I’d probably spend it on hookers and blow. How about you? For many, it would mean the difference between manufacturing cash and manufacturing points, it’s a crazy thing…
I read Drew’s post recently on his 3 part system for earning points, and while I disagree with aspects of it, one thing we agree on is that (almost) all of the travel in our household is done via signup bonuses. There’s simply enough of those going around to keep the average person traveling for ‘free’. Manufacturing points just does really make sense for me, though I do earn a fair amount of what Ben thinks is superior cash back on the trusty Arrival Card.
I like to talk about rich and poor, more as mindsets than anything. And this notion of poor person thinking occurs again at the $3K level (in fairness it happens at many levels, I just pulled this number out of my backside) let’s explore the concept.
Tom and Jerry don’t believe in manufacturing points, and couldn’t even consider doing so until they learned of AGCs offering 2.25% cash back. This means that they can manufacture points for free! They run the numbers (simplified):
$2000 AGC gives them $45 in cash back. This means that if they earn SPG points, they get 2000 spg for $2000. They then need to cash out the AGCs, perhaps it is AGC>Debit>MO. Debit costs about $20 MO costs about $1.40. So they spend $21.40 of their $45 free money and get free points. Final result, $23 in cash, 2000pts.
It’s a familiar tale, and one of the most popular ‘gigs’ out there. But it leads to an interesting question, at what point do you have enough cash in the bank to manufacture points, rather than earn them like Drew and myself?
Let’s say that in any given year you could earn $3000 in cash back via AGCs – how many SPG should you buy with that?
Buying Points
People always forget that they are buying points when they manufacture points. They think that because they are putting in the hours it costs nothing.. it’s a real behavioral issue. They think that buying a point at 3.5 cents is madness when they can ‘manufacture it’ for 1 cent.
Remember, someone always has to make up the balance: the 2 cents saved is coming out of your sweat equity. And the 1 cent is real money that you are using to buy the point.
Going back to our question, if you earn $3000 gross then that means you pushed through $133,333 via AGC. Using the notion that the cards are in $2K denominations, that is about 67 cards. Each card costs about $21 to liquidate, meaning you spent $1407 to liquidate, and have a net of 134K SPG, and $1600 in cash left over.
How many hours did you spend in line?
So, here’s the interesting thing… If you earned $X in salary, perhaps $40,000.. you’d likely say that you couldn’t afford to go out and buy SPG at full price, at 3.5 cents each. 20,000 points would cost you $700. You also might find it challenging to buy them at 1 cent each (flat out $505 gift cards) but if you earn ‘money for free’ suddenly it seems viable.
What if we look at it a different way, what if you somehow got a pay increase and now earned $48,000. After tax, you’d be earning more than when you were netting a $3,000 profit for all those extra hours, would you then go buy your points directly, paying 3.5 cents each? Probably not…
Here’s the breakdown in logic
Most people say they couldn’t just flat out buy points, but when they earn some cash back from it too, they suddenly can. They look at the cost benefit analysis of the transaction in isolation, and ignore the broader financial picture, they are willing to ‘buy points’ when they simply shouldn’t be able to afford it, because it appears a ‘net profit’.
The only way to break through this mindset is to consider your total net worth, and total cash flows.Opportunity costs are real, if you ‘buy points’ at any price point you elect to not buy cash. Check out this post by Oren on his AGC strategy. He’s using the Fidelity Amex to fund a retirement account, which is something that i’ve talked about in the past too.
I do believe that there comes a point where you should be earning SPG via AGC, I think of it as a Mezzanine level achieved after you are somewhat financially independent, but not able to travel the way you’d like to. Until that point, I am not saying you shouldn’t ‘have fun’ but you can do that via sign up bonuses. (note that you are limited to purchasing 20000 SPG per year)
I think the opportunity cost argument is valid, but only to a certain extent. If someone values their time at $15/hour, and refuses to partake in MS that doesn’t yield them that perceived value, that’s completely reasonable.
I look at this hobby as being similar to gardening. If you look at the cost that goes into it, you really don’t come out much ahead vs. buying at a costco or sam’s club. But, it’s something that we enjoy doing at least a little bit, or it’s a sacrifice we’ll make for the hope of future travel. Sitting on a pile of points and miles knowing that I could fly Cathay First or Singapore Suites tomorrow if I really wanted to is very comforting to me.
If someone values their time at $15 per hour, shouldn’t they be happier about slamming away $5k into an IRA than having the chance to fly Suites?
I’m not sure I completely followed your points above. What are you considering to be the opportunity cost of buying the SPG points? A 2% cash back card?
The way I see it, you could liquidate AGC, and net 1.25% plus an SPG point, or you could be buying cash as you put it. With the same method and a 2% cashback card, you’d have 3.25% net. So you are saying you’ve bought the SPG point for 2 cents, basically, which is a good, but not great price. If there were a way to just buy the SPG points for 2 cents, you’d be better off pocketing the cash, but there isn’t AFAIK, and I always get better than 2 cents out of my SPG redemptions (just made some cash plus points bookings, so yes I bought some more points at a little over 1.1c apiece– $110 + tax for 10k), so I’m good with buying a reasonable quantity at that price.
I am nowhere near getting enough hotel stays from cc signups, so I have to pay one way or another.
I’m saying that if you can’t afford to buy them at 1 cent you shouldn’t buy them at 2 cents 🙂
Well, that does make me think. I like it, as I guess the 2% is clearly the tradeoff (never mind I don’t have a 2% card). While I would buy some number of SPG points for 2c apiece with my depleted balance, I probably wouldn’t buy any airline miles at that price right now because I have a boatload, so I guess I shouldn’t be using miles earning ccs on unbonused purchases.
On the flip side, I don’t feel any need to beef up my long term financial situation, but taking my wife somewhere in F yields lots of intangible benefits.
Very valid points and definitely something most people do not consider. I used 400k UR points for travel this summer. I do not currently own a home. It could be argued that financially it would make more sense for me to have pocketed the points as $4,000 to add to my bank account for a future downpayment. Esp since I actually ended up using a bit of money of the trip itself too. But on the flip side I live with my parents and am still at the age where its acceptable to do so and managed to fly F everywhere and stay at hotels way out of my income level. Do I regret it yes and no. It was a good experience but probably not best for me long term as I’d like to have my own place soon.
I understand your logic but for me it’s a hoppy. I’m retired, financially fine, and like to travel. I have gone through most of the Airline sign up bonus’ and fly business class on the long hauls. For me to MS 20,000 miles a month using 3 Serve’s and one Redbird and cover the costs of that with 2.25 cash back and converting AGC to VGC allows me at least two more flights a year. Yes time is money and so is auto and gas costs but any hobby, as mentioned in the gardening example, is going to cost time and money. You have any idea how much a sleeve of Titleist Pro V1 cost:-)