Many of us have a list of places we would love to visit. Perhaps our minds race with endless thoughts about what it would be like to travel the world: the Grand Canyon, Milford Sound in New Zealand, Tuscany, or seeing Big Ben in London. We are blessed to live in a world with beauty worth seeing and intriguing history to learn. Often, however, clients feel that the expense of these trips will break the budget. Whether cost has deterred you in the past or not, I want to discuss a less obvious way to pay for your travel plans. It could be the case that the means needed to afford the trip you always wanted (or at the very least, the solution to making such travel more economical) has been under your nose for quite some time. It’s my hope that what has worked for countless insiders will allow you and your family to make more memories exploring together.
First up: Turning typical spending into points and miles
I knew early on that I needed to build good credit, so like most, I picked a credit card from the vast array of options. The plan was to use the card when I could to pay for things, set the statement balance to be paid in full each month by my checking account, and build good credit. I was aware of the fact that my spending was earning some level of value, be it in the form of points, cash back, or miles; however, I didn’t expect it to be anything meaningful. Over time, I began to see the credit card rewards get bigger and bigger each month. By using the card to pay for every possible purchase or payment, I was accumulating a good amount through the reward system and felt I was benefiting from this to the extent anyone could. It wasn’t until a conversation with a friend that I realized I was just scratching the surface.
This friend of mine was my roommate in college. He’s an Oral Maxillofacial Surgeon now, but at the time, he was in Medical School and the budget was thin. I call him DA, which is merely the initials of his first and last name and doesn’t stand for the insult that probably comes to mind. In fact, quite the opposite: he would sing in Spanish around the apartment and is a National Quiz Bowl Champion. Unlike a normal dorm (and I’m ashamed to admit it), our living room wall had a large poster of the Periodic Table of Elements. DA would stand in the middle of the living room, turn his back to the poster, and I would quiz him “Third row up, seven from the left.” He would then tell me the chemical symbol, name, atomic mass, and ionization number from memory. All that to say, he’s one of the smartest guys I know and is a great friend.
During Medical School, DA was very frugal in an effort to take the smallest possible loan. Always committed to everything he does, he would go to great lengths to save money. One day DA mentioned that he planned to take his entire family, including his parents and siblings, to Europe for two weeks. I was a bit surprised that he would spend so much money given that when I’d visited him the previous winter, his thermostat was set to 55 degrees. He said he was paying for the entire trip with credit card points, to which I looked at him with a perplexed gaze. I asked how he could do that with how little he spent each month. He explained that he was able to pay for basically every expense with his credit cards. If he needed to open a new card, he would pay attention to the bonus offers and watch for a great time to sign-up.
What did I learn? (1) That it’s possible to use a credit card to pay for certain expenses that I had only believed could be paid by a checking account, and that (2) I needed to be aware of bonus offers and how they can move the needle much faster.
Now, learning the art of maximizing the point systems for travel.
Points can convert into cash, but before you use your points to pay your credit card bill, know that those points may be worth far more when paying for flights or some other specific expense category. What would normally be an extra $1,200 from the conversion of your points into cash, can easily turn into a $4,000 value if used strategically.
Here are two examples to show you how your normal spending could help you pay for flights worth $4,000.
Example 1:
My wife has a certain credit card with a bonus system in place that allows earned points to be redeemed for cash or travel. After a little research, she found that 60,000 points could be cashed in for a total of $600 or she could fly coach round-trip to Europe by transferring 60,000 points from her credit card to a partner airline reward system. Transferring the 60,000 points per person (total of 120,000) to the airline, allows us to book travel with points typically worth $1,200, regardless of flight cost at the time. As many of you know, one round-trip flight could cost as much as $1,500 - $2,000 per person to certain locations, so you can see how the process of transferring points can provide significant savings and turn what would have been $1,200 of cash (conversion of 120,000 points into cash) into plane tickets for two worth $4,000.
Example 2:
A few years ago, my wife and I noticed that another airline was offering a bonus of 50,000 points if you signed up for their credit card. If you were able to acquire 110,000 points within a year, you would receive what is called a companion pass. The companion pass allows one designated person to fly with you for free anytime you fly on this airline. Since I needed to open a couple new credit cards, I signed up for a personal card and a business card, which would immediately provide 100,000 points if I met the spending requirement. I knew hitting the spending requirement in the next three months would produce the additional 10,000 points and I would have the coveted companion pass for the next 21 months (the duration of the year the total was reached plus one additional year). My wife applied for the same cards as well. Many of you probably don’t consider yourselves to be business owners; however, if you moonlight, receive any 1099 income, or own investment property, you will likely qualify for a business credit card. You should have an established S Corp or LLC if moonlighting or owning investment property anyway, so before you rule it out, rethink it. The term “business owner” might apply to you. In three months, my wife and I both had the companion pass. In our situation, we each listed one of our children as our companion, which meant our kids were able to fly for free each time we traveled on that airline during that 21-month period. If you take a handful of trips each year over the next couple of years, it could easily save you $4,000.
Elasticity of Points
These are just a few examples of how the points created from normal spending could easily cover the cost of that dream trip you never thought would be possible. If you haven't already, it's wise to assess the elasticity of your points by considering the many ways they can be used. You may find that one point converts to one penny when redeemed for cash, one point converts to the equivalent of two pennies when used to pay for dining out, or that one point converts to the equivalent of 4 pennies when used to purchase flights. Points have elasticity, and you want to see how far the point can stretch. After researching the creative ways to use points, identify the conversion method that gives your points the most value and hold your points until they can be used for that purpose.
For us, it’s travel. We know our points are most valuable when used to pay for flights, excursions, and on occasion hotels. Plus, we enjoy the trip more when we know the cost of what we’re doing is four times that of the cash we would have received from using the points to pay our credit card bill.
To be clear, I’m not endorsing a specific card or company, nor am I suggesting that you irresponsibly build up credit card balances beyond what you can afford for the sake of acquiring points. You may want to use your credit card to pay for as many items as possible within the confines of your budget and you should always have the available cash flow to pay the full statement balance each month. In utilizing this approach, you can actually improve your credit score; however, you should be mindful of credit utilization ratios (credit used vs. credit available) and be diligent about paying the balances each month.
My hope is this will help your family experience many incredible memories over the years that would otherwise be missed.
