What's the return on a diversified portfolio of hip alternative investments?

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There's a healthy overlap between people with an outside-the-box attitude towards funding travel and those interested in alternative approaches to savings and investment:

  • Kiva has long been a (controversial) tool used by travel hackers and outside-the-box thinkers to earn miles, points, and cash back by making short-term loans funded with rewards-earning credit cards.
  • More recently, Greg the Frequent Miler has been doing yeoman's work (followup here) reporting out the similar, albeit much riskier, possibility of funding Kickfurther (my personal referral link) "Consignment Opportunities" with credit cards to earn both credit card rewards and investment returns.
  • At some point I must have signed up for a Fundrise account, and they've been badgering me to invest in their "Income" and "Growth" eREIT's for weeks now.
  • Finally, if you listen to any popular ad-supported podcasts you've likely heard about Wunder Capital and their solar power investment funds.

Now, the last thing you want to do is put all your speculative eggs in one basket, so I got to wondering, what kind of return might you get from an equally weighted portfolio of all these investments?

Annualizing "target" returns

The first thing to take into account is that the investment horizon for each of these vehicles is different, so we need to adjust the various returns appropriately. I'll use $1,000 investments in each example for ease of comparison.

  • Kiva loans funded with a 5% cash back credit card might earn more or less than 5% because of the varying term of Kiva loans. A recent search for short-term, high-quality Kiva loans returned 15 loans, all of which had a duration of 8 months. Assuming you wait to reinvest your Kiva repayments until all your loans have been repaid, and you suffer no defaults or delinquencies, you could invest $1,000 1.5 times per year, for a total annualized return of 7.5%.
  • Kickfurther consignment opportunities funded with a 2% cash back credit card will yield 2% cash back, plus your total Kickfurther principal and interest payments, minus 1.5% of your Kickfurther principal and interest payments. In other words, a 12-month consignment opportunity offering a 16% return on a $1,000 investment will pay $20 in cash back plus 98.5% of $1,160 ($1,142.60), for a total annual return of 16.26%. Assuming the four currently available consignment opportunities are typical in both length and rate of return, we can mechanically compute an average annualized return of 14.65%.
  • Fundrise works a little bit differently since you're investing in eREIT's which are designed to be held for the long term and which pay out throughout the life of the investment and then return remaining (potentially appreciated) principal at the end. Under the "accountability" tab for each eREIT, you can see the returns Fundrise seeks from each investment fund. For the Income eREIT they will charge no management fee if the annualized return is less than 15%, and for the Growth eREIT they'll pay a penalty if the annual return is below 20%, so we can use those as the "target" returns for each fund.
  • Finally, Wunder Capital is currently offering a "Term Fund" with a target return of 8.5% and an "Income Fund" with a target return of 6%.

Building a diversified hip alternative investment portfolio

If I were interested in building a portfolio of these alternatives, my model would be diversifying across the four platforms somewhat like this: by putting $1,000 in as many suitable Kiva loans as possible, $1,000 across as many Kickfurther consignment opportunities as possible, $1,000 in each of the two Fundrise eREIT's, and $1,000 in each of the Wunder Capital funds.

That would produce a $6,000 investment with a target annualized return of 11.94%.

This would be a very stupid thing to do

There are at least two questions worth asking about such a diversified portfolio of hip alternatives:

  • How likely am I to make more money with this portfolio than I would with conventional investments?
  • How likely am I to make any money at all, versus losing some or all of my principal?

The first question speaks to the question of whether the higher target return you're seeking will adequately compensate you for the added risk you're taking with these bizarre, untested investment vehicles. After all, Vanguard will sell you a low-cost mutual fund invested in corporate junk bonds any day of the week. Why buy untradable junk from strangers when Jack Bogle will sell you relatively liquid junk?

The second question is whether you'll be compensated at all, or whether an economic downturn, poor management, and/or fraud will wipe out your investment completely with little or no warning.

But, gambling is fun

There's a painful irony to the fact that these alternative investment vehicles have been legalized and are being aggressively promoted at a time of low interest rates and pessimism about future returns in the stock market, because those conditions have retail investors desperately fishing around for investment opportunities with a higher return than their passively managed index funds. Frantically taking bigger and bigger risks makes the problem of low returns worse for all the investors who pick the wrong alternatives to invest in (and there are a lot of wrong alternatives).

On the other hand, for the dwindling number of investors with a secure path to retirement and enough money left over to gamble with, these alternatives seem like they'd be fund to play with. And who knows? You might even make some money.

