely a reason to nab new airline cards. But that doesn’t mean it’s worth putting any spend beyond minimum on the cards.

Lucinda
Guest
Lucinda

There is also an opportunity cost to stockpiling a depreciating asset like points. If you had cash, you could put it in a savings account earning 2% if you felt you needed the mental accounting trick of a separate travel account.

Steve
Guest
Steve

Maybe the best article I have ever read regarding “free points.” Required reading. Note that some of us may qualify for B of A platinum preferred which may change our opportunity costs for points. The most important thing though is that once you can figure out a cost per point, things like good and bad redemptions go out the window. There exist only rational and irrational redemptions. A rational redemption that exceeds your average cost per point and an irrational redemption is less than your cost per point.

Example: I could book a 100k mile flight on United that I could buy for $1500. I also have a B of A premium rewards with platinum preferred honors. I use a combination of chase points and United miles. My redemption value is 1.5cpp. 25% of those miles came from my Freedom unlimited (1.8cpp) , 25% from my CSR (1.08cpp), 25% from my Ink (1cpp), and 25% from flying (0cpp). My average cost would be 0.97cpp, so it’s a rational redemption.

Lukas
Guest
Lukas

I agree. Absolutely EYE-OPENING. I have very healthy balances with all transferable currencies (3M MR, 2.5M TY, 1.5M UR) and yet I keep trying to maximize my value by getting the most points for my buck. Now I’ll try to get the most bucks for my buck (with BoA Platinum Preferred in the mix) 😀

JayP
Guest
JayP

Sign up bonuses complicate everything though. Because hard pulls aren’t unlimited, spend isn’t unlimited, etc etc. Who wants to skip a 60k point sign up bonus to earn an extra point or 2 in one category? More importantly though, this is a hobby. When I start to think of how much money I could’ve earned rather than staying in a fancy hotel or flying first it ruins it. And isn’t it supposed to be fun?

WR2
Guest
WR2

This is most important in the case where Greg was analyzing: paying an AF just for an elevated point earning category. I think that is pretty foolish unless you are a mega-MSer.

For all your other mental gymnastics, you are really just fooling yourself. If you can’t justifying “buying” points for that price, then perhaps your valuations are inflated. My valuation for UR/MR is much lower than what bloggers say: about 1.6 cpp.

In reality this is still inflated, as this is like the “ask” in the bid-spread of stock prices. I’m indifferent to selling/holding at this price, but I’m not buying at this price. That price would be lower, maybe 1.4. So yes, at 1.3 I would “buy”, in the form of forgoing cash back for points…but I certainly wouldn’t pay $295 AF for the privilege.

Gregg
Guest
Gregg

I think this is a commentary that has been missing from the points and miles blog sphere for a long time. Bravo to you guys for publishing it!

You also have to use this kind of opportunity cost logic when justifying annual fees. For a long time the CSR was toted as the best card for restaurants, but when you compare to the no fee for the Uber visa you have to be spending a considerable amount on to justify that fee. Even if you value Chase points at a full 2 cents, you have to spend at least 7500 per year on restaurants to balance the fee ($7500*.04 = $300 cashback for Uber, $7500*.06 – $150 (net annual fee) = 300 net value for CSR). If you also used the CSR for travel you would make up the annual fee on the Uber visa quicker ($Only 5000 in airfare spend $5000*.03 = $150 for Uber, $5000*.06 – $150 = $150 for CSR) and you could of course use some combination of the two (e.g. $3750 dining * .04 + 2500 airfare * .03 = $225 for Uber vs $3750 dining*.04 + 2500 airfare*.03 -$150 = $225). If you ever redeem for less than 2 cents in value this might make you think very hard about keeping some cards with annual fees. And remember, these numbers are only to break even, not to come out ahead. Even if you are spending significantly more than these thresholds you have to consider that you also sacrifice the flexibility of booking the cheapest viable flight with cash for having to search for reward availability and vice versa what benefits (lounges, travel insurance etc) you would lose without the CSR.

I think the new Amex gold wipes the floor with the competition, cashback and otherwise, but if you don’t live in an area where you can take full advantage of the $120 restaurant credit, similar math applies.

