The definitive guide to using your travel rewards correctly

Paradise for you and your wallet.
Paradise for you and your wallet.
Image: Reuters/Damir Sagolj
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Forget bitcoin, award points are the world’s most popular alternative currency. You can use them to buy just about anything, but getting the most bang for your point buck normally requires exchanging them for hotel rooms and air travel. But just like any currency, it’s a risky asset class, and maintaining their value requires a smart investment strategy.

The purpose of any asset is to take spending today and turn it into similar spending in the future. For example, if you like taking vacations, you want assets that provide regular travel, not just when you had a good year.

Just like cash, the biggest risk with points is that they may lose value before you use them. “They aren’t getting more valuable,” says Gary Leff author of the popular blog View from the Wing. His greatest fear is point devaluation, which he sees as inevitable as points become easier to accumulate and fewer seats are available on flights. He and the other gurus of point management always preach spending your points as soon as possible—the idea being they will depreciate faster than other assets, including cash. But this advice doesn’t always hold up.

To understand why, let’s look at the two ways points erode in value:

Inflation: how many points it takes to buy an award

Price inflation is relative. If points lose their value at a slower rate than airfares and hotel prices rise, then point inflation isn’t an issue. Suppose a flight to Chicago is $300, but next year it goes up to $400 (a 33% increase). Meanwhile, the number of points it takes for a Chicago ticket only goes up from 25,000 to 30,000 (a 20% increase). That means points have a lower inflation rate and hold up better than cash.

Hotels rooms are indeed getting more expensive. The figure below is the price of an average room since 2001 in today’s dollars.

Prices fell during the recession, but have been back on the rise, up 7% from last year while normal price inflation has been stagnant. If you stay in hotels often, you want to own an asset whose value increases when hotel prices do, or even better, increases more than hotel prices. In this sense, hotel points can be the best hedge, depending on the program. According to popular travel blogger the Points Guy, Starwood Preferred Guest points increased in value over the last year. He estimates a single Starwood point is worth 2.5 cents, up from 2.4 cents last year. While that may not keep up with the increase in the price of hotel rooms, it’s holding up relatively better than cash. If these trends continue, you are better off spending cash rather than points because cash is losing its value faster.

Airfare is a different story. The typical cost of a plane ticket by most measures has fallen over the last 30 years. The figure below is the price of a tickets from three of the most popular flights (in terms of number of passengers) in 2014 dollars since 1996.

In the first decade prices fell, but average fares have increased more than 23% in the last 10 years for peak travel times. It’s not clear if the trend will continue. Your point strategy should reflect your outlook on prices.

If airfare gets cheaper and your points relatively less valuable, it makes sense to spend points now and conserve your cash. For example, if the cost of a flight to Chicago falls from $300 to $250 and it takes five more points to get a ticket using points, you should unload the points. Leff thinks prices will continue to fall because the benefits of cheaper oil will be passed on to consumers. More consolidation from large mergers could also decrease prices, even if it increases market power, because a large fleet means a more efficient allocation of planes on routes. That should lead to fewer empty seats, less waste, and fewer seats available to rewards users.

But if airfares continue to increase, award points may be your best hedge. True, they might get devalued by the airline (ie, more points are needed for a ticket), but airlines devalue point infrequently, only once every few years. The price of airfares, on the other hand, may increase continuously—the difference in timing creates a window where your points increase in value.

Besides, no matter what happens to airfares, you can also retain value from your points if you use them strategically: book well in advance, on normally expensive, popular routes.

Liquidity: how easy it is to use your points

With more people flying and fewer seats available, it’s harder to cash out your awards. Being able to use your points is just as important as the number of points it takes to book a ticket. It tends to be harder to use points when the economy is booming and more people travel. Conversely, Leff observed it was much easier to use award points during the Great Recession. In this sense, award points have what’s called a negative beta, meaning their value improves when most other assets tank. This relationship makes award points quite valuable because they are a great hedge against the rest of your wealth. If you care about taking a vacation or visiting faraway relatives every year—no matter the state of your cash wealth—points hold a valuable place in your portfolio.

Points, in many ways, are one of the hardest assets to manage. Like any investment, the most obvious risks don’t always apply to you, depending on your goals. If you value hotel stays, think airfares will increase, and are willing to take the considerable time and energy to research good point deals, holding on to points may be the best strategy.