The advantages of prepaying for travel at a discount

I have never belonged to the "travel is free" school of travel hackers, not because I don't think there are free or negative-cost methods of manufacturing spend (there are) or because I think my time has intrinsic value (it doesn't), but for the much simpler reason that most techniques that can be used to generate travel rewards can also be used to generate cash back. No matter how cheap or profitable your travel hacking is, the same techniques can often be used to generate some amount of cash back; that cash is the price of your "free" trips.

Now, there are a few exceptions. The IHG Priceless Surprises promotion didn't have a "cash back" option (although I did make some money when I sold the Bose speaker system I won). Likewise if you had 24 paid stays or 49 paid nights at Hyatt in 2016, you could pay for one additional stay and get a free night at any Hyatt in the world when Hyatt Gold Passport switched over to World of Hyatt. That's good old-fashioned travel hacking, with no obvious cash back equivalent.

But if you earn most of your loyalty rewards from manufactured spend, fulfillment by Amazon, or reselling private label products, you can almost always choose to earn cash instead of travel rewards. That's the simple reason I think travel is almost never free.

Instead, I prefer to think of my travel hacking practice as prepaying for travel at a — sometimes very steep — discount.

Prepaying for travel can save you money

This is obviously the most attractive reason you might choose to earn rewards currencies instead of cash back. If you need to choose between earning 1.5 Ultimate Rewards points with a Chase Freedom Unlimited card or 2.625% cash back on a BankAmericard Travel Rewards card, the obvious reason to do so is if you expect to get more than 1.75 cents per Ultimate Rewards point, for example on a premium cabin United redemption, expensive Hyatt stay, or Wanna Get Away fare on Southwest.

While I mentioned manufacturing cash versus rewards currencies, there are other ways to prepay for travel at a discount: Hyatt gift cards, for instance, are often on sale for 10% or more off face value, allowing you to "lock in" savings by purchasing gift cards on sale and redeeming them over time as needed.

It's more convenient to spread travel spending throughout the year

The other day I was chatting with a travel hacker who consults with businesses to use rewards to lower their travel costs and started thinking about the way a firm could use rewards earned throughout the year on business expenses to avoid month-to-month fluctuations in travel costs. After all, if you absolutely have to go to Louisville for business in May during the Kentucky Derby, you don't have the choice of paying the October cash rate — but you do have the option of paying the year-round points rate if, of course, you can find a standard room available.

This is more or less how I think about my Delta SkyMiles. I earn a block of SkyMiles each year with my Platinum Delta SkyMiles American Express card at a fixed cost, and then redeem them for my Delta flights whenever appropriate. Sometimes (hopefully more often than not) I save money compared to a cash back or fixed-value points card and sometimes I don't, but I don't have sudden Delta flight expenses as long as I have enough points to cover my flights.

This is partly what Frequent Miler calls "the joy of free:"

"When you book travel using miles & points, it may feel like your trip is free (or nearly free), regardless of how many miles and points you spend. If so, the pleasure you get from spending points and miles may greatly outweigh the pleasure you’d get from paying for the same trip with cash. In this case, miles & points are arguably (and ironically) worth more to you because you do not value them like cash."

But there's a more serious side to it as well. Travel expenses that can't be covered by existing points balances and have to be charged to a credit card require you to have cash available to pay off those new charges, lest you be stuck paying interest charges that quickly devour any profit or savings from your travel hacking practice. If you aggressively invest as much of your monthly cash flow as possible (have I mentioned my new blog, Independently Financed?), then having additional cash on hand to cover credit card payments necessarily disrupts the pace of your investments.

In other words, there are potential advantages to steadily building up and redeeming an inventory of travel rewards currencies even if you save relatively little in out-of-pocket expenses.

Some people need a permission structure to travel as much or as well as they'd like

Reader ed commented the other day:

"once a certain cache of points is retained, a freedom opens up to divert efforts toward cash back while still retaining flexibility for award-based travel. It would seem perfectly OK to me to pay for that increased flexibility even if I didn't use it. Therefore, I'm not sure that points that go unredeemed are without value. The value may simply be to clarify what my priorities are in the present moment, while retaining the means to travel on very short notice."

I think this is an interesting point that I don't always fully take into account. It's not just that traveling for "free" is more joyful, as I quoted Frequent Miler writing above, but that some people need the permission that paying little or nothing out of pocket provides in order to travel at all. A person who's both frugal and wants to see the world may need the impetus of high or even excessive points balances, hopefully cheaply acquired, in order to give herself permission to take the trips she's always dreamed of.

In this spirit, the constant drumbeat of devaluations may actually be a positive for the reluctant traveler! A trip that's affordable today might not be tomorrow, which may be enough to get someone out the door.

Conclusion

I love earning cash back, and try to earn as much of it as possible each month. But I admit that each of these different motivations drives me in part to earn rewards currencies in lieu of cash back: there are rewards currencies that I know will invariably save me money compared to cash back, there are rewards currencies like Hilton HHonors points that are so easy to earn and redeem that I'm able to spread my hotel spending evenly throughout the year, and there are currencies I accumulate just to give myself permission to book trips I might otherwise consider too expensive.

While the three rationales may differ in the degree of their economic "rationality," hopefully there's more to life than maximizing a utility function.