Who can resist the allure of “free travel”? Just sign up for a credit card or two and you can set off across the world for pennies on the dollar! To someone who has never applied for a credit card with a big bonus before, that last line probably sounds exaggerated at best and outright fraud at worst. What some of you reading know is that it’s not only possible, but you might not even have to pay those pennies if you do it just right!
The problem is that so many people seem to take this wonderful opportunity and do it all wrong! It’s an extremely rare day that I can make it through all the blogs I follow on feedly or the comments in reddit’s churning community without an absurd value proposition being thrown around. For every one person that truly seems to be maximizing the utility of points and miles, there seem to be a dozen chasing the juicy carrot at the end of the stick. This isn’t some unique problem to travel hacking, but rather a reflection of “deals” that every other corporation with a product to sell has used for decades and a ton of people seem to be falling for it!
Let’s explore how most people are terrible at saving in general, how to avoid the same old corporate tricks that take your money, and find the light at the end of the tunnel where you might be able to actually use travel hacking to improve your financial standing.
What Doesn’t Count As Saving Money
Everyone probably has their own definition of “saving money”, but what most people end up doing in the name of “saving money” is either delaying or maximizing their spending. Neither of which I consider to be truly saving at all.
First, let’s look at delaying spending. This is when you’re “saving up” for a down payment, or a new car, or your next vacation. The money you put away each paycheck builds up in your checking or savings account, but eventually the thing you were saving for comes around and you’re right back to where you started. There’s no longer any “savings” to speak of.
Second, there is maximizing spending. This is when someone “saved $50” on a pair of jeans or “saved $500” on a flight by using miles instead of cash and everything in between. The problem with this mentality is that the amount you “saved” probably never existed in the first place. If you walked into the department store with $50 to buy a pair of jeans and found a $100 pair at 50% off, you didn’t actually save $50. If you believe the sticker price (ha!), then you managed to turn $50 into $100 worth of product and maximized your spending, but there isn’t another $50 that you can do anything with! It didn’t exist in the first place and you’re once again back to where you started.
To extend the last example, let’s say you actually did walk in the store with $100 to spend and managed to get what you wanted for $50. What did you do with the extra money in this hypothetical scenario? Be honest with yourself here because I think a lot of people might have taken the opportunity to buy a second pair of jeans, or a nice pair of shoes to go with it, or just blow it all on Auntie Anne’s pretzels on the way out. If this is what you do with your “savings”, then you’re really just maximizing spending again.
So What Do I Consider To Be Saving Money?
Saving money in it’s purest form is putting it away to not be touched for decades or even longer. We’re talking pure net worth here, money in the bank that you don’t pull out for emergencies (because that’s what your emergency fund is for), your next vacation, or all of the stuff you “deserve” because you work really hard. This is money that you just tuck away quietly and completely block out of your memory (if you must) to avoid the temptation to spend it. Retirement accounts are perfect for this because they penalize you for early withdraws (unless you’re a crafty early retiree of course) and they let you invest the money to grow.
Having your money turn itself into more money is the end-game here, we’re not just building a Scrooge McDuck pile of money to swim in later, we want these savings to eventually buy our freedom. We can’t reach this ideal state of financial independence that doesn’t require working a 9-5 if we continue to empty out our bank accounts (or the savings never existed to begin with!).
A simple example of actually saving money is walking into the store with $100 to buy jeans, finding a pair for $50, and then putting the extra $50 in a Roth IRA. Boom, that’s actually saving money!
Corporations Know Exactly What They Are Doing
Getting back to my original point though, I see numerous people every day talking about the “savings” on their latest travel hacking trip. Don’t get me wrong, I’m guilty of the same thing, but I try not to put too much emphasis on the face value, especially when it’s much larger than I can ever see myself paying cash for.
Whether it’s Kohl’s or American Airlines, all of the big companies that are selling a product have become extremely good at it over the years. Those who weren’t as good at it have died off and the companies remaining have nailed the perfect psychological feeling of excitement that comes with making the customer think they got a great deal. A big store once tried to give credit to the intelligence of it’s customers by getting rid of discounts and putting real prices on it’s products, but unfortunately it failed miserably. Nobody wants to pay $50 for a pair of jeans unless they’re told they are “actually worth” way more than that.
The same thing applies to all of the flights and hotels everyone is booking with miles and points. This becomes especially true when you consider whether or not it’s a good deal to buy miles and points. Nothing bugs me more in this hobby than the consistent posts about every airline’s latest “sale” on miles. Sure, there might be someone who frequently travels the world (and would continue to do so if miles and points ceased to exist) that can reduce their expenses by buying miles, but for every one of those people, there’s probably one hundred who fall into the spending trap.
There is a reason loyalty programs are such a big part of the travel industry and that reason is that they are crazy profitable. Everyone probably thinks they are pulling one over on the company by thinking outside the box to maximize their rewards, but at the end of the day, each company is probably getting more money out of you than they would have otherwise.
