Why I manufacture cash

I was chatting with a blog subscriber the other day who expressed surprise when I told him I was manufacturing spend on a 2% cash back card, rather than a mile- or point-earning credit card.

That exchange made me think I should present my argument for why travel hackers as a general rule either should manufacture cash back, or at least should be willing to manufacture cash back. The simple reason is that doing so keeps you honest.

Bonused spend is capped or limited

There are cards that are straightforwardly superior to cashback-earning credit cards, or may be under certain circumstances. For example, if you have access to grocery store manufactured spend, a US Bank Flexperks Travel Rewards card (2x), Hilton HHonors Surpass American Express (6x), Amex EveryDay Preferred (4.5x), or American Express Premier Rewards Gold (2x) card are either clearly or convincingly worth more than manufacturing spend on a simple 2% cash back card.

But manufacturing spend at grocery stores faces all sorts of obstacles, from daily limits on purchases to annual caps on bonused spend. Whether the limits you face are imposed by the stores you visit, the cards you carry, or the inconvenience of visiting bonused retailers, they leave you with a simple choice: restrict your manufactured spend to bonused retailers, or manufacture unbonused spend as well?

Unbonused spend should present hard choices between rewards currencies

I loosely consider the 3 most lucrative travel rewards-earning credit cards for unbonused spend to be:

• Chase Freedom Unlimited. 1.5 Ultimate Rewards points per dollar spent, flexible if transferred to Chase Sapphire Preferred, Ink Plus, or Sapphire Reserve.
• Amex EveryDay Preferred. 1.5 flexible Membership Rewards points per dollar spent.
• Starwood Preferred Guest American Express. 1 Starpoint (1.25 airline miles) per dollar spent.

You would need to get 1.33 cents per Ultimate Rewards or Membership Rewards point in value, or 2 cents per Starpoint (1.6 cents per mile when transferred in 20,000-Starpoint increments), to break even compared to a 2% cashback-earning credit card.

Those thresholds are, on the one hand, trivially easy to meet. Getting 1.33 cents per Hyatt Gold Passport point or United Mileage Plus mile is considered a poor redemption of those currencies since it's so easy to get so much more value from them. Even 1.6 cents per transferred Starpoint is relatively easy to achieve on long-haul flights, especially in premium cabins.

On the other hand, those thresholds are only easy to meet when the points are redeemed for travel. When you earn rewards currencies other than cash because of their possible future value, then fail to redeem them, you are ultimately paying a premium for an inferior product.

Consider two travel hackers, each of whom manufactures $10,000 in unbonused spend each month for a year. The first uses a Chase Freedom Unlimited and earns 15,000 Ultimate Rewards points. The second uses a 2% cash back card, and earns $200 in cash back. Both pay the same purchase and liquidation fees. At the end of the year (in the 13th month), the first travel hacker will have 180,000 Ultimate Rewards points, and the second will have $2,400 in cash.

To make up the $600 in cash value, the first could redeem all 180,000 Ultimate Rewards points for 1.33 cents each — an easy lift, as described above.

But what if the first travel hacker redeems just 120,000 of their Ultimate Rewards points for travel, leaving them with a 60,000-point balance? Now she needs to get 1.5 cents per Ultimate Rewards point — still not too difficult, on long-haul United award redemptions or at mid-tier Hyatt properties. After all, Hotel Hustle pegs the median Hyatt Gold Passport point value at 1.862 cents.

Finally, consider if the first travel hacker redeems just 60,000 of their 180,000 Ultimate Rewards point haul for the year. They still have $1,200 in cash value, but that means they'll need to get 2 cents per Ultimate Rewards point to break even with the 2%-cashback travel hacker. Now we've found ourselves, rather than being safely below the median Hyatt point value, 7.5% above it. Rather than merely looking for a decent United redemption, we need an excellent one. All to break even with the person who's been taking their rewards to the bank in the form of cash each and every month!

This has nothing to with devaluations

When I point out the folly of hoarding miles and points, people often think I'm talking about the risk of devaluations. But as I wrote in the linked post, 

"For all the wailing and gnashing of teeth whenever an airline or hotel devalues its miles, that process is relatively gradual and relatively predictable.

After all these years, despite everything that's happened in the airline loyalty industry, the 25,000 domestic saver award ticket still exists."

If there is never another devaluation of any loyalty program under the sun; if every loyalty program opened up every seat, in every cabin, on every flight, for award redemptions, unredeemed points will still be worth nothing, while cashback earned can still be put to work paying for the expense of your choice, from groceries to retirement savings.

Conclusion

Past performance is no guarantee of future results. But it's as good a place as any to start!

When deciding between a cashback-earning credit card or putting the same unbonused spend on a travel rewards-earning credit card, take a look at your existing balances and your account history. Do you redeem the points you earn? Are you consistently getting the value you need to break even compared to a 2% or higher cashback card, taking into account the orphaned points you don't redeem?

If so, terrific — keep doing what you're doing. If not, then it's time to ask further questions about your manufactured spend strategy.

And those questions are how cashback credit cards keep travel hackers honest.