Are Opportunity Cost and Your Subconscious Hurting Your Bottom Line?

Opportunity Cost

We’ll start today with a question: I’d like to ask you to decide which path would you follow:

Maximum Miles for Real Spending?

or

Maximum Miles?

There’s a subtle, but big difference here. Maximum Miles for Real Spending is great–and I’m all for making sure you earn miles for day-to-day spending.  There are people who aren’t comfortable with MMRs, or who don’t have a large cash reserve in case something goes wrong.  In those cases, strive for Maximum Miles for Real Spending.

The fact is: Milenomics isn’t excatly about “real spending.” In fact if you’re looking at real spending as a vehicle to earn more miles you almost always can do better by first analyzing your spending and cutting costs wherever possible.  The draw of using credit cards for miles can, and does, entice us to overspend. We’ve covered this before on Milenomics, when talking about your budget for travel.

Responsibility is Boring

The Excitement of Saving Money

The Excitement of Saving Money

Responsibility is Boring. I get that. Spending is often way sexier than Saving. But If we’re talking about your long term financial health, knowing when to say when (with spending) is incredibly important.

Chasing more and more miles because of where they can take you instead of where you will use them to go is a slippery slope.  

It is for this reason that we need to know our limits, and respect them.  We don’t want to earn Miles and points haphazardly, we want to know what our demand is, and use that demand as a target for our earning of miles. Once we have enough miles we switch to cash back cards.

I enjoy reading the posts from Matt over at Saverocity. I feel like his blog does the best at trying to make Responsible spending/saving as un-boring as possible.  I’d like to dig up a post Matt wrote last month titled, “Flat Fees and Percentages.” If you haven’t already read this I highly suggest it.  Near the end Matt argues you should know your percentage back/value of miles, and be negotiating against that amount using the phrase “How much for cash?”

Now I’m not insisting you go to every store and try to negotiate a 2-5% discount. I want you to just be conscious of when paying with a card actually costs you more. A simple, but effective example can be seen here:

Gas Station A: Cash or Credit

Gas Station B: Cash only

Now I know this isn’t going to be an example most of us can relate to–but I’m asking you to consider this “textbook” type example. In the above example assume everything is held constant, location, quality, service, everything except the cash/credit card issue.

10 Gallons of Gas at Station A: $35.11

10 Gallons of Gas at Station B: $34.11

If you subconsciously chose Gas Station A because you knew they take credit cards, then you just paid a $1.00 premium for this.  That premium equates to 2.8%, or 2.8 cents per dollar. If Your gas Credit card earns 2 Miles per Dollar your cost per mile is 1.4 Cents. Looking at your cost tracking sheet, can you buy miles for less than this 1.4 CPM with MMRs? If you can you just experienced the over-payment with a credit card that Matt was describing in his post. Miles earned from your real spending can end up being your most expensive miles. 

I would bet you subconsciously do this more often than you think, whether it is opting to use a credit card vs. buying a discounted gift cards (Great for Gas by the way, because they count as the “Cash” price), Paying for Gas with a CC vs. Cash, or staying away from a location, like a restaurant  that is cash only–your subconscious mind is powerful at directing your purchases.

Your Subconscious is Costing You Money

Numerous studies have shown that our subconscious has very real effects on how we behave.  A great interview with Jonah Berger in Scientific American showed how our Subconscious mind affects our real life decisions. Two examples given are:

  • An unexplained increase in sales of Mars Candy bars after any new rover landing on the planet Mars.
  • Voters being more likely to pass tax increases if they’re voting for those taxes at a polling place inside a school building. For more on this example Jonah Berger, Marc Meredith and S. Christian Wheeler published this paper on the subject.

The marketing departments of large companies have known that something as small as the color of a product packaging can be up to 85% of the reason people buy a product.  The tobacco industry has done research into such subconscious purchases.  For example, lighter color packages of cigarettes are viewed, subconsciously, to be more “healty.”  Source: Bansal-Travers, O’Connor, Fix.

Along these same lines, you better believe Credit card companies focus on subconscious ways to get us to spend more. In fact Jon over at Wanderlusty mentioned this subconscious advertising in a post he just wrote titled “Finding Inspiration and Truth in Marketing Slogans.” I don’t take issue with his claim that this marketing slogan is inspirational, because it is. Nor do I have an issue with embracing the slogan; both creating connections and great experiences are why I love to travel Internationally.

Image used with permission from @jonk. http://first2board.com/wanderlusty/

“We are Made of our Experiences” Image used with permission from @jonk. http://first2board.com/wanderlusty/

My issue with the ad is that for the most part Citi doesn’t “sell” experiences.The subliminal message of the ad is: using your card to do “something” is a great way of increasing your joy.  This is the exact type of subconscious marketing we’re talking about.  Citibank want 1) to be the first card you think of, and use, and 2) to ensure you spend, spend, spend.The last thing the credit card companies want is us trading in our credit cards and moving back to cash.

For even more on this subject see the NYTimes Magazine article “Get Out of My Subconscious!”