How to think about the "single best" rewards currency

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Last week I joined Joe Cheung for a recording of the Saverocity Observation Deck [edit: now available for listening!] and among the many subjects we touched on was the idea of the "most valuable" loyalty currency. I pointed out that affiliate bloggers are forced by their business model to argue that Starwood Preferred Guest Starpoints are worth at least 2 cents each because Starpoints can only be earned in any volume through the Starwood Preferred Guest American Express cards, which earn 1 Starpoint per dollar spent.

If Starpoints were worth any less than 2 cents each, it would be impossible to promote the card to unsuspecting customers, since there are no-annual-fee cards that offer 2% cash back on all purchases.

A few illustrative examples of this Starpoint value game:

If you're curious, Hotel Hustle pegs the median value of Starpoints redeemed for hotel stays at 1.849 cents each.

The fact is, the impulse to identify a "single best" or "most valuable" rewards currency is fundamentally misguided: the most valuable rewards currency may not be the single best rewards currency — and vice versa!

Three "single best" rewards currencies

Knowing everything you know about loyalty programs and travel hacking, what credit card would you sign up for if it you had to pick just one? I think these are three reasonable choices (feel free to suggest others in the comments):

  • If you have access to unlimited grocery store or gas station manufactured spend, the US Bank Flexperks Travel Rewards Visa earns "up to" 4% on airfare and up to 3% on hotel stays, and charitable spend earns "up to" 6% and 4.5%.
  • If you have access to unlimited unbonused manufactured spend, the Amex EveryDay Preferred offers 1.5 flexible Membership Rewards points per dollar spent everywhere.
  • And if you have access to unlimited unbonused manufactured spend, the Starwood Preferred Guest American Express cards earn 1 Starpoint per dollar spent everywhere.

The Flexperks Travel Rewards card has obvious advantages: a high earning rate and the ability to redeem your points on any flight and at any hotel means you're unlikely to experience orphaned points or be unexpectedly forced to pay cash for travel.

The Amex EveryDay Preferred isn't of much use when redeeming for paid flights or hotels, since Membership Rewards points can be redeemed for just one cent each towards those reservations. On the other hand, British Airways Avios transfers (1000 Membership Rewards point for 800 Avios, for an earning rate of 1.2 Avios per dollar spend everywhere) give access to high-value American Airlines and oneworld reservations, and both Delta SkyMiles (Skyteam) and Air Canada Aeroplan (Star Alliance) are Membership Rewards transfer partners at a 1000:1000 transfer ratio. Even transfers to Hilton HHonors would be worthwhile at redemption values above 0.44 cents, after taxes, thanks to the 1000:1500 transfer ratio, since at that rate you'll be better off booking with transferred Hilton points than directly with Membership Rewards points.

The Starwood Preferred Guest American Express cards allow you to earn Starpoints, which can be valuable for hotel stays if you frequently stay in cities with Starwood Preferred Guest properties. They also give you access to American Airlines AAdvantage miles, Air Canada Aeroplan miles, and Delta SkyMiles at a 1:1.25 transfer ratio when you transfer Starpoints in multiples of 20,000. Finally, the SPG Flights award allows you to book paid flights at valuations of between 1 and 1.4 cents per Starpoint.

"Single" is doing all the work in this analysis

At this point the game I'm playing should be clear: no travel hacker should have just one of the three cards described above, because having just one credit card makes travel hacking nearly impossible!

  • A Starwood Preferred Guest credit card is great for Starwood stays, but it's a lousy way to pay for flights, leaving you to pay cash for all of your non-award flights and all of your non-Starwood hotel stays.
  • An Amex EveryDay Preferred card is great for earning 27,000 Membership Rewards points per calendar year at grocery stores, but it's a lousy way to build up the balances you need to book a whole year's worth of travel with unbonused spend.
  • A Flexperks Travel Rewards card is great for booking paid domestic flights, but lousy for booking premium-cabin international flights or expensive hotel stays.

Earn the "best" currency for the job

In the above analysis I completely excluded my favorite travel hacking tool, the Chase Ink Plus. Why? Because it's almost useless without access to other, complementary tools. It's true that it helps you purchase Ultimate Rewards points at 0.59 cents each, and allows you to redeem them for 1.25 cents each, or a 52.4% discount off retail.

But a 2% cash back card, used to manufacture unbonused spend, generates virtually the same discount off retail, and gives you the flexibility to spend your rebate on things besides travel, as well.

