On false economy

[editor's note: my worthless MacBook Pro has finally stopped working completely, so I'm using an aged clamshell laptop for my blogging this week. Grammar and punctuation will suffer, and pictures will be minimal/nonexistent.]

After dropping off my MacBook Pro at the Apple Store on Sunday, I started poking around the current batch of gadgets and saw the 2 terabyte Time Capsule, currently retailing for a mere $299 before taxes and portal cash back (if you signed up in time to double your Discover cash back, you can get 5% cash back now and another 5% cash back at the end of your doubled year).

My current backup solution is a $54.99, 500 gigabyte external USB hard drive, and it works fine, except for three problems:

  1. I have to remember to plug it in;
  2. I have to remember to plug it in;
  3. and I have to remember to plug it in.

As long as I remember to plug it in, it backs up my hard drive. The longer I forget to plug it in, the more out of date the backup becomes, and the more data I potentially lose.

This got me thinking about the question of false economy, which happens to be very relevant to travel hacking, in several ways.

Thinking critically about false economy

It's easy — and dangerous — to fall into sloppy thinking about false economy, and the best defense is to carefully define our terms. For me, false economy doesn't mean "paying less for an inferior product." That's just economy — we expect things that cost less to be of lesser quality! For me, false economy means specifically saving money upfront in a way that ultimately ends up costing more money, by some order of magnitude, than the amount saved. Further, it helps if the larger, future costs are somehow foreseeable, but irrationally ignored for the sake of saving money upfront.

The best illustrations of my vision of false economy are when amateurs try to make do without the help of professionals. Regular economy is using masking tape to fix a plumbing problem. False economy is leaving town, the masking tape bursting, short-circuiting your refrigerator and causing a devastating fire (it happened to Edward Norton).

It's simply impossible to imagine saving enough money on plumbers in the short term to rationalize losing your home to fire in the longer term.

Think holistically to avoid false economy

There are two popular options college students use to save money when flying from South Central Wisconsin:

  • a $46 roundtrip bus to General Mitchell International Airport in Milwaukee, which is served by Southwest Airlines.
  • a $60 roundtrip bus to Chicago's Midway (served by Southwest) and O'Hare airports (served by Alaska), which occasionally have lower fares.

You can see the appeal of both options (especially if you're the parents paying to bring your kid home or, worse yet, send them to Cancun for spring break): if a Southwest ticket saves you $47, why not put your munchkin on the bus for an hour and make them fly out of Milwaukee? It's not like you're the one sitting on the bus.

When the travel hacker is the one traveling, the calculus suddenly changes dramatically:

  • Flexpoint redemption bands means more expensive local flights may cost you the same number of Flexpoints as flights which require a bus ride;
  • Discounted point redemptions mean even more expensive flights don't cost as much as they would when paying cash. For example, to justify paying $60 for a bus trip you'd have to save $75 in airfare if redeeming Ultimate Rewards points out of a Sapphire Preferred or Ink Plus Ultimate Rewards account (1.25 cents each), $85.80 when using "pay with points" in an American Express Business Platinum Membership Rewards account (1.43 cents each), or $96 when redeeming Citi ThankYou points from a ThankYou Prestige card on American Airlines (1.6 cents each).

As a mid-career white collar professional you might find these examples ridiculous: why would anyone take a bus instead of flying out of their local airport? The reason I raise them is that I want to take the idea of economy seriously, because spending tens or hundreds of dollars for "convenience" is really out of the question for a lot of people in this country.

And let me tell you: the busses to Milwaukee and Chicago are full, all day every day, with people doing their best to save a few dollars on airfare.

Avoiding false economy isn't an excuse to splurge

I think it was Matt from Saverocity who quipped on Twitter after reading yet another first class trip report that he couldn't justify paying $1,000 for an $80 bottle of champagne (well, he said "champers").

And that's the way I feel about a lot of so-called "aspirational" travel. It's not that there's anything wrong with getting a good night's sleep on a plane, or flying across the world to spend a week at the beach, it's that the marginal benefit of doing so over a far cheaper vacation (or many, many far cheaper vacations) isn't worth it to me personally.

And I think that's a real risk: once you recognize that false economy is a problem, there's a temptation to err in the opposite direction. If a $299 2-terabyte Apple Time Capsule is a good deal, well it's just $100 more for a 3-terabyte Time Capsule. That's just 33% more money for 50% more storage space (whether you need it or not)!

Yesterday's post on chasing Delta elite status illustrates the point nicely: booking a $350 first class ticket instead of a $250 economy class ticket with Flexpoints is a no-brainer: both tickets cost 20,000 Flexpoints, but one includes free checked bags, making elite status worthless.

But booking a $550 first class ticket instead of a $350 economy class ticket isn't a no-brainer: you're paying $100 (the cash value of 10,000 more Flexpoints) and saving just $50 in roundtrip checked bag fees. $50 in cash isn't a lot of money to pay for a roundtrip first class upgrade, but it's also not free.

You don't have to make rational decisions all the time

One of the advantages of paying such a small fraction of retail for our travel is that mistakes don't have catastrophic consequences. If you forget to book through a cash back portal, you might lose a 4% cash back payout on paid Hilton stays, but your reservation won't be canceled, you won't be arrested, you'll just pay slightly more than you could have if you'd remembered to click through.

But thinking through these questions in advance will help you develop the analytical tools you need to make better decisions, more often, than you would if you approached each decision from scratch each time you have to make a reservation.

I haven't bought a 2-terabyte Apple Time Capsule yet. But I'm thinking about it, and the reason I'm thinking about it is that a 2-terabyte Time Capsule doesn't have to save me very much time, stress, and money to be worth $299.