Travel hacking math

Travel hacking math

Travel hacking can be a complex and controversial topic. Here I lay out two arguments in support of travel hacking, and address one argument against it.

Who’s paying for travel rewards?

When you buy something, you generally have the four payment options listed below. Some are clearly better than others. But the important point is that no matter which option you choose, you are still involved in the travel hacking system. The only difference is whether you’re a beneficiary or a “donor”:

  1. Pay with a credit card, make only the minimum monthly payments, and carry a balance on the card. This is clearly a bad choice, because credit card interest rates (annual percentage rates, APRs) can vary from 10%-30%. For demonstration purposes, I will use an APR of 17% for this option based on on the ranges shown here.
  2. Paying cash or credit. This is definitely better than the choice above since you don’t take on interest payments. But you also aren’t getting any cash (or points) back benefits.
  3. Paying with a typical rewards credit card and paying the balance in full every month. This hands-off approach is better than either of the above approaches, but is still not optimal; a typical cash back card without an annual fee will only yield around 1.5%.
  4. Continually churn credit cards to harvest the signup bonuses. If you make the effort to stay organized, this is by far the best way to pay. For example (at the time of writing) you can open a Chase Sapphire Preferred card that returns 60,000 Chase ultimate reward points. That equals $600 (if points are redeemed for cash), $750 (if points are redeemed for travel through Chase), or over a thousand dollars (if the points are strategically transferred to a Chase travel partner). To receive the points, you need to spend $4k over the first 90 days and pay the annual fee of $95. Taking even the worst redemption of $600, minus the $95 fee, still yields $505. Dividing by the $4k minimum spend yields a positive return of 12.6%. Since the card also generates a minimum of 1% cash back, the minimum return is 13.6%. If you continuously open good cards (and properly manage card downgrades and closures), you can maintain these returns indefinitely.

The graph below shows where each payment option sits. It also shows that the further to the left you are, the more you are subsidizing the people on the right. The reasoning is simple. Businesses set prices to account for credit card transaction fees evenly across all customers–regardless of payment method–in almost all cases. On the other side of the transaction, banks are not losing money on credit cards overall. So if travel hackers are routinely harvesting double digit returns, it is clear those paying double digit interest are footing the bill. Wealth is being transferred from the left to the right. This isn’t necessarily fair, but it is reality.

The hourly rate calculation

The case for credit card churning is clear–you are either subsidizing peoples’ travel or you are having your travel subsidized. But many people still think it’s not worth it because it takes too long. This is one of the reasons I compiled a systematic process for managing travel rewards. It reduces each new card to a few simple steps that take, at absolute most, one hour per card. Using the numbers from above again, a $505 bonus (after the annual fee) divided by one hour equals $505/hr. That is quite the hourly rate.

The “travel rewards won’t make you rich” argument

Many people, such as Dave Ramsey, have a one-size-fits-all warning against using credit cards, especially travel rewards credit cards. And for many people, this warning is prudent. If you don’t pay your bills in full, or you spend extra to chase bonuses, you will almost certainly lose money. But I have to disagree with Dave’s quote below:

I never met a millionaire who said. “I made all my money with airline miles.” Rich people don’t fall for stupid credit card tricks.

Dave Ramsey (tweeted 4/15/19)

First of all, it is a straw man argument. No one is arguing that you will make money with credit card rewards. You are either using the points to pay for travel or to offset expenses on the card. In either case, you are not making money.

Second, if you are a diligent saver–like many in the FI community–you may try to cut expenses to the point of deprivation. Here, travel rewards are more of a psychological win than a financial win. The low cost of travel may encourage you to take trips you otherwise wouldn’t, all without compromising your financial goals. This has certainly been our experience.

Finally, the point above only covers purely discretionary vacations. But most people have some form of recurring travel costs built into their life. Consider a child who plays competitive sports and routinely travels regionally (or nationally) at the parents’ expense. They can either pay full price, pull the kid out of the sport, or use travel rewards to soften the blow. Consider a young adult in the middle of wedding season. If they value celebrating this milestone with friends and family, they are going to do some serious traveling. Why not use travel rewards to cut the cost? I wish we knew how to travel hack when we had at least five weddings a year for several years. In situations like these, travel hacking can reduce the tension between financial values and more personal values.

To summarize my problem with Dave’s quote, it focuses only on the left side of the chart above. It completely ignores the right side of the chart and the transfer of money from left to right. This is too bad, especially for his readers who have already established great financial discipline. They are needlessly subsidizing other peoples’ travel.

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