Meanwhile, the vaunted transferability of Ultimate Rewards points means you can book Hyatt stays with ease, but under virtually no circumstances are Marriott Rewards or IHG Rewards points worth 1.25 cents each, leaving you to book full-price stays without even earning rewards or triggering hotel promotions. Long-haul premium-cabin United awards may cost less with Ultimate Rewards transfers, but you'll give it all back booking full-price domestic economy awards.

Putting together a travel hacking strategy should be as holistic a process as possible, and trying to decide in advance which rewards currencies is "most valuable" is likely to sabotage that process. Over the course of a year you may need to take into account all sorts of conditions:

  • if you're trying to qualify or requalify for Hyatt Diamond status, you might want to book Points + Cash awards, which may require a flexible Ultimate Rewards-earning credit card for the points portion, plus a co-payment with cash or a Hyatt gift card;
  • if you have access to grocery store manufactured spend, you may be able to pay for your hotel stays more cheaply with a Hilton HHonors Surpass American Express card than with a Flexperks Travel Rewards card (the Hotel Hustle median value of HHonors points is 0.448 cents each);
  • if you book deeply-discounted or weekend leisure travel, you may not be able to qualify for airline elite status without triggering an elite-qualifying dollar waiver using a co-branded credit card.

Conclusion

Never lose sight of the ultimate purpose of travel hacking: to pay as little as possible for the trips you want to take. The "most valuable" currency you earn isn't the "best" currency unless it helps you pay for those trips more cheaply than you could otherwise.

A real travel hacking strategy can be mostly indifferent to the supposedly objective "value" of any given currency. Ultimate Rewards points are "worth" 1.25 cents each when redeemed for paid flights with an Ink Plus or Sapphire Preferred, and 1.5 cents each with a Sapphire Reserve, but can be worth two or three times that when redeemed for Hyatt stays, Southwest flights with a companion pass, or United or Flying Blue award tickets. Delta SkyMiles are "worth" 1 cent each when redeemed for "Pay with Miles" tickets, but far more when deployed strategically for high-value redemptions.

When you are just getting started in the game, it really does make sense to pick one card to focus on — a 2% cash back card! That's not because 2% cash back is the most you can hope to earn in this game, but because until you thoroughly understand the parameters of the game, any "single best" credit card is virtually guaranteed to leave you worse off than that 2% cash back card will.

Pro tip: booking premium cabins with US Bank Flexpoints

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As fans of US Bank Flexperks Travel Rewards know, and people who recently applied for a personal or business card during the recent Summer Olympics promotion will soon find out, the third-party travel provider US Bank uses no longer allows multi-city itineraries to be booked online through their travel portal, although such tickets can still be booked over the phone at no additional charge.

Booking premium-cabin tickets is possible to do online, although you need to be extremely careful while doing so, and under most circumstances I think you'll be better off booking such tickets over the phone as well.

Here's how I found that out while making a first class reservation over the weekend.

US Bank allows you to search for "business class" flights

When conducting a search for flights through US Bank's travel provider, you can no longer search for multi-city itineraries, but if you select "Advanced Search" you can search for "Business Class:"

Check your search results carefully for class of service

Here's the first search result for a "Business Class" flight between Washington and Lexington, KY:

There's something that should be immediately suspicious about this search result, but which I missed the first time: there are 9 seats available. What Delta Connection flight has a First Class cabin with 9 or more seats?

The answer is revealed when you expand the flight details:

This flight books into the "W" Comfort+ fare class, not into the correct "P" First Class fare bucket.

The key takeaway here is that this is your one and only chance to see what cabin you're booking into: on none of the subsequent checkout screens is the class of service listed.

"Business Class" search results are all over the place

At first I thought this was a Delta-specific situation, in which you can book Comfort+ but not First Class seats online.

But no! Here's a flight correctly pricing out in Business class between JFK and LAX:

Basically it seems like a combination of sloppy programming on the part of the travel agency and the exploding number of fare classes and cabin configurations by the airlines. On 3-cabin aircraft you can book into the Business cabin, and on 2-cabin aircraft you might be booked into First class or Comfort+ depending on what fare classes are available and on how the online search engine is feeling that day.

You can change flights within 24 hours for $30 (or free)

After realizing I had mistakenly booked a flight in Comfort+, instead of First Class, I called US Bank's travel agency, QualityRewardTravel, at 1-866-814-1293. After waiting on hold for 5 or 10 minutes, I explained the situation and gave my Agency Record Locator to the phone agent. She told me that within 24 hours of booking, flights could be changed or cancelled for a fee of $30.

I told her I was calling because their website had made a mistake, and that I wasn't going to pay to fix it.

After asking her supervisor, she made a "one-time" exception and changed the flight into First Class for free, noting that the flight cost the same number of points as my original reservation.

