How I Value Points

I see the allure of setting an absolute value for points, since it helps quantify the return on the amount of time people in The Hobby (©Rolling Stone) spend working on amassing large point balances. This is especially true when I acknowledge that I’d never actually spend $6000 for a business class ticket to Europe, so a redemption for a business class seat to Europe isn’t worth the same amount as a stack of sixty $100 bills. If I can definitively say that I value my points at $.022 apiece, it follows that if I spend many hours earning a million points, I can feel comfortable that all my time has been spent well, knowing that I earned a cool $22,000.
However, it kind of drives me crazy to read all the different scenarios and rules that people cook up in service of finding the objective, true value of their points. The problem with an objective value, for me at least, is that my financial situation isn’t static. If I’m cash-poor and points-rich, I’ll accept a bad redemption value for my points in order to save cash. However, if I’m hoarding points while saving up a bunch of points for a first class ticket and I just got a bonus at work, I’m much happier spending cash instead of points on a domestic ticket. In these two scenarios, my points have very different values to me, based on scarcity vs. surplus. It really doesn’t do me any good to sit around trying to figure out how I value my points in an absolute sense, especially when that value changes constantly based on what awards I’m saving up for, how much cash I have, and my travel plans at any given time.

As a result, I prefer to value redemptions rather than points. And rather than set an absolute value on redemptions, I like to benchmark them vs. redemptions I could achieve with a cash back card. Part of the fun of points is that they enable me to enjoy premium travel that I ordinarily couldn’t afford. But let’s assume for a second that I put all my spending on a cash back card that earns 2.1% (such as the Barclay Arrival Plus), and I save up all that cash back to treat myself to the same travel experiences for which I redeem points. At any given moment, I want to make sure that my current strategy of earning flexible points and/or airline miles is serving me better than earning cash back. Otherwise, I’m wasting my time juggling multiple cards and paying annual fees when I could just get a good cash back card earning at least 2% back and be done with it.

With that said, here’s the chart I use to determine the value of redemptions. The sample redemption here is a United first class ticket from SFO to EWR. This isn’t a great redemption value-wise, but it’s better than I’d do with a cash-back card, so at least I’m coming out ahead.

Ticket face value $1,200.00
Equivalent costs $11.00
Non-equivalent costs $95.00
Miles earned for free 0
Miles forfeited 2500
Fixed point earn rate 2.1
Value per fixed point $0.01
Fixed points earned for free 0
Flexible points required 50000
Net award value for comparison $1,189.00
Fixed points required 118900
Spending required to earn enough points $56,619.05
Net spending required (after sign-up bonus) $56,619.05
Net value per point (value per point earned through spending) $0.010
Points-per dollar rate required to equal fixed point earnings per dollar 0.883
Gross value per point $0.024
Net value per point $0.022

Okay, here’s what’s going on here (in plain-ish English).

