Points and miles are a depreciating asset
Introduction
In high school, my parents declared bankruptcy.
What a way to start a points and miles blog post, right? Maybe you’re like me, and often use points and miles, as well as travel, to escape the hardest aspects of life.
So, why do I share that? Why bring us to the depth of the human experience, when you probably came here to stay on the surface?!
I share it because today’s focus will rub up against how you view and handle money, and, by proxy, how you handle your stash of points and miles.
Ultimately, your perspective on money has been built by numerous variables, but one of the biggest is from your family of origin.
Ed Coambs, a licensed therapist and certified financial planner, writes that how we handle money in adulthood is often an emotional response to the financial stressors we experienced as a child. One response might be to become very restrictive in how you spend money. You hold it too tightly. Or the opposite could be the result, he noted. “You may be overly carefree with money, figuring you might as well live for today because tomorrow it could be gone.” You hold it too loosely.
For me, after my parent’s bankruptcy, I chose the former path. I’ve historically leaned toward saving, even hoarding, to pursue a sense of financial control that I felt was lost at a young age.
There are some obvious benefits to this approach: financial margin and security, as well as opportunities for some of the more privileged things of life, like travel. However, there are also a ton of drawbacks: I am not as tender to the needs of those around me, often missing out on the joy that comes from generously intersecting my excess with someone else’s scarcity. Also, really practically, nobody likes someone who is stingy, so, sometimes, my stinginess has created barriers for me with others.
On a much less important note, it has also hurt me when it comes to points and miles.
Let me explain: We devote a disproportionate amount of our monthly income toward long-term investments, whether it be our 401(k), Roth IRA, or HSA. I ascribe to the financial philosophy of “set-it-and-forget-it” approach.
Research from Fidelity has shown that a hands-off approach to investing can lead to better outcomes, especially when it comes to reducing costs and minimizing the impact of market timing and individual stock picking. So much so, that over a ten-year period, the clients in the study that had the highest investment returns were the ones who were dead and the second-best group were clients who had forgotten they had investments! Why? Because they didn’t tinker or try to “time” the market, but instead, just let it do its thing!
This mindset been extremely helpful in our pursuit of financial independence and retiring early. However, when we first got into the points and miles game, we brought this approach into the points and miles game: accumulation and hoarding. I liked seeing our points and miles balances climbing and it felt wrong to zero them out.
The problem is: unlike the investments in your 401(k) that, over a long timeline, increase in value, points and miles are doing the exact opposite. Similar to your car, points and miles are a depreciating asset. Year-over-year, points and miles sitting in your frequent flier accounts will almost always be worth less than the year previous. In other words, points and miles are a horrendous long-term investment. The sooner you can spend them after you earn them, the more value you're likely to receive.
Why to spend your points and miles sooner rather than later
Airlines and hotels generally keep outstanding miles as liabilities on their balance sheets.
We have talked before that a lot of frequent flyer programs are worth more than the airlines they’re affiliated with! The contracts hotels and airlines make with banks to sell miles are often more profitable than their entire operations. In fact, during the pandemic, several airlines stayed solvent by selling huge chunks of discounted miles to banks and consumers. These miles became a liability because the airlines now “owed” consumers travel in return for those miles. In the few years since, several airlines have made moves to minimize that debt, to keep their books balanced.
2. Devaluations are inevitable.
Of all the options available to them to minimize that debt and the risk of outstanding rewards is to devalue them. In the past year, Alaska Mileage Plan, Cathay Pacific Asia Miles and United Airlines are just a few examples of the many airlines who have devalued their points by eliminating ways consumers can utilize each program’s miles or increasing the amount of miles it takes for specific redemptions.
3. For a lot of airlines, points and miles redemptions get more benefits than paid purchases.
Although this is not the case for every airline, for a lot of airlines, you will get more benefits from flights booked with miles, than with cash. For example, with American, our carrier of choice, you can cancel an award redemption up until time of departure, and all of those miles and fees will be refunded (note: basic economy seats will not usually count). Delta and Southwest have the same policies as well (United doesn’t charge any award redeposit fees for cancellations made more than 30 days before departure.) However, if you were to book flights with those airlines, besides Southwest, with cash, if you cancel, you are stuck with a travel credit, instead of a straight refund of the cash.
4. Don’t forget why you got into this!
If you’re like us, you got into points and miles to TRAVEL. Yes, I know that sounds obvious. However, sometimes you lose sight of that fact. Maybe your natural tendencies take over and it becomes about the game. It becomes about the accumulation. If you have the points and miles, use them! There is ZERO benefit to hoarding them.
Venice, April 2023
A trip we made happen almost exclusively using points!
What to do
The short of it is: Redeem your points as you earn them! The common phrase in the points and miles game is “earn’em and burn’em”! Yes, it’s nice to have a bit of a points balance cushion so you can pounce on a great redemption deal that pops up (like 45k in Business Class to South America). However, don't let your balances creep too high. Why? Because, again, they are a depreciating asset, so they are losing value with every minute that they sit idly by.
If you're someone in the desirable position of accumulating more miles than you can use, consider:
Spreading the wealth to friends or family members. This has been one of my favorite ways to try and grow in my generosity, giving points to friends and family to take a vacation they might not be able to take or attend that last-minute funeral out-of-town.
Adding a cash back credit card to your wallet. There can be such a thing as too many points and miles if you can't spend utilize them fast enough (i.e. you have more points and miles than you have vacation time!) If history tells you that you can quickly replenish your points balances, earning cash in the meantime is a great choice.
Diversifying the points and miles that you earn. Don’t just focus on using the points and miles that you earn, but diversifying the ones that you accumulate, so you are cushioned more from the blows of airline or hotel devaluations. For example, if you have a AMEX Business Platinum and Delta SkyMiles announces a big devaluation, you can always transfer your points to Air France/KLM Flying Blue to book Sky Team award flights.
Conclusion
To finish where we started, it helps to analyze your natural tendencies when it comes to money. Which of these money personality types do you default to: saver, spender, giver, investor or hoarder. If your natural tendency is toward being a spender, points and miles is one of the times you don’t have to feel guilty! Your tendency will actually help you in the points and miles game, as you are less likely to hoard your points, but actually utilize them, which is the wisest financial move. The natural givers are also prime to maximize points and miles, as you will not let miles sit idly by, but will put them to good use by being generous with them toward friends and family.
However, if your tendency is toward saving, investing or hoarding, just be aware that this tendency that often helps you when it comes to your net worth, could be a disadvantage when it comes to the points and miles game. Find a way to flip your mindset and start strategically draining those balances!