Make multi-city and premium-cabin reservations over the phone

Multi-city Flexperks reservations already have to be made over the phone, but I would suggest that any premium cabin flight involving a connection should also be booked over the phone, since the flight search results do not show the class of service available on each leg. It seems likely that they show itineraries where business or first class seats are available on only some of the flights. Alaska Airlines is notorious for doing this in their search results, although they at least alert you when you select a mixed-cabin itinerary.

Of course, when the cabin you want simply doesn't appear in the online search results, you'll also need to call to book.

Conclusion

One of the great things about US Bank Flexpoints is that they allow you to take advantage of price compression, when nonstop, more convenient, or premium cabin itineraries cost the same number of Flexpoints as inconvenient or economy class flights. However, US Bank's travel agency doesn't make it as easy as it should be to take advantage of that key feature of the program.

Trip delays and trip delay insurance

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If you follow me on Twitter you may have noticed that I had a bumpy couple days coming back from my family's camping trip back in my ancestral homeland. As always, a disastrous itinerary for me means a blog post for you!

What is a trip delay?

When you buy an airline ticket, you receive a promise that you'll be delivered from your origin to your final destination — and not much more. If you're involuntarily denied boarding or you're delayed on the tarmac for over 3 or 4 hours you may be entitled to some cash compensation (depending on the size of the aircraft and other factors).

Of course airlines do, under some circumstances, some of the time, do more to accommodate passengers: if a flight is delayed or cancelled, they may be willing to reroute passengers on other airlines or to different airports. If a delay or cancellation requires an overnight stay, they may be willing to pay for overnight hotel accommodations and meals.

Note that "may" is the operative word here.

What does a trip delay cost?

Before I get to trip delay insurance, I want to be clear about our terms. A trip delay has a lot of costs, only some of which can or should be formalized into dollar terms.

During a long delay, you may have to pay for:

  • meals;
  • hotel stays;
  • clothes;
  • toiletries;
  • transportation.

These are your "out-of-pocket" costs during a trip delay.

But it's essential to understand that those costs do not come close to encompassing the costs of a trip delay.

If you miss a job interview because of a trip delay, you're out of a job. If you don't make it to Thanksgiving, Christmas, Pesach, or Eid-al-Fitr because of a trip delay, you lose out on precious time with your family (not to mention the food). If you arrive late to a deathbed because of a trip delay, you may not make it there at all.

These are the real costs of a trip delay, even they don't cost you a penny out of pocket.

Trip delay insurance doesn't promise to make it right

It's possible to imagine a product that immediately goes to work for you in case of a trip delay to ensure that your trip is minimally impacted. As soon as a delay is announced, such a trip insurer (or ensurer) would swing into action, proactively booking you tickets on substitute flights — no matter the cost — that get you to your destination as close as possible to your original arrival time.

That product doesn't exist. You can't buy it alongside your airline ticket when making a reservation, you can't buy it from Berkshire Hathaway Trip Protection, and you don't get it when booking a reservation with your Chase Sapphire Preferred card.

Trip delay insurance just promises to pay for your out-of-pocket expenses

That doesn't make trip delay insurance worthless. Since there are out-of-pocket expenses incurred when a trip is unexpectedly delayed, trip delay insurance is a way to recover those costs so that trip delays don't add expensive insult to inconvenient injury.

Being able to pick your hotel of choice during an overnight delay, and be reimbursed later, has real value (especially to a travel hacker). Being able to eat at your restaurant of choice, rather than wherever agrees to take your airline's funny money, has real value. Being able to buy a real toothbrush and your preferred toothpaste instead of the garbage airlines hand out to delayed passengers has real value. Hell, you can even get a couple free pairs of socks out of it if you play your cards right.

But trip delay insurance won't get you to your job interview on time and it won't get you any more time with your family. It covers your out-of-pocket expenses, but there's no trip delay insurance product out there that even tries to make you whole.

Conclusion

As I mentioned on Twitter, my delayed trip was paid for with a Chase Sapphire Preferred card, and I've already submitted my trip delay insurance claim.

In 5-60 days (it's insurance, after all), I'll have a post dedicated to that process.

In the meantime, just remember: your trip delay insurance covers the costs, not the consequences, of your delayed flights.

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This weekend I’m off to my ancestral homeland for a family reunion up in the Rocky Mountains, and I assume I’ll be mostly out of communication until Monday night.

While I’m gone, you have the chance to reflect on the gaping hole left in your blog reading routine by my absence! You see, this site only exists because of the support of readers, just like you, who sign up for a monthly blog subscription.

