Okay, so you took my advice and added all your rewards cards to your AwardWallet account to stay organized. You have accumulated points in your accounts and wish to cash them in on your next trip. After spending a few weeks planning you decide on your destination and make hotel accommodations. All that is left is purchasing your flight ticket.
New York, here I come!
You fire up AA.com as this is your carrier of choice and notice that coach tickets cost $408 roundtrip.
That voice in your head tells you.
As you are about to check out you read the fine print. $25 per checked bag….no priority boarding? You begin to wonder “What is this Coach Choice garbage?”
After a quick scramble you find the option to redeem miles.
"25,000 miles, thats nothing!"
Is your first thought. Right, voice?
Let me book this flig…
Before you jump to redeem miles for this ticket take into consideration for a second that Citibank carries the Citi Double Cash Card which offers you 2% cash back. To put this into terms we can understand, for every $1 spent using the card you will receive $.02 back. This is our Purchasing Peg.
When considering redeeming miles vs. purchasing a ticket always remember the Purchasing Peg. Anything less than a $.02 value per mile and you are leaving money on the table. Above the Purchasing Peg and you are in the clear. Cash your miles in fool, you earned it!
Looking at the math above we can conclude that by redeeming 25,000 AA Miles on a $408 roundtrip ticket will result in a $.016/mile. If we factor in a checked bag that still puts us at $.017/mile. Below the Purchasing Peg.
"Well, I wanted to have Group 1 boarding anyhow which will save me for checking in one bag.."
Okay fine. I’ll give you the bag.
You go back, spot the next tier up: Choice Essential. You notice the tickets are a little more expensive but you get 1 free checked bag and Group 1 boarding; $466 roundtrip. More math… $.18/mile. Crap. Still below the peg. Next tier up…
Let’s take a look..
Tickets start at $549. Wait a minute…At $549, you are now getting $.022/mile.
"That’s above the Purchasing Peg!"
Yes it is, voice. Throw those 25,000 miles down on that ticket and grab yourself a cocktail. Time to celebrate vacation!
Why is it important to remember the Purchasing Peg?
Chances are you accumulated your miles by making purchases with a credit card. When you applied for the credit card your research led you to believe that earning miles on a credit card purchase was greater than the option of a cash back card. Of course there are ways to earn miles quicker with cards that carry an annual fee, thus enabling free travel quicker. But for every dollar spent you are choosing to bypass a 2% return on each purchase. By saying “Hey, I will just use miles to purchase my next flight” you are devaluing the potential of your miles.
Say you had a no annual fee, zero sign up bonus credit card that pays out 1 mile for every dollar spent. You would have to spend $25,000 in order to earn enough miles to redeem for your flight to JFK. Thats one expensive ticket! “Well, I was going to spend the $25,000 anyway, the miles were just an added bonus.” I agree, and I would never fight you on how you choose to use your miles. But if you had originally decided on the cash back route you would have $500 in your pocket instead.
What is more to you, $500 cash back, or the ~$466 ticket you were about to purchase?
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