S1 E3: Maximizing your Airline Miles. Knowing when to buy and when to use miles.

Description

Our Podcasts are always about finance and money, but this one has a small twist. As a former very frequent traveler, I learned (sometimes the expensive way) about when it is better to buy a ticket and when it makes sense to cash in airline points. Airline miles and Hotel points are like currency - learn how they work and how to maximize their value. Happy listening!

Transcript

Intro (00:04):

Hello, and welcome to the 15 minutes to financial freedom educational podcast series hosted by Arvind Ven. These 15 minutes or so Podcasts are meant to educate and empower listeners about key financial topics towards the road to financial independence and plain English and without financial jargon. Arvind Ven is an independent financial advisor, founder and CEO of Capital V Group in Cupertino, California. He is regularly featured in leading national financial publications, such as Forbes and many others. And now for our host Arvind Ven.

Arvind Ven (00:37):

Welcome back listeners. This is Arvind Ven, CEO of capital V group today's podcast. This episode is also about finance as always and money, but with a slight twist. We will talk about how to value and maximize your airline miles. So many of us have airline hotel points that are valued very much for holidays at favorite destinations. However, the value may not be as clear as money in the bank account. There's been a rush in the past few years to market airline and hotel, branded credit cards that reward card holders with points or miles based on every dollar of spending, but there are ways in which you can maximize their value provided you know how. So today, let us talk more about how to maximize the value of these points and also learn how these airlines and hotels play their loyalty points game so that you know how the game is played. My assistant Lauren took a short vacation for a family visit, so let's find out how her trip went. Hey Lauren, welcome back. So how was your trip and how has the overall travel experience?

Lauren (01:43):

Thanks, Arvind. Yeah, it was really great. It was actually me and my husband's first time to Newport Rhode Island. It's an awesome little town, great food, great attractions, but the triple overall was awesome. The flight was awesome. We typically fly United, never really had any issues with that airline, but overall the trip was great. Would love to go back and I would definitely recommend Newport if you're ever looking for a place to travel.

Arvind Ven (02:09):

Well, the new England and east coast area, I've always loved that. I don't know if I mentioned that I spent two years up in Boston for my MBA. So I have fond memories of the area, the fall colors and summer. It is nice, the only thing I didn't care for too much was the harsh winters. That was pretty severe. Winters were pretty brutal, but there are lovely areas in that part. I'm glad you were able to go there. So I'm curious, did you buy tickets or did you use frequent flyer points?

Lauren (02:35):

We actually use frequent flyer points now that my husband and I are a little bit older, we've finally learn how to use credit cards more responsibly. So we try to take advantage of using our credit cards to gain points and typically use them for flights, especially since our families are both on the east coast. So we're traveling a lot. We really try to use points when we can.

Arvind Ven (02:58):

Did you buy tickets or use saved airline miles?

Lauren (03:04):

Yeah, yeah. We just try to accumulate it throughout the year. And then sometimes when we travel, we don't have enough points. So then we just buy some tickets. But yeah, usually we just try to accumulate it and save up for the next trip.

Arvind Ven (03:16):

That's awesome. So frequent flyer points were created as a way to reward loyalty to a single airline because those programs have been around for awhile and airlines try very hard to keep them at and business travelers happy because these travelers generally bring in the bulk of the revenue, but with so many credit cards, offering miles of purchases, the rewards are getting diluted including the elite flyers. And here's why this massively accumulating miles is also a liability for the airlines have balance sheets without getting you to do much in accounting. It shows that it still is a liability. It's not really a profit because at some point these miles have to be used. So airlines have many tricks up their sleeves, including increasing the number of miles needed for a trip every so often. So actually you're looking at inflation or you can say a depreciating value of the miles.

Arvind Ven (04:06):

And in fact, I have miles from all of my previous life of traveling and I get emails trying to get me to use it because miles, because definitely they don't want that many miles every so often in a trip to say from San Francisco to the east coast may costs in terms of points, may cost say 25,000 points. One way that all of a sudden reach 30,000 it's up to them to move the goalpost. So that happens every so often. So you got to be careful as to how to maximize those points cause the, that currency.

Lauren (04:36):

Oh really? I actually didn't really notice that. So you're saying the value of my frequent flyer points gets reduced, even though I didn't use them. That definitely sounds like inflation eating away at my savings account, sitting in the bank, getting almost zero interest.

Arvind Ven (04:51):

That's a good comparison actually, because the points are like money, but at the same time, the airlines want to kind of force people to either use the miles or make the value lower so that they have less liability on the books. So the easiest route for the airline, pun unintended, is in de-valuing these points so that they can. In The example that I gave just now for raising it by 5,000 points from say 25,000 to 30,000 points for a one-way from San Francisco, to Boston they have already devalued this miles by a bit.

Lauren (05:26):

So if I understand correctly, there's a partnership between an airline and a credit card company. And so when I use my airline branded credit card at a grocery store, for example, I get airline miles for the amount that I spend, but how does it work on the other side? Meaning how does the credit card company and airlines get value out of this?

