How Do You Calculate The Value Of Cash Back Rewards?

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I know that seems like a pretty straightforward question. For example, the Barclaycard Arrival® Plus World Elite Mastercard® is arguably the best cash back travel rewards card, as it accrues two miles per dollar spent, plus a 5% refund when you redeem miles. Each mile is worth a cent. So you’re getting a return of ~2.1% on spend… or are you?

This is a discussion I started having with reader Mike by email last week, after American Express announced that as of July 1, 2015, they’re adding a 30% rebate to their “Pay With Points” option on The Business Platinum Card® from American Express. Each point ordinarily gets you 1.0 cent per point towards the cost of airfare, so with a 30% rebate that’s the equivalent of ~1.43 cents per point towards the cost of airfare.

That’s not a horrible value, though ultimately I’d still rather convert miles to one of American Express’ airline transfer partners than redeem them for ~1.43 cents each.


Which is where the conversation started. Mike’s argument was basically that you’re getting a lot more value per point than that, since you also earn miles on those tickets. Which is true, since American Express is basically “buying” that ticket for you in exchange for your points.

But oddly I don’t include the miles earned into the value of cash back rewards, and now I can’t decide if I’ve been doing it wrong all along.

In other words, remember that $450 American Beijing business class mistake fare? Say theoretically you booked that using American Express Membership Rewards points through the “Pay With Points” option.


On The Platinum Card® from American Express you can redeem each point for 1.25 cents towards the cost of a ticket. So a $450 ticket would have cost 36,000 Membership Rewards points. As an Executive Platinum member I earn about 50,000 American AAdvantage miles for the roundtrip.

So does that make this a great redemption, since I would actually profit a net of 14,000 miles without spending a dime? I’d argue no.

Why? Because the alternative was paying $450 and having both 36,000 Membership Rewards points and 50,000 American AAdvantage miles. And the way I see it, you still only got 1.25 cents of value per Membership Rewards point, since you could have replaced those 36,000 points with $450 and gotten the same results.

But I guess I figured out where Mike and I differ.

I place a value on points, and am not afraid to pay for travel in cash if it’s the better value. In other words, say there’s a hotel I really want to stay at and it’s $300 per night or 20,000 Starpoints. Do I like paying $300 for a one night hotel stay? Nope. But I hate redeeming Starpoints at a rate of 1.5 cents each even more.

Similarly, do I like paying for revenue airline tickets when I have millions of miles to redeem? No. But if my return is only 1.25 cents per Membership Rewards point and I can otherwise afford to pay for the ticket in cash, I’m not going to redeem sub-optimally just so I can say my trip was “free.”

Admittedly everyone will have a different opinion on this, and it probably depends on the relative size of your accounts (frequent flyer accounts and bank accounts).

So, where do you stand? Do you value cash back rewards like Mike does (by factoring in the rewards you’d get from paying for the ticket), or like I do (by deriving your valuation exclusively from the cash opportunity cost)?

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  1. I’d only take issue with how you value things like SPG points (any points, but for example). Does getting a $500 hotel for 20,000 points mean the points are worth $0.025 each? If you were willing to pay $500 to get those 20,000 points I’d say yes. The value of those points should not be determined by the cost of what SPG tells you the hotel room is worth but by what your next best alternative is (in my view). Suppose, had you not booked the $500 “value” room for 20,000 points, if that would have caused you to go to and book another room for $250, then that should be the cost of what you’re giving up for the points, and hence the “value” of the points.

    You can quibble about the quality of the different rooms, and that’s fine – if you would have been willing to pay $500 to book a room that same night and if that’s what you would have done had you not used the points, then by all means, you can rest assured that you got $0.025 per point value out of them.

    The value is how much you’d be willing to pay to get them, not by what the hotel, airline, etc. tells you the market values them at.

  2. @ Eric — Valid point, though for Starpoints my valuation is much simpler than that. I’m basing the value on the ability to convert them into airline miles at a 1:1 ratio, with a 5,000 point bonus for every 20,000 points transferred. In other words, the value of Starpoints is pegged on my valuation of their partner airlines’ miles being worth ~1.8 cents each (I value Alaska miles more than that, for example).

    I suppose the logical follow up question is how I value airline miles, though.

  3. Mike is not asking “as opposed to what”, which always must be weighed in the cash scenario, which *also includes those miles earned*. Imagine these two scenarios:

    Scenario 1: You spend $220 on a flight and earn 5,000 redeemable miles that you value at 1.5 cents each.
    Scenario 2: You spend $10,000 on your arrival card, using those points for the same flight that also earns the same miles.

