How much is a mile worth, anyway?

As you’ve noticed, in the areas where I reference earning miles for shopping, I also offer options for receiving cash back.  That may not make sense on a site dedicated to frequent flyer miles, but I don’t want my readers to lose sight of one fact: While frequent flyer miles are fun to collect (Some of us are a bit obsessive.), they may not be worth what another reward would get you.Let’s break it down by value.

On average, I value a mile at somewhere between a penny and two cents per mile.  That’s the simple answer and will work for most people.  Domestic economy tickets are at the low end of value, while international first class tickets are way, way above the high end.  For example, I looked at a flight from Boston to Los Angeles, roundtrip, in coach, on American Airlines.  The flight was $318, or 25,000 miles (plus $20 in fees).  Under this scenario, your miles are worth $.012 each ($298/25,000).  Furthermore, that flight would generate an additional 5,000 or so miles if you paid for it, but nothing if you used miles for it (Tickets booked on miles don’t earn miles.).  So, after all is said and done, you are only get a penny of value per mile.  Numerous credit cards will give you this value or better.

But miles can also give you tremendous value.  For instance, let’s say you’re going from Boston to Bali.  Given the distance, you can now fly an international carrier, which generally offers better service than US carriers.  Much better.  So let’s go to the top of the food chain and fly first class on Cathay Pacific.  You’d end up using 135,000 miles roundtrip, plus pay approximately $290 in fees.  Wanna pay cash?  That ticket will cost you $23,000.   And change.  Those miles have just earned you $.17 per mile.  Try finding a credit card that will give you $.17 per dollar spent (as opposed to a mile per dollar spent, standard for a credit card)!

But that leads to another, more philosophical question: Would you ever have spent $23,000 for that ticket in the first place?  Because if you wouldn’t have, you can’t value the miles as $.17 each.  If you would have only been willing to spend, say, $2,000 for that ticket, those tickets are worth only $.013 each.  Now, it’s highly unlikely you would have ever gotten those tickets for $2,000 each, so you can argue that the whole argument is futile.  But it leads us where I’d really like to go, to the more sophisticated answer: the miles are worth exactly what you are trading off for them, or your point of indifference.

Huh?  Miles shouldn’t really require this much work, but this post is all for theoretical fun anyway, so let’s go with it.

Example: Let’s say you have two credit cards, one that gives you back 2% on all purchases and one that gives you one mile per dollar spent.  If you make a purchase that gives you miles instead of cash, you value your miles at at least $02 each.  Why is that?  Because you’re giving up $.02 per dollar spent by not using the cash back card.  If you used the cash back card instead, you’d be valuing your miles at some figure less than $.02 per mile.

Here’s the bottom line: There is no bottom line.  Even if you get a great deal using miles, you also have to factor in such things as award availability (i.e., is the award going to be available when you want to use miles) and the miles that you are giving up by not paying for the ticket.  And in a scenario where the value of the mile equals what you could get in cash, take the cash.  The more fungible, the better.

Obviously, when you are flying, you have no choice but to get miles, but when you are doing any sort of shopping, you’re almost always better off with the cash back.  It’s rare that the miles will end up being worth more than a penny each, and that’s just too low a trade-off.  You could make the argument that the first class, international tickets are worth collecting miles for, and that’s absolutely true, but it will take a while to get there.

One more thing: You might question why I would be writing a blog about frequent flyer miles but, in this post, advocating that you use an alternative.  The answer is simple: While I’m explaining how the miles work and what you can do with them, I’m not going to be an advocate for frequent flyer miles simply because I write a blog about them.  You’ll obviously get plenty of miles for flying and you can do well by opening a new credit card with a great mileage offer, but be aware of what you are getting when you have alternatives.

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