For another example lets take a second look at the Citi Premier. It carries an annual fee of $95. There are a number of no fee cards out there that earn %5 cashback on gas, (I use the old Penfed cash rewards visa). If you value Citi points at a full 2 cents (for easy math), and you are using the Citi Premier only for gas (perhaps because you have a CSR, amex platinum or Citi Prestige to use for travel) then you would have to spend a whopping $9500 PER YEAR on gas just to balance the annual fee. ($9500*.05 = $475 cashback vs $9500*.06 – $95 = $475 points value). If you use the 1.82 cent valuation quoted above that number goes up to $2065 spent each year on gas!

The easy way to find these yearly break even spending thresholds is to divide the difference in annual fees by the difference in earning percentages. In this example the difference in annual fees was $95, while the difference in earning percentages was 1% (or .01). 95/.01 = 9500. The math gets more complicated if you are considering multiple categories, but I have found that comparing single categories gives me a good idea of whether I am even in the ballpark of the right spending amount.

Oh and don’t forget that you have to subtract any signup bonus spending! If you would normally surpass the break even threshold for the CSR, but you have to put some restaurant and travel spend on a new signup bonus card, that may shift you back down below the threshold where a no fee card makes more sense.

P.S. If you are interested in publishing more math heavy articles that offer this type of analysis in other points, miles and travel scenarios I would be excited for the opportunity to share my ideas and do some contract writing for you.

Yuri
Guest
Yuri

Don’t forget that US points can be used at 1.5cpp via UR portal, and this is better than 4% from Uber. You also need CSR in order to transfer points. I prefer to have CSR vs other cards with $95 AF because of 1.5cpp possibility. You will need to spend 22000 UR on portal in order to break even $55. I spend a lot more. Are you going to forgo transfer option completely and just cash UR from now on?

Steve
Guest
Steve

Yeah, I’ve been using the annual fee/additional % equation for a while. I dumped the CSR when I found out I needed to spend 9k a year on restaurants to justify the AF.

king
Guest
king

These kinds of posts are the needed which will make newbies run away. Make it more complex.

Good write up

Yuri
Guest
Yuri

Bottom line use Altitude Reserve for everything, and forget about all other cards!
One card to rule them all!

Lucinda
Guest
Lucinda

Excellent analysis. Makes me appreciate the value of cash back cards like the BofA suite (at Plat Honors level) + rotating category no fee cards like Chase Freedom, Discover IT and US Bank +.

I’m one of the few hold outs without a CSR or CSP or a premium Amex card, but I get a ton of cash back every year to spend on travel or whatever else I want.

Something that could be included in the opportunity cost is the value of purchasing gift cards at a discount and then using them for purchases. (Harder to incorporate into the analysis). The opportunity cost for dining and shopping could be closer to 5% in those categories if you shop/eat at places when using gift cards you’ve purchased at a discount.

Yuri
Guest
Yuri

There is also Vantage West Connect Rewards Visa, where you can chose on of the following 5% categories (up to $1500 per quarter):

Travel
Restaurants
Utilities [water, cell, electric, etc.]
In-Store Wholesale Purchases [Costco, Sam’s Club, etc.]
Department Stores
Hardware & Home Improvement Stores
Charitable Organizations
Pharmacies & Drug Stores
Amazon.com

Lucinda
Guest
Lucinda

Looks good, but is it restricted to AZ residents?

Yuri
Guest
Yuri

Dunno, I didn’t try, but I see no restrictions.

trackback

[…] in the transferable currency game. It furthermore falls in line with this morning’s post about the opportunity cost of earning miles — though in this case, Capital One is kind of giving you a chance to have your cake and eat […]

MSer
Guest
MSer

This logic only really applies to those who don’t do MS. If you do MS, then there is no real opportunity cost as you’ve maximized your best opportunities from the start (ie, do your 5%, 5x opportunities and work your way down the list). The amount of spend on things like fuel and entertainment etc is minuscule by comparison.

Blue
Guest
Blue

Logic still applies. Even if you are MSing at or near zero cost you still have the forgone 2% instead of the points.

Examples:
Ink Cash, Office. 5URx0.018= 0.045 cents in value instead of 0.02 cents in cash, which is directly equivilent to buying UR at 0.44 cpp.

BB+, Any. 2MRx0.018= 0.036 cents in value which is directly equivalent to buying MR at 0.55 cpp.

Josh
Guest
Josh

What did you mean by this?
“but by choosing not to and choosing to use my Ink Plus, I effectively bought those points at a pretty steep price — much higher than I’d have paid if I were to take cash out of my pocket.”