I had this seemingly simple question from a reader recently. And interestingly it is a similar question that I ask, or deduce from, people I meet on a regular basis. There are a lot of people who don’t ‘get’ the concept of manufactured spend and the reason for this is that there are two distinct aspects of the manufactured spend process, as outlined here in Credit Card Arbitrage, why the game is far from over there is the earning side of points and miles and cash, and then there is the spending side.
Both sides can be optimized, for example if you know how to add on free one ways using American Airlines, your earned points just became more valuable, and if you know how to earn not only from points from the card, but by buying online through a portal your earning process just became accelerated.
Earning in the positive, or earning in the negative – The two sides of the manufactured dollar coin
This is the stumbling block for people. Interestingly I notice the Negative side catches more self employed people than employed people, and as I find myself in the former category I can see why. When we hear of ways to manufactured points for cheap a business owner immediately is thinking of his bottom line – why on earth would he want to spend money on something, especially when it can be generated for free?
Earning in the Negative
There are a great many people who earn points at a net dollar cost to themselves. These people are doing so for the purpose of buying points for less than market rate. In order for this strategy to be successful it is important to be constantly aware of the best market price for a traditional acquisition of the points (this fluctuates when there is a sale or bonus points match promotion) and finding a way to lower that price. A frequent mistake when using manufactured spending to buy points on the cheap is to lose track of the market rate and instead employ an arbitrary ‘to me they are worth X’ rate.
An example of earning in the Negative would be someone who uses the Club Carlson Visa to buy a $500 giftcard for $3.95, earning over 2500 Club Carlson points. Doing that 20 times equals 2 nights in a good Club Carlson property, so you would say that the cost of that is $39.50 per night in a room that would otherwise cost you $250.
Everybody needs an X rate, but that number can never exceed the market price – this is the slip up people make when they say things like ‘I just got 10 cents per dollar for my Avios’ when really they couldn’t get more than the 3 cents it costs to buy them.
Some people will argue (myself included) that it is never necessary to pay for points, even at a subsidized rate like this because the signup bonuses are so high that they are the best way to generate your points balances. However, other people will claim that their burn rates are so high that they simply need more points all the time, which is theoretically possible for people who are making multiple international First Class trips.
I get it though, for many people they just cannot wrap their heads around manufacturing for points and paying money for them, but it is a valid way to achieve your travel needs.
Earning in the Positive
This is the one that I like personally, this one you are talking about paying cash to get cash. If you can find a 5% Cash Back card, such as something from Wells Fargo, TD or Amex walking into certain stores is like picking $20 bills off their shelves (and not getting arrested for it). Buying a similar $500 gift card for $3.95 and earning 5% on the transaction generates over $25 of cash back (you would earn on the fee too, making it $25.20 earned from the transaction, minus costs of $3.95 leaving a net profit of $21.25 per transaction.
The earning in the positive I think makes sense to absolutely everyone, so if you are struggling to wrap your head around manufactured spending this is the reason. However, it is only so obvious because of the clarity of the transaction, it is cash for cash. However, cash for cash does not pay for a certain level of travel – you cannot afford to fly Business/First class Internationally on cash, it has to be on points. So if that is your goal it becomes a more convoluted equation, which many people tend to say they will lend themselves towards earning in the negative.
A third way?
Can there be a third approach to this bipartisan standoff? I think so. Here is how it can work: You focus on earning money, and buying points with the money. Clearly, the people in Team Negative have found better ways to buy points than directly from the Airlines/Hotels, so to eschew their knowledge and strategies would be unwise. However, if they focus all of their efforts in Negative Earning they incur a cost that takes away from their income.
If you create a closed system, where everything earned at a cost is paid for from the same strategy on a Cash Back card then you can protect your wealth, and achieve things truly for free. A simplified spending ratio would be 1:5 in that for every one 5% Cash Back purchase of the $503.95 card you buy five points purchases, in any currency you wish that gets you to your goal. Using the rounded down ratio would also allow you to price in T-Rate as Milenomics calls it, and be paid for your troubles.
What about opportunity costs?
There is always someone who brings up the opportunity costs argument and it makes me want to punch them in the arm really hard. Everything has a fricking opportunity cost, so yes, if you are earning cash back and using it to subsidize your travel points acquisition that money could have been spent elsewhere. I would like to propose a new rule at this point: if you create a closed system that generates income for the sole purpose of achieving any goal then you aren’t allowed to ask about the opportunity cost.
There is profit in manufactured spending, some of it is obvious such as the net positive income from cash back, some of it is less obvious such as getting hotel rooms for pennies on the dollar, and it is OK to use both strategies in order to meet your goals.