Arvind Ven (05:46):

Ah, ha. So now we're getting into the nuts and bolts of how the entire mileage points work is. Yeah, you're right. It sounds simple. Like we go to the grocery store, we buy something, you go and get points, but how does it all work in, why are they doing this at a very high level? The explanation is that airlines sell miles to credit card companies for millions or even billions of dollars. So this is a great cash infusion for the airlines and much better than a bailout from the government or tax payer dollars. So they are also better than getting alone because this is a, without too many caveats, they are getting cash infusion by selling miles through this credit card companies. Credit card companies are interested and they want to do this because they get to attract more new customers by offering these miles when people use a credit card. So let's say if either you are, I mean, you've got card issuer X says, I'm going to give you 60,000 airline points for signing up compared to another card that says, I'm going to give you zero. Then definitely going to be pretty motivated to look at the card company that's giving me bonus points or bonus airline miles for signing up. And that's how the system works.

Lauren (06:54):

Why did you say something about this thing, the liability for the airlines for tax purposes?

Arvind Ven (06:59):

Right. And without getting into much accounting. The miles will be used down the road. And that means the free tickets and less revenue for the airlines. That's why they call it a liability. Because even though they got the cash from the credit card company for the miles that they sold them, the whole idea is that. So we get this point. So if there are millions or tens and millions of unused airline miles and points with credit card customers, or even with regular flyers, that can, will be used down the road and that's considered a liability at the book. So it's definitely a drag on the product. So the airlines definitely are very motivated to try and get people to use them. I try and do value them so that the liability is less. So that's the mechanics between how it works. So the key to maximizing your miles is to understand the concept of cents per mile.

Arvind Ven (07:50):

Let me repeat that. It's cents per mile. I wish it were dollars per mile, but that's not the case. Books and blogs have been written on this topic. Then you can go online and read. There's so many really popular blogs on quote unquote credit card hacking and how to maximize your airline points. But I had written the big group blog. We have an article on maximizing airline points too. So Laura, let me ask you a question. What is a favorite of city, a cities that you would love to visit? If there's international, it'll make the example that I'm going to give even way. Interesting.

Lauren (08:22):

So favorite city that I have been to, I really enjoy going to the bay area. Since I'm currently in Southern California. We also really like going to park city, Utah to snowboard or sometimes just Vegas.

Arvind Ven (08:37):

So what would be, would you, would it be barriers if we London,

Lauren (08:41):

I would love to go. I would love to go everywhere. My family is from the Philippines, so I would love to go back to the Philippines, but yeah, I have so many countries on my bucket list. Let's just say Paris.

Arvind Ven (08:51):

Okay. I mean, Hey, that's a great city to go to. They've been spent a long temperance had been there. We'll have to go there again myself, sometime one of these days when things get back to normal, but let's take an example like, so let's say you have a few days off and I'm going to look around to go fly, to make a quick hop across the Atlantic. You look around and find a ticket for $600 round trip on your favorite travel website. Then he said, let me see, I got points. Maybe I'll use points instead. So let me see what the airlines website says. And then you see that the round trip ticket will cost you about 60,000 miles. So here's the formula for calculation and it is very simple. Maybe I should have a drum roll for this.

Arvind Ven (09:34):

You take $600, the price and divide that by 60,000 miles or the points required. And they get 0.01, which really is $0.01, which makes it 1 cent. So that really is 1 cent per mile. I would say Walla because it's French. Did they ever tell you that I took French in high school and once upon a time I could even order it at meal in France when I was traveling. No. All I can remember as well, but I think that's cool. I didn't know that, but that's awesome. That's about all I remember. So anyway, but the more important point is more than walleye. It's really the cents per mile. So we calculate it. If the dollar price divided by 60,000 miles required, if you are going to use points. So you got 1 cent per mile, but just not do, but I would say that's the bare minimum, but let's say that you have a lot of, we spent a lot and we have a lot of points stashed away and let's say you want, they got to live life a little bit in 71 to fly business class.

Arvind Ven (10:29):

So let's see what the situation here is. So you look at the San Francisco two or barriers itinerary, and you say that, okay, it cost $6,000 round trip from business class to Paris, ouch. But if you use your miles, you see that have cost you 120,000 miles total for the entire trip to Paris and back. So here's an interesting calculation. You saw just 1 cent per mile when you for the economy, but here for business class, let's look at the calculation, the price for $6,000 round trip and the miles required was 120,006,000 divided by 120,000 thumbs to $0.05. That is a 5 cents per mile. I would say that make it a double voila or a quintuple voila. that's five times more than the value of what you got for the economy class. So you're actually maximizing your points since you were getting one cent per mile, now you are getting 5 cents a mile, which is awesome, right?

Arvind Ven (11:22):

So obviously the miles were much longer way if you fly business class in this example, however, if you don't have a ton of miles stats, right, that economy class is the only option, but a general rule of thumb is always to try and get at least 1 cent per mile when you use miles, otherwise it may be better to get a ticket and adding to your frequent flyer balance If the price is right. So that's it for today's episode, read more about us at www.capitalvgroup.com or reach out to us by email or call us. Let us know if you have topics of interest that we can have for some of the upcoming podcasts. And we'd love to hear from you until the next time, travel safe and stay off.

Speaker 4 (12:07):

Arvind Ven is a registered representative with advisory services and securities offered through LPL financial, a registered investment advisor member FINRA. And SIPC the opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance reference is historical and is no guarantee of future results. The information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor. Financial planning offered through capital V group, a registered investment advisor and a separate entity from LPL financial.