[Editor's Note: This is a guest post from Alexi Zemsky, MD. Alexi is an electrophysiologist (a very specialized type of cardiologist) and a personal finance blogger who blogs at Miles Dividend MD where he focuses on early retirement and on what he affectionately calls “Travel Hacking.” We have no financial relationship.]
The first thing that needs to be said here is that I am a huge fan of The White Coat Investor. As a doctor who blogs about finance this site has proven to be an indispensable resource that I find myself going back to time and time again. Jim's writing on passive investment, investment vehicles, tax avoidance, insurance products, and financial planning is as exhaustive as it is well researched. So it would make no sense for me to discuss important subjects such as back door Roth IRAs, or health care savings accounts in my guest post. That ground has already been well covered here.
The Miles Game
Instead allow me to focus on the other main aspect of my blog; The miles game. Which is (admittedly) a funny-sounding hobby, but one that I contend is worthy of your further consideration. I will be the first to admit that there is sort of a disconnect between my profession (I'm an electrophysiologist) and my hobby (travel hacking.)
I don't spend too much of my time talking about my hobby with fellow physicians. And the reason for this is simple: when I do, I get a look I that I can only roughly translate as “Why on earth would someone with your salary waste his time collecting tin cans?” And I completely understand the skepticism. Coupon clipping may be enjoyable, and you may be obsessed with it, but it is sort of embarrassing to talk about. Only more so if you make a good salary.
But obviously, it makes sense to me on a personal level. And my goal here is to argue that the miles game is very advantageous on an economic level, particularly for high income earners like physicians. But before I begin I should define my terms.
Defining The Miles Game
The Miles Game involves using the best aspects of hotel and airline loyalty programs to book expensive travel (airline fares, hotel stays, and incidentals) for nearly free. The cornerstone of travel hacking is credit card churning. Credit card churning involves repeatedly signing up for multiple credit cards in order to rack up hundreds of thousands or even millions of miles/points in sign up bonuses to be spent on travel.
In order to participate in churning you must be able to pay off your credit card bills in full every month and meet minimum spend requirements. Which brings us to manufactured spending. Manufactured spending (as I practice it) is the art of offsetting every cent of personal spending with credit card spending, by buying cash gift cards, loading them onto a prepaid card, and paying bills with the loaded prepaid cards.
Strung together these concepts form a powerful strategy (the miles game) that allows you to amass $10-$20,000 worth of free travel per year. So without further ado, here are the top reasons why playing the miles game might be a great idea for your future financial success as a physician.
1. Many physicians do a fair amount of travel.
Travel is a luxury. And fortunately it's a luxury that most physicians can and do afford. But despite this, travel is not cheap. A simple spring break trip to Hawaii for a family of four or five can easily set you back $5000 post tax even if you hunt out bargain fares and hotels. And short weekend trips to visit family in other cities aren't cheap either.
So if travel hacking allows you to save just $12,000 a year, (a conservative estimate assuming 3 to 4 family trips per year) then this becomes money you that you can instead plug into a backdoor Roth IRA or a healthcare savings account. At a 7% return over 20 years, this savings invested would yield you a sizable $521,000 of retirement savings, even ignoring the substantial benefits of using pretax dollars for your healthcare savings account. That certainly isn't chump change.
2. The miles game teaches you useful financial skills.
In this post I am presenting travel hacking as a useful adjunct to financial planning. But for me it actually happened the other way around. Part of the reason I became a doctor is that I didn't want to think about business all the time. I just wanted to take care of patients. I only became interested in personal finance after I saw the incredible power of getting organized for travel hacking.
To be successful in travel hacking you must really get into the weeds in terms of monitoring your own credit score, staying on top of your bills, and paying attention to micro economic details. But the key to your eventual success is that it's all fun. That and the rewards are immediate and obvious.
This positive feedback loop unexpectedly sparked my interest in personal finance. Both pursuits required similar organizational skills. And for the first time I understood that such detailed exercises could be fun. And while the rewards of investing for retirement were not as immediate as they were for booking vacation travel with miles, the utimate goal was ultimately even more attractive than free travel – early financial independence.