There are lots of revenue models used by different kinds of websites. Some travel hacking websites are ad-supported, and require a huge number of page views in order to make money. Unfortunately, my peculiar brand of no-nonsense, hard-headed analysis and advice doesn’t attract that number of visitors, so my monthly ad revenue remains humbly in the 2 digits. By the way, thanks to all my readers who whitelist my site in their adblocker, and to those who don’t know that adblockers exist.

Other websites accept money from banks and credit card affiliate networks to promote their products. Long-time readers may remember that I actually briefly tried that model, but when you enter into those kinds of relationships, you turn over editorial control of your content to the people cutting the checks. For obvious reasons, that wasn’t going to work for me, and I was soon cut loose. I never even got paid, not that I’m sore about it.

Because I know I have a core group of dedicated and loyal readers, I finally decided to go a different direction, and allow readers to support the site directly by signing up for a blog subscription. This way, my readers always know exactly who I’m working for (hint: it’s you).

Today, I’m lucky enough to have over 100 monthly subscribers, some of whom have been supporters for over 2 years. I’m incredibly honored to have the lasting support of so many travel hackers for what started as a side project to promote an ebook. The ebook never took off, while the website and blog have become my full-time gig.

Unfortunately, the model is starting to show signs of strain. Earlier this month I moved from an affordable Midwestern city to a gentrifying East Coast metropolis, and my rent went up correspondingly. While the plan was never for this site to make me rich, grinding poverty doesn’t have much appeal to me either.

Fortunately, there’s an easy solution: readers just like you can sign up for a monthly blog subscription. You see, if everybody who appreciates this site thinks somebody else is going to pay for it, then the site won't get paid for at all. If that happens, it means I'll go get a job doing something else: a classic lose-lose situation. On the other hand, if readers just like you individually decide that this site is worth keeping around, together your blog subscriptions will make sure the lights stay on around here.

Additionally, it’s always a good time to sign up for a monthly blog subscription, because the sooner you sign up, the sooner you lock in your price. Since the price of a monthly blog subscription goes up every 6 months (the next increase will be November 1), the longer you wait to subscribe, the more you’ll pay in the long run, or even in the not-so-long run.

Besides the fresh, honest takes on the world of travel hacking that you already enjoy here on the blog, as my small way of expressing thanks for the support of my beloved readers, subscribers also receive my occasional subscribers-only newsletters, access to the entire archive of past newsletters, and invitations to subscribers-only meetups around the country. So far I’ve met up with readers in Chicago and New York City, and additional meetups are always in the works — hopefully coming soon to a city near you!

As always, thanks for reading, and for your support.

—The Free-quent Flyer

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Hacking business travel: the good, the bad, the ugly

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Last night I was chatting with a friend who's going to be in town next month for a work conference. Even in my spare time I'm always trying to help people save money, so I quickly checked whether I could offer him a better rate than what he'd paid for the conference hotel. I offered to book the stay for about half of what he had reserved the same room for, and then he asked the fateful question: "will the hotel still give me a receipt?"

Most people travel mostly for business, and business travel is expensive

Loyalty programs have a fundamental genius in their core value proposition: direct your company's travel business to us during the week, when hotels and airlines are engaged in a cutthroat competition, and we'll give you free flights and rooms on the weekends, when we're empty.

Credit cards directed at business travelers have a similar premise: use our product, instead of our competitor's, for your reimbursed business expenses and we'll share our cut of the transaction fees with you.

The travel hacker would ideally like to complete this circle by redeeming loyalty currencies for his reimbursed business expenses, thereby monetizing his points balances precisely when those points are most valuable.

Taxes make hacking business travel difficult

The core problem with hacking business travel is taxes: taxes make business travel cheap.

The marginal federal tax rate on a self-employed person is between 14.13% and 50.93%. That means a self-employed person who pays for travel in cash already gets a huge discount off retail simply by excluding the cost from her self-employment income. A nominal 3 cent-per-point redemption therefore becomes a 2.58 cent-per-point redemption for someone in the lowest tax bracket, and a mere 1.47 cent-per-point redemption for a self-employed person in the highest federal income tax bracket. Accounting for state income taxes would make the situation correspondingly worse.

For employees, the situation is similar. Even if you were able to negotiate with your employer for higher pay in exchange for making your own travel reservations (I'm not even sure this arrangement would be legal), the increase would have to be higher than the retail value of your travel expenses to account for federal and state income taxes.

But we think outside the box around here, so here are three approaches to hacking your business travel: the right way, the wrong way, and the illegal way.