  • Equivalent costs are fees that you’d pay for a ticket either way (fuel surcharges, departure taxes, etc). In this example, I put $11, since that gets tacked on by United either way.
  • Non-equivalent costs are fees that you only pay for an award ticket (close-in booking fees, credit card annual fees, etc). I didn’t have any extra fees here, although I do pay a $95 fee on my Sapphire Preferred card, which is the card I used to earn these points. This amount is debatable, since the $95 I pay for my Sapphire card contains other perks. Plus, I may make more than one redemption with points from this card in a year, meaning a more accurate amount would be (gross feevalue of perks)/number of redemptions in a year.
  • Miles earned for free takes into account a sign-up bonus. The whole point here is to make sure that I’m better served spending money on a mileage card versus a cash back card. Sign-up bonuses definitely change the economics of using a flexible point card, so I think it’s useful to track this. I’ll explain how it factors into the below results in a second.
  • Miles forfeited takes into account miles that you would have earned if you had purchased the award as a revenue ticket instead.
  • Fixed point earn rate is the rate at which a cash back card earns cash. This is usually 2%, although it’s 2.1% in the above example, since I’m comparing it to the Arrival Plus.
  • Value per fixed point is almost always $.01 unless you’re doing a comparison with a non-cash fixed value currency like Southwest points.
  • Some cash back cards earn sign-up bonuses too, so you have to take that into account as well. (However, if a cash back card includes an annual fee, you should only include the difference in fees between your mileage card and the cash back card in the non-equivalent costs above. I’m not accounting for the Arrival Plus’s annual fee here, since it’s waived the first year.)
  • Flexible points required means the number of points you had to spend to redeem the award.
  • Net value for comparison is the ticket value minus the equivalent costs. Since you pay the equivalent costs no matter what, you get the best comparison by pretending you’d pay cash for these costs regardless of what type of currency you’re spending for the award portion of the ticket.
  • Fixed points required divides the net award value by the value per fixed point to determine how many fixed points you’d need to book the award.
  • Spending required divides fixed points required by fixed point earn rate to determine how much you’d need to spend on a cash back card to earn the enough points to book the award.
  • Net spending required adjusts the spending required to account for a sign-up bonus. This tells you how much you’d need to spend after receiving a sign-up bonus in order to book the award.
  • Net value per point adjusts the value per fixed point to account for the points earned through a sign-up bonus. Assuming these points are “free,” then the points you actually earned through spending are worth more relative to the value of the award.
  • Points-per-dollar rate – this is the most important metric to me. Here’s why: if you were using a cash back card, you’d need to spend the net spending required amount in order to earn the award. So, if both cards had exactly the same yield, then spending the net spending required amount would yield exactly the amount of flexible points required to book the award. Dividing flexible points required by net spending required yields the earning rate that achieves this equivalence. My Ultimate Rewards card strategy earns around 1.6 points per dollar, so according to this metric, I’m much better off with these cards than I’d be with a cash back card.
  • Gross value per point is the basic value per point in this redemption. This isn’t an absolute value per point in general, but it shows what return you get for your points in any particular redemption. For example, if you think your points should be worth two cents each, then this should always be above two cents.
  • Net value per point is the other important metric. Points-per-dollar rate doesn’t include sign-up bonuses or anything like that. It’s a good benchmark to see if you’re earning more than you’d earn on a cash back card relative to a given award, but if you want a more accurate value of your points in any given redemption, this metric is necessary. The first part of this equation provides a true net value of the award. This is different from the net value for comparison, since that value subtracts only the equivalent costs from both awards. The true net value includes both the non-equivalent costs as well as the cost of the miles you aren’t earning, since this isn’t a revenue ticket. In this redemption, the gross value per point determines the value of the miles you’re forfeiting, so the true net value is the face value minus the sum of (equivalent costs + non-equivalent costs) minus the product of (miles forfeited * gross value per point). The true net value is then divided by the true number of miles used. If an award costs 50,000 miles and you forfeit 2500 miles, then the true number of miles used is 52,500. However, if you earned a sign-up bonus for part of those miles, that gets subtracted (so if I earned a 30,000 mile bonus that I used toward this redemption, the true number of miles used drops to 22,500). Again, the point of this net value is to determine the value of the miles you earned through spending. It isn’t supposed to assign an objective value to your miles as much as it’s designed to benchmark whether you’re doing better than if you put all your spending on a cash back card. In the above example, net value per point is 2.2 cents, since I’m not factoring in a sign-up bonus on this redemption. 2.2 cents isn’t great, but at a 1.6 point-per-dollar earn rate, that works out to 3.52 cents per dollar (including fees, remember), which is better than any cash back card.

So, at the end of the day, this wasn’t a great redemption for me, but it still was much easier to earn than it would have been if I were using a cash back card. Plus, I don’t exactly have $1200 sitting around for a plane ticket either, so I was going to redeem points either way – it’s just nice to know I’m not wasting my time with the credit card Olympics.

Just for comparison’s sake, here’s what a business class award to Amsterdam on KLM would look like, using mostly Thank You points earned on a Citi Prestige and a Citi Premier, both of which I signed up for this year. The Prestige has a $450 fee, and the Premier is $95, but it’s waived for the first year. I’ll put in $200 for annual fees, since the Citi Prestige has a $250 airfare credit that’s basically cash. I’ll also put the $500 fuel surcharge in the non-equivalent category, since I’m not sure if you end up having to pay that on a revenue ticket or not.

(Update: check out this post for more on fuel surcharges.)

Ticket face value $5,500.00
Equivalent costs $0.00
Non-equivalent costs $700.00
Miles earned for free 100000
Miles forfeited 19110
Fixed point earn rate 2.1
Value per fixed point $0.01
Fixed points earned for free 40000
Flexible points required 125000
Net award value for comparison $5,500.00
Fixed points required 550000
Spending required to earn enough points $261,904.76
Net spending required (after sign-up bonus) $242,857.14
Net value per point (value per point earned through spending) $0.011
Points-per dollar rate required to equal fixed point earnings per dollar 0.515
Gross value per point $0.044
Net value per point $0.128 

This is a good example of the outsize value that you can get from flexible points. I’ve always wanted to fly to Europe in business class, but I could never afford it, nor could I afford to spend years and years racking up $242K in spending on a cash back card in order to afford it. Given that I earned 100,000 points for free, the return on the money I needed to spend to earn the additional 25,000 miles is crazy. On my Citi cards, I earn around 1.7 points per dollar, which in this redemption ended up being worth 21.76 cents per dollar. Obviously they weren’t actually worth that much, since if I actually earned 22% back on every dollar I spent, I’d pay off my car instead of jetting off to Amsterdam. But still… it definitely illustrates what’s possible when moving from a fixed currency to flexible points/miles.