3. Mixing a little luxury in with your frugality.
On some level smart financial planning is simple. It's all about cutting your spending and increasing your investment. But let's face it, after 7-11 years of postgraduate training, sometimes the prospect of this sounds about as appetizing as a clear liquid diet. Travel hacking allows you to save money even as you cash in on previously inaccessible luxury goods such as first-class travel, luxury hotel stays, and elite loyalty status. It is quite simply one of those rare win-win propositions that in medicine or in life, I think you'd be foolish not to take advantage of.
4. Travel hacking is a productive form of escapism
The miles game is like a giant entrepreneurial puzzle. It sounds more complicated than it is, but figuring out all of the pieces that make travel hacking work is a big part of the fun. The game can probably be played in about 6 to 10 hours a month of your free time. And you will use skills that you don't really have to use in your day to day job as a doctor. And aside from the satisfaction of using different parts of your brain, you also get the palpable rewards of free travel that come along with your new hobby.
5. The joy of giving.
When you've amassed a good amount of miles, one of the greatest joys is being able to fly your distant family and friends out to visit you or to meet up with you in a far-off locale. Since you are sharing the fruits of your labor (which is kind of like sharing a homemade present) it feels very personal despite it's impressive real world value.
6. Tax efficiency (ie saving the best for last.)
Most doctors are in high tax brackets, and many are in the highest tax bracket. And unlike venture capitalists and hedge fund managers, we tend to pay our fair share of income taxes, and then some. And if you are in the highest tax bracket and live in a high tax state (like me) it is easy to see more than $0.50 of every additional dollar that you make will disappear to taxes. Now I'm about as liberal as they come. But it doesn't take a genius to realize that it is in your own rational self interest to pursue tax efficiency when faced with such incentives.
How many additional patients would you have to see to take-home an additional $12,500 post tax (or $25,000 pre-tax) in a year? How many colonoscopies would you have to perform? How many Gallbladders would you have to resect? How many arrhythmias would you have to ablate? How many phone calls would you have to return? And how many pieces of paperwork would you have to fill out?
A lot. That's how many.
And to me, at least, the additional effort would not be repaid with additional happiness from my increased income. It would, I think, be a net loss. Which brings us to one of the hidden beauties of the miles game.
The miles that you earn are not taxed.
By all means you should not take my word on this, and should discuss this claim with your accountant, but the fact of the matter is that, in most cases, miles are treated as rebates, and are not taxable. So if you redeem $12,500 worth of travel with your miles per year you're effectively giving yourself a $25,000 a year raise. And it doesn't take a neurosurgeon to realize that any hobby that puts $25,000 in your pocket each year and over $500,000 in your pocket in 20 years, is fun to pursue, and reinforces good habits, may not be so crazy after all.
Now if you'll pardon me, I've got some tin cans to collect.
What do you think readers? Are you a travel hacker? Why or why not? Comment below!
WIth all these credit cards, have you personally had to deal with any issues of identity theft/fraud? We did last year with DISCOVER. It was stressful and time consuming. We currently have fraud alerts on our credit reports and are considering credit freezes which would make your strategy difficult. Any thoughts? Thanks for an interesting post.
Dr. Mom,
Thank you for your excellent question.
I have no experience with identity theft, so take my comments with a grain of salt (I’m no expert.)
I think the first question is; “does having multiple cards put you at higher risk of identity theft?” It is intuitive that the answer is yes. After all, more cards would be more targets for theft.
On the other hand I don’t know how vulnerable an unused card sitting in a drawer at home would be to theft.
What I am fairly certain of is that if someone were to put false charges on one of my cards now, I would realize it sooner than I would have in my days before playing the miles game. I am very vigilant in keeping an eye on my credit report and credit card bills now, because my next churn depends on it.
I am not sure that that helps, but those are my thoughts.
Thanks,
Alexi
Two of my worlds just unexpectedly intersected in this blog post – cardiology and miles.
Nice Mike,
Great minds think alike.
Alexi.
