It Costs More than You Think

Recently, my wife and I were having a talk about vacation expenses. She was trying to decide between:

  • buying a plane ticket for cash, or
  • using points/miles to purchase the ticket.

I argued for points. Here’s why:

Taxes

It’s not an issue of a $100 ticket or using 10,000 points. (This assumes one point is worth one cent. But, your mileage may vary.) It doesn’t work like that. That’s because $100 spent isn’t truly $100. To spend $100, you need to earn substantially more than that.

Consider us an example. We’re in the 22% Federal tax bracket. And, we’re in the California state 9.3% tax bracket. And FICA (payroll taxes) are another 7.65%. That means when you spend $100, you actually have to earn $163.80. That’s quite a difference. Said another way, purchases cost 63% more than we think they do. This is because of taxes.

Opportunity Cost

Beleive it or not, paying 63% more for something is actually a pretty small factor compared to the opportunity cost of buying stuff. In fact, just paying 63% more for something is a steal when you consider the opportunity cost.

Instead of buying $100 worth of something, what if you took that same amount of money ($163.80) and invested it, earning the historical average? Your real return (considering inflation) would be more than $300 in 10 years time. In 30 years, that’s it’s more than $1,000.

 

What’s the takeaway? Use points!