You should never buy points for what they're worth

The frame of reference for my manufactured spend practice is not usually the cost I pay per point that I earn, although I naturally privilege cheaper techniques above more expensive techniques, and there are certain techniques that are too expensive to fit into my practice at all.

Rather, my analytical framework is based on opportunity costs: am I better off manufacturing a hotel or airline loyalty currency, or using the same technique to manufacture cash back instead?

In the hotel sphere, it's easy to calculate "breakeven" points, which I call a property's "imputed redemption value:" the amount of cash you have to save in order to justify earning sufficient points to make a redemption instead of simply paying for a stay with cash.

It's also possible to buy points

There is a clutch of high-profile bloggers who write exhaustively about the constant stream of airline offers to sell miles at a discount compared to their normal prices. For example, American AAdvantage normally sells miles for about 3.19 cents each, but during their current promotion you can buy them as "cheaply" as 1.81 cents each (because of the fixed $30 processing charge, the rate will always be lowest when you buy the maximum allowed number of miles).

So the question is, should you buy American Airlines miles for 1.81 cents each? There are two ways to look at that question.

How much are AAdvantage miles worth?

If you redeem your AAdvantage miles for expensive flights with low or no fuel surcharges, your answer to this question might be "far more than 1.81 cents each." After all, until March 22, 2016, 67,500 AAdvantage miles and some nominal fees will get you from San Francisco to Hong Kong in Cathay Pacific's first class cabin, a $9,367 value next fall — 13.9 cents per point!

If this is your view, then paying anything less than 13.9 cents per point is a straightforward win: you get a $9,367 flight, but pay only a small fraction of that amount. Alternatively, you could pick a "realistic" valuation for the flight and use that instead. For example, if you think Cathay first class is worth just twice the price of economy, you could use that value instead ($1,486 for the same dates), and get a valuation of 2.2 cents each — still more than the 1.81 cents American is selling them for.

How much do AAdvantage miles cost?

If you manufacture AAdvantage miles instead of using a 2% cash back card, your answer to this question should be "2 cents each." In this case you might consider buying AAdvantage miles in bulk for 1.81 cents each, and direct that manufactured spend back towards your 2% cash back cards, ending up with more value overall.

On the other hand, if you earn AAdvantage miles by signing up for their co-branded credit cards and spending $3,000 to earn 53,000 AAdvantage miles, your answer should be "0.11 cents each" — that's your $60 in foregone cash back spread over 53,000 AAdvantage miles. In this case, you'd be crazy to overpay by 15 times for miles you could earn so much more cheaply.

Of course, if you're a rich weirdo, you may be burning AAdvantage miles more quickly than you can earn them exclusively through signup bonuses. In that case, the important thing is your marginal cost: how much are you paying for each additional AAdvantage mile, and is it more or less than American is currently charging for the same mile?

Never buy points for what they're worth

Travel hacking is ultimately about the spread between the price you pay for your trips and the price travel providers would like to charge you. In other words, acquire travel cheaply but redeem it dearly.

That means a basic mistake to avoid is overpaying for your miles and points. If you're currently buying AAdvantage miles for 2 cents each and an opportunity comes along to buy them for less than 2 cents each, that's a no-brainer.

But another way you can overpay is by allowing a high theoretical valuation induce you to narrow the spread between your cost of acquisition and value of redemption. For example, one of my regular readers values Hilton HHonors points at 1 cent each, since that's they value he's able to get from them as a Diamond elite with the program. If you take that valuation seriously, you'd conclude that he would be better off earning 6 HHonors points per dollar at grocery stores than 5% cash back — buying HHonors points for just 0.83 cents each.

But a moment of reflection shows that's crazy: instead, he could earn 5% cash back at grocery stores and use his American Express Hilton HHonors Surpass credit card for non-bonused spend where he'd otherwise earn 2% cash back — buying his HHonors points for just 0.67 cents each instead!