There is a bevy of useful information in the points and miles world. Blogs, podcasts, forums, and social media groups offer a virtually unlimited supply of quality insight. But there is one area in which I find most people miss the mark- when they compare cashback vs point potential when making large purchases.
I came across a post recently in a Facebook group that exemplifies this. The poster, a very nice person, had a common points and miles question. They have a large loan they are going to pay off early. For doing so, they would receive a moderate discount on the loan itself. The discount would amount to $500. They found that they could use a credit card to pay off the loan, but the credit card fee would negate the $500 discount. They would, however, net somewhere in the ballpark of 50,000 points by using their credit card.
The poster received many suggestions, most about which cards to consider and which redemption opportunities would yield the most value. One response stated that they should just opt for the cash and not use a credit card. Someone replied to that reply with a laughing emoji. Yes, such a ridiculous notion.
This showcases a common error in this community. When confronted with a large expense or cashback opportunity, there is an urge to consider points/miles as the currency of choice. That’s natural and not altogether bad. Points and miles are exciting to think about. Vacations are fun. The real problem comes in the miscalculation when comparing cash and points/miles. Most, when making the comparison, think of cash as a fixed value.
I’ll continue with the example above. Respondents correctly pointed out that if the poster used the Chase Sapphire Reserve card, those 50,000 points could be worth $750 if used through the Chase portal. Heck, they could be worth even more if the right redemption presents itself through a travel partner. $750, if taking advantage of points, is worth more than $500, so it’s a better value, right?
Superficially, yes it is. The problem with the comparison, though, is that the present value of cash isn’t necessarily fixed. Just as the value of points can be more valuable based on how they are used, so can cash.
Say the poster had another outstanding debt like a mortgage, for instance. Using that cash could lock in a return relative to their interest rate. Want even more value? Invest the cash in a low cost index fund. $500 growing at a reasonable rate of 5% over 20 years will net just over $1300.
When comparing cash vs points. You can’t only think about the current value of the cash relative to the redemption opportunities of the points. You need to consider the future value of the cash relative to the point redemption opportunities. It’s a simple thing to overlook, but if our goal is to make better decisions, we have to consider the full range of options.
I think that most points and miles folks are right on when calculating the value of points across programs. I also think that most points and miles folks severely undervalue cash. Cash today is worth more than points tomorrow.
As I said, I get the inclination to favor points/miles. Using cash to pay down debt or invest isn’t sexy. Nor will you feel the positive impact of the decision immediately. But, when it comes to finances, the boring, long term decisions are the most fruitful. The goal isn’t to have so many points and miles that it would take a lifetime to spend them. The goal is to have a life so financially solid that paying cash for travel expenses isn’t a setback.