    The net benefit of both scenarios is identical, regardless of how you even value those miles.

    For Mike to be including the benefit those miles as part of the original *valuation of the cash-back points* would imply that you should do the same thing with straight-cash (also earning the miles), which is reducto ad absurdum: $1 cash is worth more than $1 cash (clearly not). The value of those points in the above Scenario 2 is clearly 2.2 cents, compared to the alternative.

    Hence why when thinking about this, I think it’s always best to subtract out the value of the miles back on the front-end to always arrive at a “net cost”: If you are spending $220 on a flight earning 5k miles at 1.5 cents each, the *net cost* of that flight is $145. Hence when comparing an award ticket *using miles*, it should be done against $145, *not* $220, since that is the relevant alternative when discussing an award ticket that wouldn’t earn miles.

  4. Precisely. You would definitely convert it through, but it would depend on what the value is of those points when you use it on the airline. I think it has to fluctuate. There might be some minimum value depending on what other currencies you have with which to make an alternative payment (cash, points in lieu of cash, etc.), but that very much depends on what you have available.

    Suppose I want to take one really nice award flight using 100,000 points (name your airline) and I have four flights I need to take this year (also assume those are all the points I have to my name). If I could instead get the four trips paid for with points (25,000 each), then the cost of those trips need to be deducted from whatever value I place on the hypothetical 100,000 point trip (which, again, should be based on what I’d be willing to pay and not what AA/UA/DL etc. tell me it’s worth).

    I realize a lot of people want to go through a bunch of credit card apps to get a bunch of points and take a really fancy flight, but I think a proper valuation should include what they’re giving up (at a minimum on a cash back card). Given that, cash back cards are often a lot harder to beat (at least at 2-3%) in terms of spending than most people think. The one caveat is the sign-up bonuses – since you can’t (in most cases) get the cash equivalent, it often will make more sense to sign up for the airline/hotel card for the bonus.

    Anyway, I’ve done most of this off the cuff so I’ll just post it and wait for the objections (welcomed).

  5. It’s worth pointing out that if you *don’t* compare award tickets against a net cost, that is at least an internally consistent way to think about the problem if you’re talking about points. But it then becomes impossible to make meaningful comparisons with 1) an all-cash option (since again $1 can not be worth more than $1), or 2) across different point currencies, which have different valuations.

    Hence why I always maintain it is best to always consider net costs before making valuation comparisons. A flight that earns miles should be accounted for a less than the cash outlay you make.

  6. I lost you about halfway through this post, but in terms of the statement … “But oddly I don’t include the miles earned into the value of cash back rewards, and now I can’t decide if I’ve been doing it wrong all along.” … I think this really gets at the value of points, not cash back. If you start thinking of cash-back rewards as more valuable than their actual monetary value simply because you will earn points if you use that cash to purchase tickets, then you’d have to apply that reasoning to all cash because cash is fungible (even if it’s technically redeemable as a statement credit against travel purchases). So if you want to account for the fact that travel purchased with cash earns points and travel redeemed with points does not, you’d have to discount the value of points, not increase the value of cash.

  7. > So if you want to account for the fact that travel purchased with cash earns points and travel redeemed with points does not, you’d have to discount the value of points, not increase the value of cash.

    Exactly right, and well said (what I was clumsily trying to say above).

    Indeed most people probably over-value miles because they compare against the gross cash outlay, not net cost of revenue flights. But that doesn’t imply that you should try to flip the accounting around to increase the value of cash. Gets too messy and incomparable that way.

  8. I agree with much of what Ben Hughes and Eric stated. To summarize:

    1. Base point/mile values on what you would consistently pay in cash for the awards you are able to regularly use them for, with some expected devaluation built in. For me, those cash values at hotels are Airbnb prices for nice apts or villas or Name Your Own Price Priceline 4 star well located hotels, even if the award gets me a nicer room at a nicer hotel which I consider compensation for my time taken to learn and keep up with the programs. This usually works out to 25-50% of best available discount rates at large chains, roughly $50-$125 per night. For airlines, I base cash values at the typical economy sale fares for a route plus $50-$200 one way for business or first class comforts depending on the length of the flight, and accounting for the miles not earned on an award flight by adding them to the total miles used when comparing to paying with cash. I think these kinds of cash values are obviously subjective, but realistic for travel deal oriented readers who don’t have huge annual budgets for travel. This approach leads to values 50% or more below most bloggers’ valuations, such as SPG points worth 1.25c when transferred in 20k increments to airline miles, and AA miles currently at 0.75c not accounting for potential 2016 ‘enhancements’.

