If there is one thing I could share with anyone interested in points and miles, from novice to ‘expert’ it is this: valuation is subjective.
The moment you buy into other people’s BS about value you lose all sense of reality, and this will snowball into making more and more bad decisions where points and miles are involved. The BS starts from the sales and marketing teams of the underlying programs. It is perpetuated by people who are mindless followers, or people who are savvy credit card sales people.
Scenario
You are told that Etihad First Class from NY to the Middle East retails at $20,000. You collect 150K pts that can be redeemed at 1 cent each for a value of $1500, or that flight. You are considered daft to redeem for less than the flight. But.. what if the sales and marketing guys changed the cost of the flight to $1500? Would you run out and redeem 1:1 for the flight, or would you fly only when you needed to, and otherwise use the points elsewhere?
The flight is the same – it gets you from origin to destination, it does so with a certain amount of comfort, nothing has changed other than the perception of value perpetuated by the BS.
Here’s how many mistakes I’ve seen on this in the past week:
It’s simple math: Earn miles at about one to two cents per mile. Spend them at two to three cents per mile. A mile is worth slightly more than two cents…if you are breaking the piggy bank. [Randy Petersen, Huff Post]
getting the flights and hotels for ~6% of their retail cost [Noah, MoneyMetagame]
In the U.S., an i3 costs around $45,000. So redeeming 11 million miles for one amounts to getting .4 cents (four tenths of a cent) in value for each of those 11 million miles. You’d get much better value redeeming those miles for flights on Lufthansa, or on one of its many airline partners.[Freequentflier]
All three of these savvy guys are allowing the sales and marketing BS to impact their valuation. In the case of Noah I can see the excitement behind showing that retail price, I’ve done it myself. However, the only way to value a mile or point is the impact that it has on your own bottom line.
Another example is Frequent Miler just launched a hotel’s credit card value page. He lists the Hyatt card as the best value credit card with a valuation of $596.
Let’s pretend..
A bumbling beginner is offered the chance to pick a credit card. They can take the Chase Sapphire Preferred with 40K pts, or the Hyatt card with 2 nights. Confused, they ask you what it is ‘worth’ and you cite ‘well the shiny silver Hyatt card is worth $596, and the shiny blue CSP is worth ‘at least’ $400 in Amazon Gift Cards. What should they pick?
- If the beginner is an independently wealthy Hyatt Diamond because they spend 100 nights a year vacationing at Hyatts, then I’d say the Hyatt card.. because it really would lift a sum of money from their expenses, perhaps even more than $596.
- If the beginner is an average guy, who has a mortgage, maybe some debt, perhaps a kid or a dog… then $400 would probably do more for their well being than anything else.
Now, what about the shelter need of the hotel? Well, certainly, the guy with an extra $400 in cash still needs a hotel for 2 nights.. kinda.. if there was a real need for a room for those nights vs being pressured to cash in the vouchers before they expire in 12 months that is. But even then, it comes down to the spread for what they would (and should) spend for a room, and the $400.
In their defense
Noah mentions that he wouldn’t necessarily use the rack rate when comparing value for his trip, but that hotels for NY are expensive regardless, and Greg’s list is only hotels right now…. But for the hotel list, I can’t see how it can ever be more than that, because if you had another list of ‘cash like’ cards you couldn’t really cite the 40kers like the Arrival, Venture, CSP as being worth ‘around $400’ and have them below the Hyatt card… it makes no sense.
Tim (FF) who talks about the BMW i3 I disagree with. If I read his post correctly he is saying that using the 11M miles for flights is a savvier decision, because the ‘value per point’ is higher. Personally, I’m not too familiar with the luftwaffe award chart, but if we make it simple and pretend again.. let’s say a RT from here to Nova Scotia is 100K OR $10,000…
- 11M = 110 flights at 10K per flight for a ‘value’ of $1,100,000 >>> over 1M USD!!!
- Whereas a car is $45K
Much smarter to fly from NY to Nova Scotia 110 times right? Or, would that just be plain stupid, and mean you still need to buy a car?
Again, it’s down to the individual. If you needed to make that flight 110 times, it makes a lot of sense, but if you need a car and don’t really need to make that journey quite so many times.. then the smarter choice is the car, even at a fraction of the ‘value’.
Stepped up lifestyle
Let’s nod the hat at the value found in stepping up your lifestyle for similar costs. There is real value in being able to experience things beyond your pay grade, and life is to be lived. That said, when making a choice between option A and option B, it is worth remembering that the ‘price’ you use for valuation is being set by sales and marketing guys to make you think it is worth something. Keep yourself grounded by comparing the value between the price they propose is market rate, and what you’d really pay.
If you lose sight of true value and buy into the BS, you’ll start making a lot of poor financial decisions.
Finally….you make TBB!
Blog posts about valuations bore me to pieces. I agree with you on this! Probably the last time I feature a blog post about valuation!
What if the BMW was a VW Diesel car instead? lol
Sweet baby Jeebus say it isn’t so!
You got this right on point, great post.
Take the money and run, especially if you already have plenty of points and miles. Yes, 135,00 or 125,000 AA miles on CX or JAL in F-Class is an awesome redemption, I done it, many times! This year, we needed to use some cash for a renovation, 800,000 MR an UR points = $8,000 in cold hard cash and gift certificates, loved getting that new roof on points, appliances are next, thanks to HD gift certificates. That cash is tax free, so I’d safely say it was ~$13,000 in cash value for redeeming these points.
I know a couple of round trips in SQ Suites would have been nice as well, but to usthis cash is worth more than those flights.