The right way: just ask

If you work at a company where travelers book their own travel and are later reimbursed, then you could simply ask your supervisor or boss whether you could redeem miles and points for your travel and be reimbursed with cash. The human resources and accounting departments would probably have to sign off on the idea, but at a small company those might be the same person, and they might agree.

They also might not, so you have to be willing to risk flat-out rejection (and potential followup questions about your sanity) to go this route.

The wrong way: spoof reservations

Another option I consider moderately unethical would be to in fact book paid reservations, print off your receipts and, if necessary, your credit card statements, then cancel the reservations and rebook the same reservations with points.

Naturally, this would only work if the travel department doesn't require, or doesn't check, that hotel folios and boarding pass ticket numbers match the supporting documentation.

There are two reasons I believe this approach to be at least moderately unethical, even though at face value the outcome is identical to the "proper" method of paying cash and being reimbursed for travel expenses. The first is that I regard any technique that requires you to obscure your activity is inherently suspect. Now, we all may hem and haw and come up with circular explanations for carrying around thousands of dollars in gift cards, but the fact is that money orders are, in fact, perfectly legal to buy and use in the United States — if pressed, no one would feel the need to deliberately conceal their use of gift cards to manufacture spend.

The second reason I'm wary of this technique is the potential consequences for the travel hacker's employer in case of audit. While the travel or bookkeeping department might not bother to compare PNR's, ticket, or reservation numbers, that's precisely the kind of information an audit team might notice, or even look for. If your behavior puts your employer in legal or business jeopardy, I regard that behavior as ethically suspect.

The (il)legal way

While misleading your employer about your travel reservations may be unethical, trying to do the same thing with the IRS is an excruciatingly bad idea. If you're deducting business travel from your Schedule C or other business tax form, you'd better have supporting receipts showing what you actually paid for your travel. Redeeming miles and points, then claiming the cash value of your trips as a deduction, is a recipe for disaster.

On the other hand, it's also true that miles and points are treated as having a cash value in other situations. For example, when you win a stash of miles and points in a sweepstakes, or when they're awarded as a bonus for signing up for a checking account, you're issued a 1099-INT or 1099-MISC for the value of the points.

If you have a large enough business, and travel enough, it may be worth consulting with a tax attorney and getting some formal advice about what values you might assign to the miles and points you redeem for your business travel.

For example, if you could convince a tax attorney to advise you that Hyatt Gold Passport points are worth 1 cent each, then a 15,000-point redemption for a $400 hotel night would yield a $150 deduction, compared to a $400 deduction. Applying the same 14.13% tax rate to both deductions yields $21.20 in tax savings for the point redemption and $56.52 for the cash rate, for a total redemption value of 2.43 cents per Hyatt Gold Passport point (an out of pocket cost of $400 minus $56.52, compared to 15,000 points minus $21.20).

Again, that's an avenue that's only worth pursuing if you have a large enough business that the savings involved comfortably cover any fees you pay to your tax attorneys.

Why I manufacture cash

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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.

Finding the value in the Chase Sapphire Reserve

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Now that everyone's had a chance to calm down about the Chase Sapphire Reserve card, let's take a look at the card's features and see what, if any, value it might have to a travel hacker.

Keep in mind that since the Sapphire Reserve has a $450 annual fee, you don't need to get $450 in value to make the card worth getting. You need to get $450 in value to break even.

Ultimate Rewards flexibility

When you have a Chase Sapphire Preferred, Ink Plus, or Sapphire Reserve, you can transfer your Ultimate Rewards points to Chase's travel partners.

I won't relitigate the question of who qualifies for a Chase Ink Plus credit card. But suffice it to say, some readers cannot or feel they cannot be approved for Chase Ink Plus cards, in which case their only option if they want to make their Ultimate Rewards points flexible has been to carry a Sapphire Preferred, with its $95 annual fee.

If carrying a Sapphire Reserve allows you to downgrade your Sapphire Preferred to a Freedom or Freedom Unlimited, that brings your Sapphire Reserve's annual fee down by $95, plus the value of any additional points you earn with whichever of the the two, far superior, credit cards you change your Sapphire Preferred to.

Note that this is not true if you have access to an Ink Plus, since its accelerated earning rates at gas stations and office supply stores makes it worth carrying whether or not you have a Sapphire Reserve.

100,000 Ultimate Rewards-point signup bonus

After spending $4,000 on purchases within 3 months, you'll earn 100,000 Ultimate Rewards points, worth $1,000 in cash. Since the annual fee of $450 isn't waived the first year, this is the equivalent of a $550 signup bonus, less the difference in value between the cashback you'd otherwise earn on the same $4,000 in spend. Assuming you have a 2% cashback card you'd otherwise manufacture spend on, the total value of the signup bonus drops to $510 in cash.