Everyone needs a hobby, so no judgement upon those who like to play the miles game. And I’ll admit that it sounds rewarding and maybe even fun. This hobby just seems to be a bit too risky for me. How often to you mess up and incur interest and fees? And as a previous commenter pointed out, having more credit applications flying around increases your exposure for identity theft. Recovering from ID theft can easily take 100 hours of work.
Also, I like hobbies that I can put down for a while if I’m too busy to play with it. This hobby is alot like a pet in that you must devote time taking care of it regularly (6-10 hours/month) or it won’t work.
Monk,
I think these are fair criticisms.
If it sounds like too much work, it probably is.
Saving a good portion of your income, investing in smart low cost passive vehicles, and insuring against badness are much more imperative than the miles game ever will be.
The fact is that for me I love the process and the puzzle like aspect of sorting it all out. So for me it’s about the process and the results in equal measure.
And if you happen to be the type of person who gets a kick out of this stuff, it is very rewarding.
Thanks for commenting,
Alexi
I am all for putting all my expenditures on my Southwest Credit Card that I pay off monthly to accrue plane tickets. Not worth it to me to open multiple credit cards and cancel to accrue rewards. That can’t be good for your credit score and as others have mentioned it may increase your risk for identity theft.
Agreed. Sounds like this would signficantly impact your credit score. More than 1-2 credit adds/subtracts a year can decrease your credit score and all that opening and closing would look very concerning to most banks if you needed a loan.
Incidentally, my father is a big fan of the American Airlines Citibank Card. He is always trying to get me to sign up for it. It has a $95 yearly fee (free the first year) which makes it hard for me to stomach but it gets you:
– 1 mile for each $1
– 2 miles for each $1 spent on AA.com
– Reduced mile charge for some fares (cheaper flights)
– No blackout dates for miles
– 10% “miles back” when booking using miles
– Free first checked bag each way (per person)
My dad mostly likes it for the last feature as one flight requiring a checked bag pays for the yearly fee. Also he charges just about every thing he can each month and then pays it off.
I do the same with the same card and love it.
It should also be noted that you left off one *very* important perk:
– yearly $100 travel voucher for american airlines
Therefore, so long as you’re traveling on currency (as opposed to miles) at least once every year, the $95 yearly fee becomes essentially free in a matter of trading around where your money goes.
Finally a post that is right up my alley 🙂 I’ve been racking up miles/status through cc bonuses for about 5 years now and it’s an awesome hobby. I’m pretty cheap by nature so I think the thing I like most about this hobby is that it lets me enjoy things that I would never pay for on my own.
It’s not a ton of work but you need to have an interest and be organized, that’s it. You can easily rack up $5-15k in rewards per year and it’s all tax free. Granted, I probably wouldn’t spend that much on travel anyways but I don’t mind staying in ocean front suites in HI and flying business class to/from Europe for free either 🙂
PS – For those worried about your CS, you’d be surprised at how little it can affect your score. I’ve never been denied for a card, have about 30 cards at the moment and a CS in the high 700’s.
Doing this with Southwest cards (premier and eventually plus) so that I can get Southwest Companion pass for wife’s interviews. Figure most residency will have preferred rates for hotels so I should focus on flights.
I disagree with people worried about their credit scores, but then again I don’t plan on needing to get more than a home loan. I have no idea about the credit fraud.
This has certainly raised my eyebrows. And getting rewarded for everyday expenses is certainly very enticing.
I did have one concern. Reading through your site regarding “manufactured spending,” it seems almost too good to be true that one can use a credit card to buy “cash equivalents” such as the Vanilla Reload, and then load into a Bluebird account, then use the Bluebird to write a check to pay off the credit card…thus creating money spending that really didn’t occur at all (aside from the fee Bluebird charges).
So this kind of circular money cycling seems almost like a landromat. Are there cases or reports of people’s accounts getting audited/looked at if the credit card company or Bluebird or Vanilla Reload thinks that this kind of spending is a bit abnormal? What is the legality in this kind of manufactured spending?
It recently got dramatically tougher to manufacture spending. The vast majority of gift cards/pre-paid debit cards that can be turned in for cash now require you to pay for them with……. (yep) cash !!
In my area the change occurred on April 3rd, 2014.
Loading my Wally World Blue Bird is a wonderful way for me to my manufactured spending using vanilla ice cream visa gift cards earning miles and dollars.
I think it is well worth my time as it is kind of a fun hobby to make and extra 20k per year.
After you go through these credit card “churns”, how long do you keep the cards? Do you cancel them before the following year when the annual fee kicks in?
Yes,
I generally cancel or downgrade my cards 10-11 months after approval, unless the card pays for itself.
Alexi
FWF?
Ming,
There is nothing illegal about manufactured spending, provided you abide by the rules of your credit card user agreements.
Manufactured spending is an accepted term, but it can mean many different things. What it means for me is that I offset every penny of my spending with credit card spending. It costs me about 1% to buy gift cards, but it’s worth it to me.
Others are considerably more aggressive with their manufactured spending. And blogger frequent miler seamlessly made 1,000,000 miles in one month last year.
Each person must decide for themselves what they’re comfortable with when it comes to this sort of thing. But it is not illegal. And no money-laundering is going on.
Alexi
I am still confused as to how this is helpful. If I charged $80,0000 worth of prepaid cards on a miles card over the course of the year I am going to earn 80-90,000 miles plus maybe a bonus if its a new card. Lets say 30,000 miles.
Thats 120,000 miles. If those cards cost me “1%” they I “spent” $800 earning that 120K. Given that 25k miles is worth about $250 in flights you essentially are doing a whole lot of work to earn one extra roundtrip (in the US) a year.
I think the key is to avoid spending money you wouldn’t otherwise spend. For example, I just bought a bunch of windows for the house. I could have put it on a card and gotten cash back (could have gotten miles if I had a miles card) but they gave me a 3% discount to pay cash, so I did. But there are plenty of offers out there where you only have to buy one thing or put $500 on a card and they give you tons of miles as a sign-on bonus. This is the type of thing guys like the guest poster are after.
I know it seems weird but there really is a lot of money to be gained. Right now there is an offer for 100k AA points when you spend 10k in 3 months. There is a $450 annual fee (you do get a $200 statement credit after first purchase) but people are spending the 10k within the first couple of weeks, waiting until the points post and then canceling and getting the AF refunded netting 100k points and $200. My first time around I paid the $250 but I’ll be doing this for the second card I was just approved for.
Good MS’ers will be able to manufacture spend around 1% so if you need ‘to spend’ $10,000, it should only cost you around $100. So in this case, you’re paying $100 for $200 and 110,000 American Airlines miles. Good deal? And to make things even sweeter you can do another card 8 days after your first application and do the same thing over. And if you want you could do a third card 68 days after your first app 🙂
Travel hackers don’t care about cash back from normal spend, that’s pennies compared to the sign-up bonuses. And while MS may not be illegal, let’s be honest, it’s basically a white collar way of laundering money.
Thanks for the reply! This makes me feel more at ease. I can definitely see the benefit in converting as much required monthly spending as possible to these rewards cards. I do also see some use in manufactured spending as long as it’s not too excessive for me. Maybe just spend enough to make up any shortage in meeting the amount of miles/points needed for the planned trip.
Unfortunately I just got my 2nd credit card with my bank about 2 weeks ago (I had only been using my first and only card up until that point) and so will have to wait a few months before applying. But will do some research in the meantime.
Harry,
Thanks for the comment. You do a great job of illustrating the incredible power of travel hacking.
I would make a point here. Travel hacking is a spectrum whose practitioners feel comfortable at varying degrees of aggressiveness.
For myself, not indicating that this is better or worse than anyone else, I simply try to offset each dollar of my own spending with credit card spending. To me this seems reasonable and comfortable.
Also, I can not concede That travel hacking is a form of money laundering. After all, as I understand it, money-laundering is a way of transforming illegal money into legal money. I.e. running drug money through a cover business in order to be able to bank the drug money.
I think a better description of travel hacking, is credit card arbitrage, where the practitioner takes advantage of an opportunity in the marketplace to legally benefit himself.
Alexi
WCI
You raise an excellent point about not spending money you wouldn’t otherwise spend.
As with any such endeavor, there is the risk of getting too enthusiastic, and spending more money than you otherwise would have in order to save money!
In my case however, this hobby netted me thousands of dollars of value which I have invested in my own retirement.
Alexi
I’ve read a little about these Vanilla cards. Is there a way to purchase cash equivalents without getting hit with card fees? If not, what of the prepaid card options has the lowest fees?
I stopped at my local CVS yesterday and was shown a paper where as of April 2014 they are not selling Vanilla Cards on credit card. Is there another store that sells them on credit card?
I think this hobby is awesome, particularly for those graduating now (most of us are >200k debt), which is at least 2500/mo in student loans. My wife and I will be 500k in debt; which is about 5k/mo on 10yr repayment plan.
This makes repaying off student loans much less painful. I can offload those 5k/mo via manufactured spending and reward myself with travel.
Resident,
This is a fun hobby. I have no doubt that you will find it very rewarding. And coupling your savings to investing in your retirement makes it doubly powerful.
It’s great that you are already interested in making smart financial decisions now. I was not so interested in finances at your stage, but wish I had been. Pay particular attention to WCI’s advice to “live like a resident” for the first 5 years of practice. That is a powerful prescription.
You are correct that the vanilla reload opportunity is largely a thing of the (recent) past. But don’t fear, there are many other avenues to pay for loans/etc indirectly with your credit cards.
One such opportunity is to use evolvemoney.com to pay your loan payments with Visa gift cards purchased with credit cards. I know salliemae is on their list of payees.
Good luck,
Alexi
I checked evolvemoney and they accept reloadit cards? I have not used these. Can I pay for them with credit cards?
Monica,
Reloadit cards can sometimes be bought with credit cards but usually not. It’s store dependent.
On the other hand Visa gift cards are easy to purchase by credit card at drug and grocery stores and are widely reported to work with evolve money. You simply set the PIN and use them as debit cards.
Alexi
I am sorry I am very new to this. Is there a way you deal with the 5.95 fee for the visa gift card? I can only find ones up to $500. It seems the only visa cards you can reload must be done with cash. Thanks!
A couple of weeks before your post here a friend told me about taking his wife and kid to Australia first class and hotel for free from this kind of thing. After reading the post I dove in. I got approved 5/6 cards for a total of 240,000. I can easily make the spending requirements. The only extra cost is a couple of annual fees not waived and if I pay any fees to buy reload cards for manufactured spending.
Keith,
Welcome to the miles game. I hope my site was helpful in your pursuit.
Congratulations on your first churn. It’s amazing how value packed this endeavor is.
Don’t forget to invest your savings passively in your retirement. Only then will the circle of goodness be completed!
Alexi
Alexi, your site was helpful. I already save a ton, this will just allow for travel that otherwise wouldn’t have been done, but mostly will be used to get tickets for family to visit my wife and I more often.
I’m very much a newbie to this credit card chunning. The article was a great why to do it. But are there any detailed articles as to HOW to do it? With specific instructions?
Joe,
Thanks for your interest in the topic.
I would start here:
http://www.milesdividendmd.com/miles-and-points-travel/
And please leave any questions in the comment section. I’ll be happy to answer them.
Alexi
Joe,
I think my initial response to this question got filtered out by a spam filter.
If you would like more information about the hows of travel hacking, simply click over to my site (link in article.) And clip on the tab at the top right of the page for “miles and points travel.”
Please leave any questions in the comments section.
Alexi
Found it and pulled it out.
Monica,
You should be able to find visa gift cards for a 4.95 fee. This works out to a 1% cost plus the time it takes to devote yourself to this hobby.
Keep in mind that if you are hitting credit card bonuses your cost is much less than 1 %.
But if you want to pay nothing, buy gift cards with 5% cashback where you buy your supplies. This will net you 4%.
For more see “don’t pay, do play” on my site.
MD2