The value of points can be a very complicated question. There are multiple ways to value points, but in the end, value is dependent on how useful they are to you personally. There are 3 main ways I use to value a points redemption: Cents Per Point (CPP), out-of-pocket costs, and personal value.
Cents Per Point
The Cents Per Point method is pretty standard across the points and miles community. This is mainly because it creates a good comparison value to determine if you are getting a good value out of the points you are using.
CPP is calculated by taking the total cash price of a redemption and dividing it by the number of points required for that same redemption. For example, a $300 flight that costs you 15,000 points has a value of 2 CCP ($300/15,000=0.02). However, this value is not as useful on its own and is more useful in comparison to other potential redemptions.
CPP is often compared to the reasonable redemption value (RRV). A reasonable redemption value is determined by analyzing different redemptions that can be made with a certain type of points without too much difficulty. The purpose of comparing a particular redemption’s CPP with the RRV is to make sure you are getting a decent amount of value out of your points. This is especially useful if you have multiple points that can be used for the type of travel you want. Comparing the CPP, as well as using the RRV, can help you determine which points to use in order to get the most value out of your points. However, this is not the only way to value a points redemption.
Out-of-Pocket Costs
One of my favorite ways to value a points redemption is with the out-of-pocket costs. This method looks at the price of acquiring the points and redeeming them to travel. There are multiple ways to use the out-of-pocket costs. You can use the method to compare redemptions (directly comparing the out-of-pocket costs, or comparing the cash saved), or you can use it to determine if a particular redemption fits within your available travel funds.
Both of these methods have merit. I typically use the latter to determine if a trip fits within my available funds. I set a determined amount to save each month for travel and pull money out of that fund for travel expenses (including annual fees for credit cards to get points). This allows me to keep track of what I’m spending on travel so I don’t overextend myself.
Now let’s look at how that works: simply take your total costs to acquire and spend your points. These items typically can include annual fees for credit cards, fees spent on items to meet the minimum spend (if you wouldn’t normally pay that fee, taxes & fees for flights that aren’t covered by points, baggage fees, resort fees, and other such items that are necessary for your points redemption but aren’t paid for with points.
Note that I’m not including food and activities for your trip, as those would be something you pay using points or not. I also don’t include the amount spent to meet the spending requirement. Exceptions to this are fees on credit cards that you can typically avoid but can be useful for meeting spend requirements. Such fees are incurred when paying taxes, utility bills, rent, purchasing visa gift cards, or other such purchases that have some sort of fee (percentage or flat).
For example, if it takes one credit card to get enough points for the hotel stay you want, the out-of-pocket cost would be the annual fee of the card and any fees charged in cash for the hotel. Many hotel programs will waive resort fees when you use points, but sometimes they won’t, just make sure to check so you can keep track of your out-of-pocket costs.
The out-of-pocket cost method helps me to determine if a specific redemption will fit within my available funds for travel. This method will also influence my credit card strategy. For example, a low out-of-pocket cost redemption may allow me to take multiple trips that year. Or, I may decide to open some cards to increase points (outside of getting points for a planned trip) giving me more flexibility for higher out-of-pocket cost trips in the future.
Getting points in this manner allows me to spend money now, when I have extra in my travel fund, and save the points for a future year when I plan on taking a trip with a higher out- of-pocket cost. This is just like the typical method of saving money for a future trip, but with points, you can get there exponentially faster than with the traditional saving method.
CAUTION: Points often lose value over time, just like inflation, and can also expire in many cases so be careful while collecting lots of points for the future. You may find that the points you’ve accumulated might not get you as much as you were planning when you earned them. Or, if you’re not careful, you may lose all of your points to expiration before you use them. However, having a good bank of points can also be useful for last minute or unplanned trips, so decide what will work best for you. Make sure to stay organized and plan any points saving carefully to account for expiration. Also, only collect points in this manner for programs that you are more likely to use in the future.
As a side note, if you’re getting close to using up your travel fund, cash back cards can be useful to increase your travel fund allowing even more flexibility for travel. The trade off here is that you may limit cards you can get in the near future (see this application rules article for more information).
As you can see, the out-of-pocket cost method is extremely useful for organizing and planning future travel using points and miles without spending more than you can manage.
Personal Value
The personal value you get out of a points redemption can not easily be quantified, so most people don’t even try. In the end, it comes down to what you want. For example, you may get a better CPP for your points by booking a domestic flight with one stop through Turkish Airlines, but you may get better personal value by flying direct. Or you may not even consider domestic flights to be a good personal value if you want to travel internationally. You see where it gets difficult? It all depends on what’s important to you.
Using personal value to determine if a points redemption is valuable all comes down to how you feel about it. If it makes you happy, regardless of the numbers, it has a high personal value to you. This method is all about getting away from the numbers and using the points to get the travel you want, not just what has a good CPP or a low out-of-pocket cost. This can also lead to different card strategies for everyone since the points that have more personal value are going to be different for everyone.
Comparing the Valuation Methods
Let’s look at an example and compare the valuation methods. Let’s say you have $1200 a year (saving $100 a month) to spend on travel and you want to take a trip to Madrid, Spain. Using the points and miles strategy, that money would need to cover food, activities, and ground travel, taxes and fees that can not be paid with points, and annual fees for cards to get points.