    2. Even at those realistic values, I would want a significant discount (50% for me) when acquiring miles/points through paying for travel, buying them directly, or directing spending to miles/points earning credit cards or portals instead of cash back options. That compensates again for the time spent learning and finding awards, and the likelihood that the travel deal oriented want a significant discount even on the best priced publicly available options of Airbnb/Priceline or sale fares in economy. As such, I would only acquire SPG points at 0.6c or less, or AA miles at 0.3c or less taking into account my sense of 2016 ‘enhancements’. This usually means signup bonuses or especially cheap fares that line up with my travel plans are the only efficient options.

    3. But what about Elite benefits, many ask? I think if you consistently acquire miles/points at these significant discounts to REALISTIC cash values, you can go ahead and travel in premium cabins and get almost all those benefits in airlines, and there are many credit card and status match daisy chains to get you status at hotels in addition to reasonable point premiums for suites.

    None of this applies to Ben given his huge amount of travel and well deserved financial success, but for even well off working stiffs looking for 2-3 vacations per year, I think it’s the best financial method to get high end travel.

  9. One question I have is about miles is accounting for the risk of sudden devaluation, which I suppose is similar to analyzing forex. It seems to me that if you’re sitting on a sizeable stash of points then it can be in your interest to redeem them suboptimally because their present value will always be greater than their future value. SPG are different because they’re transferable and can be a decent hedge, but the risk still remains.

  10. I think the first thing to do is have a proper way for valuing one’s miles. I manage over 5MM miles (outstanding) and 2.5 MM redeemed in the last two years. For each redemption, I calculate the value per mile as:

    (a – b) / (c + d)

    (Retail fare I’m willing to pay – Taxes) / (Miles redeemed + miles foresaken) = value per mile

    a = retail fare I’m willing to pay (not what the “retail price” is. If I can stay at a $500/night Starwood or $190/night 5* on Priceline, I’ll do the latter so “a” cannot be greater than $190). When I use miles to fly J or F, I calculate what is it that I would actually pay above the Y fare. A good comp for this is when I paid $xxx to upgrade a longhaul flight through one of the international airlines’ bid for upgrades tool. Overnight US – Europe may be $350, daytime Europe – US may be $200 (everyone can come up with their own value).

    b = usually 0 on hotels but obviously important on airline redemptions

    c = obvious (include any discounts like Chase IHG or Citi AA 10% back)

    d = what am I missing out on? Does not include EQM value since I only care about that for AA and nothing else.

    **Note that (a) and (d) are really the important ones to do right. Too many people overvalue (a) because they’d never actually pay $9,000 for a US – Japan J round-trip. Many people exclude (d) from the calculation. There’s a reason that BA Avios short-haul Y redemptions are amazing – not only is (c) really small, but so is (d). OTOH, when I redeem 20K AA miles to do US – South Am offpeak, (c) = 20,000 but (d) often = 5,000 or so.

    Because this model already takes into account the opportunity cost of redemptions, I don’t have to complicate my view of redeeming cash back points.

  11. I think Ben Hughes pretty much nails it except that he doesn’t say explicitly that when you pay for a ticket in cash, you have to account (i.e., subtract) both for the miles you earn through the flight AND the miles/cash-back you earn through paying for it with a miles/cash-back credit card.

    As for what miles are worth, for me that’s somewhat easy. Realistically, I’m going to redeem for a trip I’m already taking anyway on AA and, given transatlantic redemption difficulties, it’s going to be domestic. My domestic mid-con flights typically run me maybe $400-$450. At 25,000 miles, that means maybe $1.6 cents per mile, which is a bit under just about every other valuation I’ve seen.

    Jig is right, however, that you then need to reduce your valuation further by a discount both for the illiquidity of any non-cash currency and for (perhaps) any likely devaluation. Since, in my case, the 25,000 mile domestic redemption is here to stay, “devaluation” effectively means the de facto evaporation of “saver” availability.

    At this juncture, and given my high mileage balance, I intend to jump on any domestic “saver” award I can pin down if the cash price is $400 or more or perhaps even significantly less. So that’s my bottom line. Pretty fuzzy, really.

  12. No no no no.
    That no means YOU’RE not doing it wrong, BTW. This fella mike IS.

    You don’t add the value of points that you get on purchased tickets. What you do instead is SUBTRACT the value of miles forgone when you pay for a ticket using miles instead of dollars. So, if you redeem 25,000 miles for a $500 economy ticket, (which seems like a $.02/mile redemption,) you didn’t actually get $.02 per mile. You gave up some number of miles (let’s call it 6,250.)