Cheers,
PedroNY
Good stuff! The challenge comes in when you start figuring out how to leverage the HD cards the best.. Raise is pretty cool with stacks too… And don’t forget your movers coupons 🙂
Spot on as usual Matt. I have grown accustomed to looking everything as a balance of my time, money, and resources, with much gratitude to your thought-provoking posts. Your quote of Freequentflier may have been out of context though – I don’t believe he is actually recommending redeeming that for an i3 but rather leaving it as an open ended question on how you would spend your miles if you had that many. I would most likely use it on flights, but if I were in a position where I’d have that many Lufthansa miles then whether I spend it on an i3, a bunch of swank flights, or a toaster would be a waste of my own brain power. Whoever has that much is probably so well off that he puts miniscule value on whether it’s .4 or 4 cents per mile redemption value. If the EK flight now costs $1500 instead of $20,000 I would certainly think very carefully before redeeming. I do think sometimes that I might get more enjoyment out of buying into the marketing BS. I probably would enjoy a trip more if I knew that it is more exclusive than I can afford. Of course, if your decisions lead to financial hardship/strain then it’s certainly not a good idea.
Glad to hear it’s helping! Btw re the i3 my position was you’d likely be better to get it!
Matt, gotta jump in on your comment here:
“If the beginner is an independently wealthy Hyatt Diamond because they spend 100 nights a year vacationing at Hyatts, then I’d say the Hyatt card.. because it really would lift a sum of money from their expenses, perhaps even more than $596.” — I completely disagree. You’ve got a guy (no intent to be sexist) who is earning a bunch of points, just from stays, he’s probably in the 6 figures of points. How on Earth is the Hyatt Card going to add value for him? Lets say best case scenario, he has a PH Sydney or PH Tokyo stay. I recently book a PH Sydney stay, 2 free nights (from the Hyatt card) equate to roughly $2k from the available room rates – so immediately that value is just under 4x the accepted “value” of the card. I would say the Independently Wealthy Hyatt Diamond is missing out because he has other expenses that he cannot offset with miles/points.
I could go on, but probably better that I not.
Maybe he burned all the points? The point is if he is willing to pay cash and a card can remove that from his expense side, it’s a wise decision. If he wouldn’t pay cash, perhaps he should look at the rest of his balance sheet.
Disagree if you like, but I would argue that he is not looking at the big picture, and thus not prioritizing his spend. Now if he’s lighting his cigarettes with $100 bills, then, we’re all wasting our time. But if this fictional character actually cares about his expenses, I think we would be remiss to not consider expenses outside of his lodging.
I’d like to disagree.
Good points here. I’ve written similar arguments many times in the past. That said, it is equally wrong to say that $400 is always better than 2 free Hyatt nights. If someone wants to stay at the Park Hyatt Sydney, for example, signing up for the Hyatt credit card is the cheapest way to accomplish that.
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Regarding my credit card rankings, I shouldn’t have labelled the dollar amount as “estimated value”. I just couldn’t think of a better term for this dollar amount that means something like “the amount that people typically inadvertently pay for these rewards”. I won’t go into detail here about what it really means (its complicated), but I do want to note that it is NOT influenced by retail prices. Hyatt could decide to make all rooms at all hotels available for $1 per night and it wouldn’t change the numbers. Or, they could decide to increase all rooms to $1 million per night and, again, it wouldn’t change the numbers.
Totally- that’s why I said that a guy who pays to stay at Hyatt would get that value (or more).
The broader concern I have is if people mindlessly follow valuations like this they’ll get things twisted..
Valuations for the masses might just be impossible to do, but attempting it is a fun task.
I try to NEVER think about the “value” of the points before I use them. I only do this: For where I what to go, how much does it cost in $$ versus my various *points* “currencies”? I always start with the “where” and never the “how cheap can I get something?” aspect.
That done, I compare my various collected currencies against the lowest $ price.
Anyway, travel is not about the redemption value.
This is the kind of post I like, because it has a more eagle’s view of finances in general and how miles and points fit into that. I travel occasionally but for various reasons can’t make it a hobby like many points bloggers do. So I see points as a resource just like money is, and I try to look at it from different angles and see where I get the most benefit.
I love the Home Depot example above- think about it, that’s fantastic! And I totally agree about the tax-free aspect of it being an even bigger bonus.
Whatever spending can be shifted to points is a win. As far as value goes, you’re saving what you would have spent otherwise, nothing more.
Sometimes there is added value in a certain redemption that makes sense too, in that it’s a nicer experience that you wouldn’t choose paying for in cash.
That’s where keeping an open mind helps you spend your money/points consciously!
P.S. Can’t wait until I can pay for everything with points..tax free- I can dream, can’t I? 🙂
Absolutely great perspective – the headline-grabbing “valuations” for international first class travel have VERY little to do with what I, as a father to young kids, care about… because we just aren’t jetting off to Europe or Asia no matter what cabin we could be flying in.
What we do, is fly around North America to visit family and friends. And that means I care about displacing actual $$$ I’d be spending doing that with “sub optimal” redemptions… not banking miles until I can “maximize” redemptions that I am not taking for a number of years.
But of course, that doesn’t generate hot headlines or clicks…
You mixed two things: value and valuation. Value is there. A first class international ticket may be priced $10k. Are airlines crazy? Definitely not. Some rich guys will be glad to pay the hefty price for their experience anyway. There is nothing wrong to say a ticket worths $10k. The market shapes the price and the price changes over time based on demand. That’s exactly how it works.
Your valuation is a different story. You may not think the first class ticket worths the price. You value it to be $2k, personally. You are absolutely right about this part, but your opinion won’t change the market. There are always some people willing to pay the price. You still get $10k value for the ticket, it’s just you don’t value it as valuable as the market price. In a word, you get the value as many bloggers claimed, but may not be something you really need.
It is like paying extra money for something that is not required. It might be worthy, it might not, depending on your point of view.