How to determine if you should pay in cash or points
I don’t know about you, but when I am trip planning, most of my time is spent thinking about making memories and moments like these. However, to get to moments like these, you need to make tough decisions along the way, like, “Should I pay with points or cash?”
Why it matters
There’s two key components of the points and miles game: accumulating points and redeeming them. For each of those components, I think there is a key question to ask.
When it comes to accumulating points, we are constantly asking, “Which points/miles (and how many) do we need to accumulate to accomplish our travel goals, while not hurting our financial health?”
When it comes to redeeming points, we are constantly asking, “Are we getting the most value possible from our redemptions, while not falling into decision paralysis, where we never book anything at all?”
That’s the tension we hold: find the best value we can to ensure our points/miles go further, while also not spinning our wheels so long that we miss out on good value. It’s the opposite of the premise of Jim Collin’s classic Good to Great: We miss out on a good redemption because we’re hyper-focused on finding a great redemption.
However, I do believe there is a boundary between a good redemption and a bad one as well. Things like redeeming 100k AMEX points for a $500 gift card or 93k United miles for a carry-on suitcase (even if it is a Tumi!) Gross. If that’s all you plan to do with your miles, then get a cash back card that earns 2% with no annual fee and ride out into the sunset. Travel rewards cards are best utilized toward redemptions for travel!
Basics
Which brings us to what has become a foundational truth for us in this game: Unless you are talking about (most) hotel points (like Hilton or Marriott), which are consistently valued between 0.4-0.8 cents per point, the baseline you want to redeem your points for is 1 cent per point and, ideally, closer to 2 cents per point.
Do you understand what I mean when I say that? Don’t feel bad if you don’t. It honestly took me awhile to have it sink in. So, let’s use an example.
Here’s one of our hotel stays from our recent Peru trip that we booked on points, after comparing it with the cash price:
Calculating the Point Valuation
The cash price would have been $513.65 and the award price was 88k points (22k points per night, with 5th night free as a Hilton Gold elite, which we get complimentary from our AMEX Platinum) So, a bit of warning. There is a little bit of math involved. I know, the horror! However, this example is not too wild. Simply divide the cash cost by the number of points.
$513.65 / 88,000 = 0.0058 (x 100 = 0.58 cents per point)
Since we value Hilton points at 0.5 cents per point, and want to utilize the free breakfast benefit that comes with our Hilton status, this is a good value redemption. Great? No. However, since points and miles are a depreciating asset, and cash flow is king, if we come across even a good redemption, we’re booking with points over cash. Only when the cash price is radically low compared to the points valuation are we paying cash.
When it makes sense to pay cash
Let’s take a look at an itinerary to visit Norway in the Fall (Oct. 3-11), out of Chicago.
Paying cash: Just under $600 for a round-trip flight from Chicago to Norway.
Using miles: 60k AA miles round-trip, plus $125.75 in taxes and fees.
Calculating the Point Valuation
Calculating point value for flights is a bit more complicated, as you need to account for the taxes/fees that are tacked onto the miles redemption (since it’s already baked into the cash price.)
$595 (Cash price) - $125.75 (Taxes on the award flight) / 60,000 = 0.0078 (x 100 = 0.78 cents per point)
This is horrendous. Period. We often get 1.7 cents per mile using AA miles, and often can even get between 4-10 cents per mile when redeeming for Business Class on Q-suites (Qatar Airline’s Business Class) or Cathay Pacific Business class. So, getting less than 1 cent per point for an American Airlines point redemption is always going to be a resounding “no”!
Note: If we were to book this flight, it would be using cash, and we would likely book through the American Express Travel Portal “Pay with Points” feature, using our American Express Business Platinum. Since American Airlines is our selected airline on one of our Business Platinums, we would be refunded 35% of the points we used to book the flight. Translation? The round-trip cost would be 38,675 American Express Membership Rewards points AND the flights would earn American miles AND count toward re-qualifying for status next year.
When it comes to redeeming points, constantly ask yourself: “Am I getting good value here?” Am I at least getting between 1-2 cents per point value on flights and at least 0.5 cent per point value on hotels (with the big exception being Hyatt, whose points are worth closer to 2 cents per point.)
I know you’re probably thinking, “But how do I know what a Hilton point or an American mile is even worth?” Eventually, you will start to get a general feel for it, but until then, referencing Frequent Miler’s “Reasonable Redemption Value” page is a great tool!