Real Spending = Real Money

When we are too focused on our “real” spending, and how to maximize Miles earned from it we run the risk of overspending.  I don’t have a good way to analyze this for you–but I know my own personal spending got out of hand 8 years ago when I first started really trying to earn more and more miles.

After I stopped looking at my real spending as a way of earning miles, and instead looked at it as a way of spending money things changed.   It was at this time  when I started to look at acquiring Miles as a business venture, and applied constraints like time and costs into the process. I was able to increase my mileage balances quickly, and for very little out of pocket costs by giving priority to the business of earning miles rather than my personal spending.

You could say Milenomics was born out of the need to stop spending real money and instead start earning as many miles as possible for as little as possible. Looking at real spending vs. “fake” spending has made me much more aware of my real spending, and has helped me try to eliminate bias in that real spending.

Opportunity Costs Are Very Real

Take the above example of a Gas station selling gas for two prices; a $.10 cash discount, and a credit card price. If you pay for the gas with cash you give up the Miles you’d earn with the credit card. If you pay with the credit card you give up the cash discount.  Each purchase has an opportunity cost.

This is also a great example where your real spending gets in the way.  Let’s use the current 5X Chase Freedom Gas Bonus. If you choose to pay with a credit card during this bonus period you’ve given up a $.10 discount to earn 5X UR points. At $3.51 a gallon that’s 17.6 UR per gallon vs. 10 Cents per gallon cash discount.  Sounds easy–go with the Credit card, right?

But what if you had a gas station that sold you Reload or Gift Cards? You could earn the whole $1500 worth of your Chase freedom quarterly bonus, and pay for the gas with Cash. I’d argue that this is really the best way to handle the situation.

Option A (Real Spending):$1500 worth of gas = 427 Gallons @ $3.51 a gallon. A 10 cent premium for credit card = a total cost of $42.70.

Option B (Fake Spending): 3 x $500 cards at 5.95 each = $17.85.

These are the kinds of questions I’d like you to consider when you balance your real spending and your fake spending.

If you don’t have access to a gas station which sells cards then the example isn’t valid for you.  Instead lets look at a different example:the Chase Sapphire Preferred. I love to beat up on this card–and I’ve done it many times, both here on Milenomics and on other blogs.   For someone who has high real spending in travel this card is always pointed to as a keeper. Similarly someone who eats out a lot is usually pushed to keep this card as well.

What we’re missing in this discussion is the fact that no card exists in a vacuum.  If it did then we’d be able to make the case that keeping it open was the best idea for all people with high travel and dining expenses.

When you strip this vacuum away and hold it up to the light of other cards you can see that the opportunity cost of keeping the CSP really does hurt you.  I long ago wrote a comparison piece about the CSP vs. the Chase Freedom.  This straight up, head to head comparison is great for driving page views–but it is terrible in the real world; We’re not limited to just one or two cards.

Real Spending Complicates the Discussion

For a moment lets assume our real spending is $0 and our ability to Churn is limitless. The opportunity cost of the CSP is easy to calculate when you remove real spending; If you can figure out a way to churn $1500 a quarter (per Freedom) in these categories:

Chase Freedom 2014 Calendar

You’ll end the year with  30,000 UR (33,000 with Chase Exclusives).  Doing the same spend with your CSP would earn you 7,500. In this example the maximum opportunity cost of holding a CSP instead of a Freedom is 25,500 UR, (33,000-7500)

But What about my real spending?

Obviously the above example isn’t realistic.  We have to put our real spending back into the equation for a complete picture. If we’re going to be realistic I’ll also throw another variable into the mix: The Fidelity Investor Rewards American Express Card.  This is the same card Jason at Food, Wine, and Miles was considering as part of his overall strategy, and a card that I’m absolutely in love with.

Not enough is written about this card, and that is something I’d like to change.  Today I’ll offer it as a replacement for the 2x UR points earned on Travel and Dining with the CSP.  An effective combination would be:

1) Convert CSP to Chase Freedom, use for Churn in 5X categories.

2) Open and use Fidelity Amex for all non Freedom Bonus spending and non bonus Travel & Food.

Earning 2% (or more) cash back with the Fidelity Amex compares to the 2UR earned with the CSP in bonus categories, and crushes it for 1UR normal spending.  Keeping the CSP open and using it for “real” spending also has the opportunity cost of the churn possible on the Freedom card each quarter. 

Where all of this fits into your spending may be different.  Your ability to use a Freedom for MMRs and churn will dictate your opportunity cost of the CSP vs. the Freedom.

This Doesn’t Have to Be True

I’m not saying to leave points on the table by sticking to just one card for all your “real” spending.  A truly efficient strategy includes cards which have bonuses in the categories you spend in. What I’m asking you to do is to think about your spending pattern, and compare it to your MMR churns.  If one is hurting the other analyze that opportunity cost, and see if you can do better. Our real spending should be dwarfed by our MMRs, and as such it really should take priority in which cards we hold.

Note:  For some things the security of a CC purchase are worth even a large premium.  When I want my purchase backed up not just by the store, but by my CC issuer, even a 10% cash discount might not entice me to put the plastic away.