Is a $510 signup bonus worth pursuing? Maybe! But I walked into a Citi bank branch today and picked up a brochure for a $400 cash bonus for opening a new Citibank Checking account. Doctor of Credit has a list of a few thousand dollars in bank account signup bonuses. The Chase Sapphire Reserve signup bonus is a bit higher than those signup bonuses, but a bit harder to get — you have to be approved, after all!

In short, if you chase signup bonuses, the 100,000 Ultimate Rewards-point signup bonus is probably all you need to know about this credit card. If you don't, you'll need to find the card's value elsewhere.

Increased value of Ultimate Rewards travel reservations

With a Sapphire Preferred or Ink Plus credit card, there are exactly two reasons you would redeem Ultimate Rewards points to book travel through the Ultimate Rewards booking engine:

  • you are booking paid air travel on an airline or a stay at a hotel without award availability;
  • or, although there is award availability, transferring Ultimate Rewards points to one of Chase's transfer partners would yield less than 1.25 cents per point in value.

The two situations have different implications, and need to be treated differently.

If you regularly use Ultimate Rewards points to book travel when there is no award availability with Chase's travel partners, then the move from a 1.25 to 1.5 cent-per-point redemption means saving Ultimate Rewards points: every $1,000 in paid reservations you make costs 13,333 fewer Ultimate Rewards points (66,667 instead of 80,000). If you currently book $3,375 in paid Ultimate Rewards reservations per year, the Sapphire Reserve will pay for its annual fee in the cash value of those savings.

In the second case, you are moving the threshold for points transfers compared to paid bookings. With a Sapphire Preferred or Ink Plus card, at all redemption values above 1.25 cents per point, accounting for taxes and fees, you'll get more value transferring Ultimate Rewards points to a travel partner than booking through the Ultimate Rewards portal. For example, a simple domestic United one-way costing 12,500 Mileage Plus miles and $5.60 in fees is a better value than redeeming Ultimate Rewards points for the same flight at any price higher than $161.85. At 1.5 cents per point, that breakeven point moves to $193.10. This is a very small change in the breakeven point!

The fact that taxes and fees are levied on both paid airline reservations and award flights means that the breakeven point increases by less than the 20% increase in the value of Ultimate Rewards points redeemed for paid travel.

Thus the difference between the first and second situations becomes clear: if you already find value redeeming your Ultimate Rewards points for paid travel, the Sapphire Reserve generates genuine savings compared to what you're currently paying. However, the increase in breakeven point is not significant enough to change the value calculation for Ink Plus and Sapphire Preferred cardholders who already get more than 1.5 cents per point in value from their United Mileage Plus and Hyatt Gold Passport points transfers.

Southwest Airlines presents a slightly different case, recently discussed by Trevor at Tagging Miles.

$300 annual travel credit

I'm the only blogger who says this, which either means I'm wrong or that I need to keep saying it more loudly and convincingly: statement credits are worth much less than cash.

How much less? Well, we've already established that with the Sapphire Reserve, $300 in travel booked through the Ultimate Rewards booking engine costs just $200 in Ultimate Rewards points.

If that is true, then how can it be the case that a $300 annual travel credit is worth $300, rather than $200?

There are lots of ways to get $300 in travel out of the $300 annual travel credit:

  • Buy $300 Alaska Airlines tickets and refund them to your travel bank.
  • Buy $300 in Southwest Airlines tickets and redeposit their value to your account.
  • Buy $300 in gift cards from a travel provider that sells its own gift cards (Marriott properties all sell Marriott gift cards, for example).
  • Pay $300 for travel.

The card is too new to know whether this would work, but you could theoretically even book an Alaska Airlines ticket more than 61 days out, or a fully refundable airline ticket, or a refundable, prepaid hotel reservation, wait for the credit to hit your account, then refund the reservation. I consider that an excruciatingly bad idea, but that's up to you.

The point is, $300 in travel is not worth $300 in cash to a travel hacker, but credit card annual fees have to be paid for in cash!

Conclusion

There are a lot of places a travel hacker can look for value with the Sapphire Reserve, but the card's benefits are not additive in the way affiliate bloggers suggest: 100,000 Ultimate Rewards points are not worth $1,500, a $300 travel credit is not worth $300, and the increased value of Ultimate Rewards points through the Chase booking portal is only valuable to the exact extent you redeem Ultimate Rewards points through the Chase booking portal.