    So redeeming miles actually cost you 31,250 miles and saved you $500. That’s 1.6 cents per mile. That’s how you do it.

    On this there can be no debate.

  13. the goal of The BA bloggers and other credit card salesmen is to inflate the value of everything so that the readers believe that they are getting awesome redemption for free => more credit card money coming in.

    Creating these fake debates is a good way to showcase all the credit cards in their affiliate portfolio

  14. > I think Ben Hughes pretty much nails it except that he doesn’t say explicitly that when you pay for a ticket in cash, you have to account (i.e., subtract) both for the miles you earn through the flight AND the miles/cash-back you earn through paying for it with a miles/cash-back credit card. – @Tom

    Excellent point, and certainly correct. Normally we tend not to include credit card points back when making comparisons, but that’s because we’re often talking about spend that’s offsetting some other spend. In the miles vs. cash example, that spend is indeed *net*, so yes you should subtract out the value you get from the card spend. For me, on my Amex Biz Gold 3x (valued at 1.5 cents), I basically subtract out 4.5% of the flight cost.

  15. @Lucky Sez: “Valid point, though for Starpoints my valuation is much simpler than that. I’m basing the value on the ability to convert them into airline miles at a 1:1 ratio, with a 5,000 point bonus for every 20,000 points transferred.”

    I’d like burst that bubble like I burst every other bubble about how great SPG points are thought to be because of (a) their many transfer airline partners and (b) the favorable (1:1) point to mile transfer rate.

    First, SPG is NOT the only hotel program that has “many airline transfer partners.” Hilton Honors may have as many if not more ( ). For example if you look toward the bottom of the webpage at the link above, you’ll see three tabs listing HHonors’ points for miles transfer partners in (a) Americas; (b) Europe, Middle East and Africa; and (c) Asia Pacific. Lots and lost of partners. For the Americas, listed are pretty much all the airlines but here’s a sampling:
    Exchange 25,000 HHonors Points for 6,500 Premier Kilometers. Exchange in increments of 25,000.

    Exchange 10,000 HHonors Points for 1,500 AAdvantage miles.

    Exchange 10,000 HHonors Points for 1,000 Delta miles.

    Exchange 10,000 HHonors Points for 1,000 TrueBlue Points.

    Exchange 10,000 HHonors Points for 1,000 Aeroplan miles.

    Exchange 10,000 HHonors Points for 1,000 Mileage Plan miles.

    Exchange 10,000 HHonors Points for 1,500 HawaiianMiles.

    Exchange 10,000 HHonors Points for 850 Dividend Miles.
    Go to the link and you will see that HHonors airline transfer partners are pretty much a list of “who is who” among the airlines in all regions of the world.

    So, we have established that HHonors has as many if not more transfer partners than SPG. How about the HH points to miles transfer rate? Can it possibly compete with SPG’s 1:1 (before they throw in the 20% discount)? That is where something I have be trying to open the bloggers’ eye to comes into pay. One has to take into account the both sides (earning and redemption) of the mile/point equation in order to be able to compare points and their relative “values” across programs!!!

    On average HH members earn 6x more points than SPG members earn starpoints. That means that in order to compare HHonors points to AA miles transfer listed on the HHonors website as

    Exchange 10,000 HHonors Points for 1,500 AAdvantage miles

    to SPG points to AA miles, one has to DIVIDE the HHonors points by 6 to account for how many more points HH members earn a clip compared to SPG members. Doing that, the exchange of HH points for AA miles in terms of SPG points is:
    10,000/6 HHonors points to 1,500 AA miles
    1.1: 1.0 HH to AA miles.

    Not as bad as one would have thought, ey?

    To decrease their “liability” (i.e., starpoints that they award but count against their bottom line until they are redeemed) since redemption of starpoints for free stays at SPG properties offers the worst value of any program, SPG decided to encourage their members to redeem starpoints as airlines by throwing in a 20% discount for transfers of 20K starpoints or more.

    Hilton would rather have members redeem HH points free stays at Hilton properties, so they did not sweeten the deal as much on transfers to miles airlines. But as you can see, in terms of raw “unsweetened” transfers, HHonors has both the partners and transfer rates that are quite competitive 🙂

  16. Everyone has different goal. I don’t think a single valuation would suit everyone.

    I happen to be someone who values traveling on business for international trips and I did paid out of my pocket for those tickets on many occasions. Earlier this year I had to fly internationally last minute, where cheapest business class ticket was $6000. I was hesitating (since I was only comfortable spending $4000 on a flight ticket), until I realized I had enough miles for the trip. For that trip I got over 4 cents per mile, so I personally value UR and UA at more than 3 cents per point/mile.

