Revenge of the Time Value of Points

News

Before we dive back into the time value of points, there are a few relevant and leading news items to discuss:

• Ness, a favorite credit card for churners who love Chipotle gift cards, Aesop bath products, and On sneakers abruptly shut down at 5:00 PM Eastern yesterday. They’re allowing you to redeem your points through Wednesday of next week, and in theory they’ve lowered the redemption cost of several options. There are two interesting observations for the time value of points:
  
  • The value of points can increase over time, though it’s very rare
  • The value of points can drop to zero overnight
    
• HM Bradley, a once favorite high interest rate account and great rewards earning credit card that was eventually completely devalued is shutting down bank accounts in the next month, and credit cards in the next two months. For the time value of points:
  
  • Interest can be considered a form of points, and if it doesn’t pay due to a bank shutdown then its unpaid value can also drop to zero
  • Your opportunity cost for short lived products can be vanish overnight, so the more outsized the value of a product, the more likely it is to revert to the mean or to fail
    
• Alaska is changing MileagePlan award redemption rates. Some of my typical redemptions will go down in price, and others will go up. This is a mixed bag. For today’s discussion:
  
  • A program has multiple aspects, and occasionally different parts of the program have a different devaluation rates

Not only does maximizing the value of your points require burning early and often, but it also necessitates hitting smaller products with outsized value harder than products with average value.

Revisiting the Time Value of Points

With those notes in mind, we can derive an equation for the time value of points. If it doesn’t render correctly in your email client, see the website here. (And yes, I’m sorry to put you all through this, but sometimes I can’t won’t help myself):

FV = PV \times (1 + r - (q \times d) + i)^n \times (1 - p)

Where:

FV = future value
PV = present value
r = any promotional increase of value in a given period
q = the probability of a devaluation in a given period
d = the rate of devaluation in a program in a period
i = interest on points earned in a period (there is a program that does this)
n = the period (time)
p = the probability a program shutting down and wiping out all value

(Thanks to Jon for noting that the original version of this post lacked a definition for i)

The Point?

Is this formula useful? Sort of. It’d be more useful if someone would write a quick calculator web site. Do I actually expect anyone to use this formula? No, not really for anything other than mental gymnastics.

Points and miles still devalue, and sometimes they devalue a lot. Don’t forget that the second part of this site is titled “And Burn”.

Pictured, left to right: MEAB with glasses; The entire churning community after this post.