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?
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)