    To me personally I don’t redeem for domestic flight or economy class. Value is a major factor, but most importantly I don’t mind sitting in economy on a 2-3 hour flight, but I can’t stand economy for a 9-12 hour flight. Also, first class in domestic flight is just like economy with bigger seat… I will just pay several hundreds to fly economy and get it over with, while saving up the precious miles/points for what I really want.

  17. Stan,

    You are certainly right that everyone’s realistic valuation will vary depending upon their usage of points/miles. However, I would like to flesh out what that means for the many folks that use similar examples to your usage of a $6k price compared to using 140k UA miles.

    You have to consider whether:

    1. You will consistently use your miles in this manner (last minute, high cash price)?

    2. Whether you have consistently cheaper cash alternatives by planning ahead for sales fares, even in premium cabins, like Qatar’s current global sale, European carriers’ regular seasonal sales, current sales to Asia. Business class in many areas worldwide is down to $2K-$4K.

    3. Most importantly, if you personally use a 4c per mile valuation for UA or similar airline miles, you will probably jump on opportunities to directly buy or indirectly acquire through credit card spend or paid travel at the 2c per mile level. That will lead to you paying around $3000 in cash foregone for a 140k UA business roundtrip award + taxes, not to mention potential devaluations and higher partner pricing. This may be a fine price for you, but given sale fares these days, you could get a paid fare at that level and earn a bunch of additional miles.

    4. Also, and this is a guess on my part, most readers and blog followers don’t actually intend to pay anywhere near $3000 in cash for a roundtrip on business. Paraphrasing many, they are in this ‘game’ to travel in business for economy prices or less. For myself, using a 0.35c maximum for acquiring UA miles leads to paying around $600 for a roundtrip business award including taxes, which is appropriate given the work involved in learning and keeping up with programs and finding award availability, and the other non-trivial expenses involved once you actually get to your destination.

    As you say originally, point/mile valuation depends on what you are comfortable paying in cash for the flights/rooms you are regularly able to use them for.

  18. Thanks for your reply Jig. You are certainly right that I don’t always have to compare with the high cash price as there are usually cheaper deals available. And most people probably don’t use the miles for this purpose.

    My point was mostly that, people serious about using points should do their own research on what they will likely end up using the points for based on their own “goals”, personal situation and spending, to come up with their own “valuation” of points (instead of using bloggers’ valuation). I just use my own cases as example.

    I do foresee that I personally will have more unplanned last-minute international travel waiting to happen, which I can get 4c value per point. I also would like to fly Emirates to middle east for leisure in about 3-5 years. From what I can see SEA-DXB premium cabin is crazily expensive and I will have to “work on” my Alaska miles that will potentially worth more than 6c per mile. So mentally I am saving up points for these inevitable trips where I will get more than 4c per miles/points, and I am viewing it as investment or insurance. I will not redeem the points when it only yield 2c per mile, because of my own situation. I don’t have infinite amount of points, so I will pay out of pocket when a business class ticket costs $2000-$3000, and therefore allowing me to use the points when the ticket price is $6000.

    That said, I am not going to spend money to purchase points/miles at 2c cost ahead of time, despite I viewing them potentially worth 4~6c for my usage. Miles and points are not real currency, and to me their valuation means “there is a good likelihood that I will redeem it at this value for something I want/need, but subject to depreciation and program change”. It’s sometimes also a little psychological – I am going to choose earning 1 pt over 2c cash back per dollar spent any day, but I am not willing to spend 2 cents to buy 1 point (unless I am going to immediately use it after miles purchase).

  19. Stan,

    Understood and agreed on almost all your points, with 2 caveats.

    First, I would still say that your intended regular usage of miles is quite unusual, which I don’t think you disagree with, and you are subject to last minute award availability, which may not be there if cash prices are high, so a bit of a Catch 22, but I recognize some airlines do release last minute availability as long as the cabin is not F/J = 1.

    Second, choosing to earn 1 mile instead of 2 cents is not directly buying the mile for 2c, but financially its identical. Likewise, paying cash fares when awards are available is also buying miles at some rate (mile price = [cash price – award taxes & fees] / [award miles saved + miles earned on fare], with some reduction for the value of elite qualification miles). Since you mention the psychological difference between these indirect methods and directly buying miles, it seems you are aware they are objectively the same.

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