This doesn't mean the Sapphire Reserve is a bad card or that you shouldn't get it.

This does mean you should look at your own pattern of earning and redemption, then think for yourself before jumping on the latest credit card affiliate bandwagon.

3 ways I would use the Ritz-Carlton credit card

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There's a simple reason why I am so skeptical of signup bonuses and recurring annual benefits. I receive e-mails and comments every day from readers who say the same thing: "I signed up for this credit card before I found your site, and now I have no way to use these points/certificates/companion tickets." If you don't get those e-mails and comments, there's no reason for you to realize just how widespread the problem of orphaned and expiring loyalty benefits is. You may even think you're the only one who has trouble redeeming Membership Rewards points (you're not).

I don't have anything against signup bonuses. But if you chase signup bonuses, rather than focus on how to pay as little as possible for the trips you want to take, you're unlikely to get the most value from your travel hacking budget, whether that budget is in the form of time or money.

Last week I applied that skepticism to the new Chase Ritz-Carlton Rewards credit card. But just because I don't chase signup bonuses doesn't mean signup bonuses are worthless or bad! On the contrary, the right signup bonus at the right time can help you achieve your travel goals at the right price.

With that in mind, here are 3 ways I would use the new Ritz-Carlton credit card signup bonus of 3 free nights at a Tier 1-4 Ritz-Carlton property after spending $5,000 within 3 months.

A 3-night vacation

Sometimes you just want to go away for a long weekend. Nothing wrong with that! Without flying halfway around the world, you could spend 3 nights at Lake Tahoe, in downtown Boston (where hotels, even on points, are shockingly expensive), or in Puerto Rico. Slightly farther afield, there's a Tier 2 Ritz-Carlton in Santiago, Chile.

Those aren't all properties where you'll get outsize value from your redemption, simply because there are other, cheaper properties nearby. But you'll still save the money or points you'd otherwise pay, and you'll get to stay in a class of property you might not otherwise be able to afford.

A leg or side trip during a vacation

If you're planning on a multi-week trip like the one I took to Europe this summer, it would be easy to book one of your stops at a Ritz-Carlton property. The Ritz-Carltons in Budapest and Geneva both look lovely and are centrally located.

Likewise, if you are planning a long stay in a single location, you might want to make a side trip to see more of an area. While planning a trip to Kauai, you might decide to take a side trip to stay at the Ritz-Carlton in Kapalua, or while visiting Tokyo you might plan a few nights in Okinawa or Osaka as well.

Extending a stay

There are a few ways you could use the Ritz-Carlton signup bonus to extend a stay.

First, if you are relentlessly focused on maximizing the value of your points, there are certain inevitable obstacles to doing so. For example, Hilton HHonors points are most valuable when redeemed for 5-night stays, since the fifth night is free. If you want to stay more than 5 nights, but less than 10, that benefit is correspondingly less valuable.

But if you are staying in an area with both Hilton and Ritz-Carlton properties, you can use Ritz-Carlton free night certificates to extend your stay. For example, you might redeem 320,000 HHonors points for 5 nights at Hilton's Grand Wailea, then head around Maui for another 3 nights at the The Ritz-Carlton, Kapalua, maximizing the value of your HHonors points and enjoying an 8-night Hawaiian vacation.

Second, you could extend a stay at a Ritz-Carlton property. For example, for 350,000 Marriott Rewards points you could book 7 nights at the Tier 3 Ritz-Carlton Vienna (plus 55,000 United MileagePlus miles or 50,000 miles in other loyalty programs), then redeem your Ritz-Carlton free night certificates to extend your stay to 10 nights. Note that if you're transferring Ultimate Rewards points to Marriott Rewards, this is only a marginal play since the Park Hyatt Vienna costs just 25,000 Gold Passport points per night.

Third, you might try to achieve something similar to my experience with Hyatt Gold Passport suite upgrade awards. Since the Ritz-Carlton credit card comes with 3 "Club Level" upgrades annually on paid stays, you could book one paid night, apply a Club Level upgrade, and see if you're allowed to keep the same Club Level room on subsequent nights paid for with your free night certificates. There's no guarantee that would work every time, but it's virtually certain to work at some properties, some of the time.

Conclusion

The right time to sign up for a new credit card is when you already have a redemption in mind, and your research indicates that a new card's signup bonus or earning and redemption structure make it the cheapest, easiest, or fastest way to achieve that redemption.

The wrong time to sign up for a new credit card is when bloggers are salivating over temporarily raised payouts on their affiliate links.