In a world without loyalty programs, if you would have stayed at the hotel next door, or flown the other airline, then you might be coming out ahead personally, but only if you would have taken the trip without points and miles in the first place.
Ideally, Start With Your Desires and Work Backwards
In a perfect world, everyone would first figure out what they needed or wanted and then seek out the best or cheapest way to make it happen. Unfortunately, this is damn near impossible in the world we live in today. Advertising is the main driver behind making it hard to avoid outside information influencing your day to day choices, but even friends and family will have a significant impact on where you end up spending your money.
Let’s go to an imaginary place where you know nothing about credit cards and frequent flyer programs (this might be hard for some of you). One day you decide that you want to travel to Paris because it looked pretty awesome in a movie you saw. After talking to some friends who traveled there last year, you discover it will probably cost ~$2,000 to get you and your significant other there and back plus a place to stay.
Being the responsible, financially minded individual that you are, you started saving money away and a little while later, you have $2,000 in the bank (plus some extra for food and fun) and are ready to book your trip. At this point, you stumble across the wide world of “travel hacking” and discover you can actually get flights via a couple new credit cards and $150! Not only that, but you can sign up for another couple credit cards and cover all of your hotel nights for a week! What!?!? Sounds crazy, but with a little time and organization it’s certainly possible.
You now have an important choice to make. What do you do with the extra $1,850 in the bank that is no longer absolutely necessary for your trip? Do you start planning additional stops on the trip or even additional trips? Do you increase the quality of restaurant you eat at while there because you can afford it now? Maybe you book an extra excursion or tour that didn’t seem vital when you were originally planning the trip?
All of those will certainly increase the kind of experience you have on the trip, but there’s another choice that your future self might thank you for. Just leave it in the bank or throw it into a retirement or investment account! Simply having money (unexpected or otherwise) is no reason to spend money, it’s important to take a step back and see if you’re actually getting long term value out of each dollar you spend.
Challenge: Actually “Save Money” On Your Next Trip
There is no shortage of people talking about how great their latest flight or hotel redemption was compared to the face value, so I’m putting out a challenge to anyone brave enough to give it a shot:
The next time you book an amazing trip with miles and points (that only cost you a fraction of the face value), save some money away in a retirement account or invest it for the long term.
The problem with a lot of the amazing redemptions is that the “money saved” on the trip never existed in the first place. Many of these trips never would have taken place without the existence of miles and points, so we’re once again back to maximizing the value of our limited spending, not actually saving money. Especially when we’re talking about first class redemptions that may retail for tens of thousands of dollars.
I’m not saying you have to take the actual face value of your redemption and save it away, but I think there is a significant amount of value in doing so. Maybe give yourself an honest assessment of what you might have spent on the trip if you had to pay cash. With cash, maybe you would have flown economy and stayed in the 3-star hotel. That’s fine! Just take that total minus the amount you actually spent redeeming the flights and save it away in an index fund that will grow over the next several decades.
If even that seems beyond your reach, just start small. Every time you book a flight for $11.20, round up to $50 and put the extra $38.80 in a savings account or investment that you won’t touch for a long time. How about for every hotel night you book with points, just save a consistent amount like $20?
Let’s try to turn this crazy hobby of trying to maximize cents per point into something that actually helps pad our net worth for the rest of our lives.
Don’t Worry, I’ll Go First
This entire post kind of spun off of me questioning whether or not our own miles and points obsession was actually benefiting us financially. Our overall travel spending from before we signed up for our first rewards credit card to now doesn’t seem to have changed much which is pretty eye-opening. Don’t get me wrong, the $1,000 we spent to get home a couple years ago can now get us to Europe in business class with hotels, but at the end of the day we’re still spending the full $1,000! Our savings, net worth, and retirement progress have remained relatively unchanged!
I think this is perfectly fine if we take a step back and decide spending this money on amazing travel experiences outweighs the benefit of saving it away for the future (the jury is still out), but it’s been extremely easy to inflate our travel lifestyle to match our newly found ability to travel for cheap.
Once you see the possibilities that miles and points can award you, it’s hard not to seek them all out and optimize everything in the name of travel hacking. I think the sweet spot for most people lies somewhere in between saving away every penny that “would have” gone towards travel and maximizing travel spend value by keeping your overall spending the same.
A happy medium would be if you previously spent $5,000 on one big trip a year, maybe spend $4,000 on 3 big trips thanks to travel hacking and put the extra $1,000 away for the future.
I try my best to stay conscious of all the money leaving my pocket in the name of “free travel” and I hope you do to. The next time (and maybe every time) I book a flight with miles, I plan on immediately taking the face value of the ticket and immediately moving it to my Vanguard account. We already save a high percentage of our income, but this will be a great incentive to save more while still satisfying our desire to travel.
Don’t forget, it’s possible to start moving your retirement date up just $100 at a time. If you do it just right, you can eventually become the “Man (or Woman) With Savings” that this 1969 newspaper ad describes: