I travel a LOT for work. As a result I have a pretty substantial bank of points saved up. Which got me thinking, "This is probably more points than I need. Am I really going to spend this many points on travel redemptions? Maybe I should cash some out since these points will lose value over time."

The question: Should I cash out any of my points? If so, how many exactly?

I looked online and found little guidance beyond "team cashback" vs "team points" discourse. So I decided to have some fun and do some math. The answer was valuable for me, and I think for some of you out there with high point balances might find it useful as well.

This is a post for the nerds for sure, but don't be scared by the math! I promise the intuitions are simple and a calculator can do all the heavy lifting for you.

The Formula

$X=P_0+\frac{ln(\frac{c_t}{c_c})}{ln(1+r)}\times (E-T)$ where $X$ : the number of points you should cash out $P_0$ : the number of points you have today $c_t$ : the redemption value of points for travel $c_c$ : the cash back value of points $r$ : the discount rate $E$ : the number of points you expect to earn annually $T$ : the number of points you expect to spend annually

If you sit and look at this for a minute, you'll probably have a few questions.

• Doesn't the redemption value of points fluctuate?
• Which discount rate should I use? What is a discount rate exactly?
• What if the amount of points I expect to spend or earn will vary over time?
• What if I have points across different ecosystems?
• Do I really have to remember what a logarithm is?

There are good answers to these questions! And I will do my best to answer them. Before you plug this function into Wolfram Alpha, walk with me through the derivation so you understand the intuition behind it.

The Derivation

Let's start by making our question more precise.

What amount of points that I have today should I redeem for cash?

This is a start, but it only describes the form of the output that we want, not the inputs.

Given a current amount of points, an expected future income of points, an expected future spend of points, and redemption values for points vs cash, what amount of points that I have today should I redeem for cash?

Better!

But we still have some concerns like the ones we raised earlier. Don't point redemptions vary in value? What if you'll redeem some portion of your points for Hyatt stays at 2cpp and others for flights at 1.2cpp? What if you got a big sign up bonus this year and don't expect to earn the same number of points next year? What if you're saving up for a big trip five years from now, and don't expect to spend any points until then?