Let’s say you booked the following for two people:
Flights – American Airlines for 115,000 miles (57,500 each person) and about $172 in taxes and fees round trip
Hotels – Crowne Plaza Madrid – Centre Retiro Standard Room for 150,000 points for 7 nights
You could get these points using these example welcome bonuses:
American Airlines Miles – AAdvantage Aviator Red World Elite MasterCard ($99) – 75,000 miles after one purchase on main card, one purchase on authorized user card, and paying the annual fee (all within 90 days)
IHG Points – IHG One Rewards Premier Credit Card ($99) – 140,000 points after $3,000 spent in first 3 months
To get the necessary points, you and your travel partner would each open the AAdvantage Aviator Red World Elite MasterCard. Doing so, and meeting the requirements for the bonus, you’d pay $198 in annual fees for the flights. ThenaAfter meeting the spend for the IHG One Rewards Premier Credit Card (which has a base 3x points per dollar or 9,000 points by meeting the spend), you could easily end up with enough points for 7 nights at the Crowne Plaza Madrid. That’s with 140,000 points from the bonus and at least 9,000 points from meeting the spending requirement (you may need to spend a little extra to get the full amount of points needed). Getting the points for the hotel stay would have an out-of-pocket cost of $99 for the annual fee on the card.
This results in a grand total of $469 for both the flights and hotels, leaving you with $731 in your budget for food and other costs. Of course, you could also open a cash back card to extend your travel fund even further if you feel that $700 wouldn’t be enough cash for your trip. Compare this to $1716 for the same flights and $1015 for the hotel for the same dates. You would have paid about $2731 using cash but only $469 using points to book the same flights and hotel. That’s $2262 in savings!
Now let’s look at the CPP for this example and compare it to the RRV for those point currencies:
For the flights, your CPP would be calculated by taking $1540 (deducting the taxes and fees you have to pay anyway) and dividing by 115,000 points. That gives you a CPP of 1.3. If we compare that to the RRV for American Airlines miles of 1.3, you’re getting a reasonable value out of your points.
For the hotels, you would take the $1015 and divide it by 150,000 points. This gives a CPP of about 0.67. The RRV for IHG is 0.63 meaning you are getting a slightly higher value out of your points than the RRV.
Neither of these individual redemptions shows outstanding value when compared to the RRV. Using these points for a different redemption may give you a better CPP value compared to this redemption and possibly compared to the RRV for those points. However, you have to take into account the personal value of the redemption as well.
Let’s say you have always wanted to go to Madrid, are you going to care if you’re getting better than the RRV for your points? Probably not. In fact, depending on how badly you want to go to Madrid, you may even be willing to get a value that is much lower than the RRV for your points.
These types of situations make CPP and RRV completely irrelevant to you personally. The fact that, for this specific example, you’re getting the RRV is just a bonus. However, if you don’t care when/where you go specifically, you may want to look for a higher CPP from your points so that you can travel more in the future or take a trip that typically costs a lot more in cash. Of course, in either case, you also have to take into account the out–of-pocket cost and whether or not it fits with your financial situation.
As you can see, the value of your points isn’t strictly a numbers game. I tend to focus first on out-of-pocket costs because I want my travel to fit within my overall financial plan first. That’s the whole reason I got into using points and miles. A good CPP tells me if I’m getting a decent value for my redemption, but I always look at the personal value of the redemption first. I’d rather go somewhere I’ve always wanted to go than get a great CPP value. I do try to get a CPP that at least matches the RRV for the type of points I’m using though.
You can see a list of RRVs here on the Frequent Miler blog. I feel that they have the best reasonable redemption valuations out there so there’s no reason to redo the work.
Bonus Method
There is another valuation method to consider when it comes to redeeming points: opportunity costs. Choosing to earn/use points in one way versus another way has a hidden cost. This cost comes in terms of the value you miss out on by earning or using points a certain way. An easy example of this is cash back. If you are spending $5,000 on a card to get x number of y loyalty points, you are missing the opportunity of using that $5,000 to earn cash back.
For example, let’s say that a welcome bonus gets you 60,000 points with an RRV of 1.3 after you spend $5,000 on the card within 3 months. That’s $780 worth of travel, but it’s limited to the loyalty program (or their partners if it’s transferable). If you use a 2% Cash Back card instead (without the welcome bonus), you would earn $100 of cash that can then be used for anything.
For most people, this is a no-brainer. Why would you give up $780 in travel, that could potentially be even more for $100 in cash back? This trade-off is one of the things that credit card companies rely on. Most people use points for cashback, missing out on the much more lucrative potential for traveling with points.
What if you’re not working on a welcome bonus? What if you’re deciding where to spend $500 at a grocery store each month? This is where things get more complicated because it depends on a lot of variables. These variables could be how many points you have in other programs, your travel plans, the spending category bonus on the card, and what welcome bonuses you are working towards.
As you can see, this can get really complicated very quickly. I recommend worrying about this further down the road when you have enough points that you aren’t going to use them up very quickly. This gives you more room for these kind of decisions since you aren’t necessarily needing points for a specific trip.