A few weeks ago I wrote a post that looked at my travel spending in 2015 with the goal of “keeping myself honest,” and see if I could notice any patterns of spending that I could reduce or eliminate as I progress into the year.

In it, I remarked that, unlike most people, I don’t actually net out my cash back rewards (or equivalents like Capital One Venture ‘Miles’) against my travel expenses, because cash is fungible with all other cash and doesn’t change the fact that I spent the money in the first place.

The difference is substantial. Instead of having spent a ‘mere’ $975 of my travel, accounting this way means that I have a $4400 line item on my balance sheet. Even though I don’t have many other expenses (travel is my primary ‘hobby’, after all), it’s still a lot of money for a single person my age.

After getting a little distance from my post, I realized that my line of thought was completely self-inconsistent. There. I said it. It was wrong, incomplete, stupid, whatever.

I’ve written a lot about the opportunity cost of points and miles, and in particular, how your costs should actually account for these when considering the cost of a redemption. Free-quent Flyer has a good recent post on this idea (you can also see his many posts on imputed redemption value for a different phrasing of the same idea), but roughly speaking, if I opt for one Alaska mile per dollar instead of 2% cashback, then my business class ticket to Europe (50,000 points one-way) costs me (in real money), $600 more than an economy class ticket (20,000 points one-way), because that’s the money I forwent in order to generate the marginal 30,000 points.

That leaves me with two options:

  1. Count only net costs, in which case my travel is nearly free.
  2. Obsess over every single transaction (both purchases and redemptions) and add the opportunity costs of my points and miles into my accounting.

In my opinion, 1 would be lying to myself and 2 is just not worth my time, so much so, in fact, that I have actually considered opting for 1.

It’s funny how I’m almost ending up exactly at the same position that a lot of main-stream blogs and media use to convince you of the value proposition of signing up for credit cards. I almost hate myself for my own hypocrisy. Given that hating myself isn’t really an option, however, I’m going to blow up the whole thing and go with 3:

  1. Keep an eye on my opportunity costs (i.e. for larger purchases where I opt for miles instead of cash as well as for sign-up bonus minimum spending requirements) and use those as a rough multiplier to calculate the cost of my redemptions.

This has a couple benefits:

  1. Since I get most of my miles and points from the two sources mentioned, they are the dominant factor in determining my miles ‘purchase’ cost anyway. The calculation therefore wouldn’t be that far off compared to keeping track of every transaction. In the event you’re curious, that value hovers somewhere between 0.6 and 1.6 depending on the currency, since my opportunity cost is 3% rather than the more typical 2%.
  2. It’s honest.

Works for me ????

Happy hacking!