Hoarding, rationing, and the next dollar problem

I have recently found myself in what should be an enviable position for any travel hacker: I’ve booked all my upcoming flights and stays, used up my quarterly and semi-annual credits, and am still sitting on all the miles and points I could conceivably use through the rest of the year.

Of course, instead of giving me a chance to relax and take a break, this objectively great situation has me thinking more about how to approach travel hacking, and everything-else hacking, on the scale of years instead of months.

Hoarding

I think of myself as the kind of person who tries to strictly manage their loyalty balances, not out of moral superiority, but for the simple reason that by definition I’m virtually always earning loyalty currencies based on their current value (with the interesting exception of anticipated mergers and transfer opportunities, like the Hawaiian-Alaska merger).

The longer I let balances sit, the less likely I am to redeem them at that current value. In other words, I know the value of my points at their current redemption values, and earn them on that basis, but the longer they sit in my accounts, the less likely their ultimate redemption value will be the same.

It’s vital to differentiate between two meanings of “devaluation,” since they’re often used interchangeably. The top Hyatt redemption tier, to give a simple example, used to be at 30,000 Hyatt Gold Passport points for the seven top-tier Park Hyatt properties in the system. I used to even be able to name them all off the top of my head, although I only ever stayed in Zurich and Vienna, where you get to swim in the old Bank of Austria’s vault and eat breakfast in the old cashier’s hall — a good time!

World of Hyatt’s Category 8 now goes up to 45,000 points, with the Park Hyatts (Parks Hyatt?) in Tokyo, Paris-Vendome, Zurich, and the Maldives Hadahaa joining that category, while the other formerly “top” properties (Vienna, Sydney, and Tokyo) are still in Category 7, which now costs up to 35,000 points thanks to the introduction of seasonal pricing.

These are devaluations, if you mean that holding everything else equal, the same hotel costs more points per night. But of course, all else isn’t equal.

At the level of an individual hotel, properties age and get worn out, and get renovated and refreshed. Where the property is in that cycle should matter when deciding whether points have “really” lost value: you may have fond memories of paying 3,500 points for the rundown Category 1 where you spent your honeymoon and be disappointed it’s now Category 4. But if it’s moved up in categories because they did a gut renovation, then you may find it’s an even more romantic getaway on your 10th anniversary.

At the global level, it doesn’t matter if individual properties move up or down in categories; it only matters how much of your home currency’s value you get across all the redemptions you actually make. In the golden age of blogs and forums people often argued that using cash prices gave inflated values because we would not be able to take the trips we do without travel hacking, so it’s unreasonable to claim points “saved” you the amount of money a trip would cost that you never would have taken.

This supposed problem is just a rhetorical trick though, since people who are not travel hackers, including former and future travel hackers, still take vacations. The correct value to use in calculating your savings is neither the cash price of the hotels you stay in or the flights you take, it’s the money you would otherwise spend on the vacations you would actually take.

Rationing

I call it “hoarding” points when people accumulate more than they can realistically anticipate using in the near-term, running the risk of devaluation. Rationing is the counterpart of hoarding on the redemption side: someone is unwilling to use points except above some minimum value, and for lower-value redemptions uses cash instead.

The problem with rationing is not that it’s bad to get as much value as possible from your loyalty currencies. The problem is that if you’re regularly spending cash instead of miles and points for your travel, you’re probably not earning enough cash, and the same time and money you spend earning loyalty currencies would be better spent on earning cash and cash equivalents.

For example, both the US Bank Flexperks Travel Rewards and American Express Hilton Surpass cards earn bonus points at grocery stores: Flexperks earns 2 Flexpoints per dollar and Surpass earns 6 Hilton Honors points per dollar.

Flexpoints are worth 1.5 cents each when redeemed through the US Bank travel portal, so the Flexperks card earns the equivalent of 3% in cash.

If you spent $10,000 on each card, you’d have $300 worth of travel value or 60,000 Hilton Honors points. There are many cases where 60,000 points can get you more than $300 worth in stay value, especially when using Hilton’s 5th night free benefit, so say you decide to use the Surpass for that spend.

On your next trip, you see a 60,000-point Hilton is available, but you find a cash rate for $250 after taxes and fees, or just 0.4 cents per Hilton point. Since you’re afraid of having “wasted” that $10,000 in spend, you ration your Hilton points and pay cash for the stay instead.

The problem in this case is obvious: you’ve now spent however much it cost to manufacture $10,000 in spend, and you’ve spend $250 on a hotel stay.

If this happens once, there’s no harm done: you can still use the Hilton points on a future stay. But if you find this happening over and over again, then you are probably valuing Hilton points too highly; they probably are not actually worth 0.5 cents to you, and you should be using a different, lower value for them when deciding whether to earn or redeem cash or a different currency instead.

The next dollar problem

On the redemption side this is a version of the “sunk cost” fallacy: it doesn’t matter what you paid for your points, the only thing that matters is whether you will save money by redeeming them now or holding on to them for later.

When it comes to personal finance, I call this the “next dollar” problem, which is closely related to my concept of compounding discipline: what do you do with the next dollar you earn?

Personal finance columns often set out to make these choices sound easy: should you use the next dollar you earn to pay off low-interest student loan debt or high-interest credit card debt? Should you invest in a taxable account before maxing out your retirement contributions?

Sometimes this is explicitly framed in terms of the next dollar, for example the advice to “save every raise” by increasing your 401(k) contribution rate each time your salary increases, so your take-home pay stays the same.

It’s not important to me in the slightest what you decide to do with your next dollar. The point of this exercise is to think about it in advance. For example, should you pay off credit card debt before you make IRA contributions? There are anti-debt and economic literalists who tell you the answer has to be yes: you should rank all your debt by interest rate, start and the top, and every dollar goes into paying off those balances one-by-one before you start saving money.

There are obviously people for whom and times when that’s the right decision, but it’s equally true to describe this as a decision between putting the next dollar into an account protected in bankruptcy or paying of a balance dischargeable in bankruptcy. The more likely you are to find yourself in bankruptcy court, the less inclined you should be to do your creditors any favors.

As for me, I’m currently putting my “next dollars” into Prosper peer-to-peer loans and towards filling up my fourth rewards checking account (if you’re wondering, I have two next dollars because investing with Prosper is an extremely slow process unless you’re willing to lower your risk threshold or increase your per-loan investment, neither of which I’m willing to do).

In a month or two I’ll have met my goals for both those accounts, but there will still be a next dollar. I still have a balance on my Small Business Administration loan from the pandemic with a 3.75% adminstered interest rate, which I could accelerate payments towards, although that’s a lower return than I’m used to getting from my next dollar; even cash in my brokerage accounts earns more. I’m far from the maximum annual contribution to my solo 401(k), so I could move my weekly contribution up, which has the advantage of providing automatic compounding discipline within the account itself.

Like I say, I’ve got a couple months to think about it, but thinking about it I will be.