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.
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.
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.