The Cost Of Earning Miles From BankDirect

The Cost Of Earning Miles From BankDirect

Million Mile SecretsThe Cost Of Earning Miles From BankDirectMillion Mile Secrets Team

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Yesterday’s post discussed how you can earn miles from your checking account.

But are you wondering if it really is worth the opportunity cost (the amount of interest which you would earn if you kept your money elsewhere)?

Million Mile Secrets reader TR wrote in the comments yesterday (bold for emphasis):

Hold on, Bank Direct is not such a great deal. Right now today I can get 1.35% on a jumbo money market account. By putting $200000 with bank direct it will therefore cost me ((.0135-.0005)x200000= $2600. I will get over the course of 12 months 240000 miles. Therefore I will be paying a penny a piece for these miles. There are better deals out there, trust me.

Well, TR can put money in a jumbo money market account and get 1.35% interest versus the 0.05% from BankDirect.


However, TR also has to pay tax on the $2,600 in interest earned.

But TR most likely won’t have to pay tax on the AAdvantage miles earned since BankDirect doesn’t send out a form 1099 for the AAdvantage miles earned.

If TR is in the 30% marginal tax bracket, TR has to pay $780 in taxes (30% X $2,600) on the $2,600 interest earned by leaving $200,000 in a 1.35% jumbo money market account for 1 year.

Which means that TR’s opportunity cost, or the after-tax interest earned by leaving $200,000 in a 1.35% jumbo money market account is $1,820 ($2,600 in interest earned less the $780 in taxes).

However, by leaving $200,000 for 1 year in a BankDirect account, TR earns 240,000 AAdvantange miles, since Bank Direct pays 100 miles per month for every $1,000 in average daily checking balance.

The net result is that TR will earn 240,000 AAdvantage miles for an opportunity cost of only $1,820 (the after-tax interest from the 1.35% jumbo money market account).

To put that in perspective, it costs 250,000 miles for 2 First Class tickets from the US to Europe and 270,000 miles for 2 First Class tickets from the US to Asia.

TR’s cost per mile (cpm) is 0.76 cents per mile (opportunity cost in US cents/ # of miles earned or 182,000/240,000), which is a steal!

I’d buy LOTS of AA miles at that price if I could.

So even if you could earn 1.35% interest elsewhere, you’d be better off leaving your money in BankDirect where you’d effectively be getting AAdvantage miles for 0.76 cents per mile.

High Yield Reward Checking Accounts:

Reader agape2travel also wrote in the comments:

With my ‘cash’ I use “HIGH YIELD REWARD CHECKING ACCOUNTS”. The bank I use offers 5.01% interest as long as I make 12 debit card purchases (a lot of $1 teas at McDonald’s for me) and one direct deposit or direct bill. I chose a bill that cannot be paid by my credit cards. My 5.01% earning is better than earning miles (or at least in my humble opinion). There are several “H.Y.R.C.” bank accounts that offer anywhere from 2.51% interest to 5.01%.

It is great if you can earn 5.01% interest from a bank account consistently!

That’s because earning 5.01% interest on $200,000 is $10,200, which results in an after-tax interest or opportunity cost of $7,140 assuming you are in the 30% tax bracket.

If instead of earning 5.01% interest, you left $200,000 for a year in a BankDirect account, you would earn 240,000 AAdvantange miles, since Bank Direct pays 100 miles per month for every $1,000 in average daily checking balance.

Earning 240,000 AAdvantage miles for a cost of $7,140 (the opportunity cost of earning 5.01% interest with a high yield reward checking account) results in a cost per mile of 2.98 cents per mile (opportunity cost in US cents/ # of miles earned or 714,000/240,000) which ISN’T such a great deal to me.

agape2travel is smart to not leave $200,000 in BankDirect when the money can earn 5.01% interest elsewhere!

But high yield reward checking accounts typically cap the maximum amount on which you earn the high rates of  interest.  They also require you to use the bank’s debit card for a certain number of transactions since they fund their high interest payments from the fees earned by using debit cards. These banks are typically smaller and regional banks.

Bottom Line:

I would still leave my money in BankDirect – even if I could earn 1.35% interest elsewhere – since getting AAdvantage miles at 0.76 cents per mile is a deal I’d accept almost anytime since it is a great way to earn miles for Big Travel with Small Money!

However, the benefit of earning AAdvantage miles via BankDirect fades away if you can earn higher rates of interest. The exact interest rate at which it makes sense to not keep money in BankDirect will differ based on your tax bracket and the amount you are willing to pay for 1 AAdvantage mile.

Most folks will still benefit from BankDirect since high interest rates are not readily available (especially in a low inflation environment).

But thanks to readers TR and agape2travel for reminding us to do the math before opening a BankDirect account!

Disclosure: You should know that BankDirect is my primary bank.  However, I don’t get any commission from BankDirect or anyone else for this post or for the links to the BankDirect in this post.  I also do not have a direct financial interest in Texas Capital Bank.  If you ask me to refer you to BankDirect and you open an account, we will both get an additional 1,000 AAdvantage miles.

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This article is several years old & would be nice if it were updated, since some of the terms have changed. (Example - limit is now $50K deposit for the 100miles/month perks -- AND there is now a $12 monthly service charge with .01% intererst.) In view of the changes, it's still pretty cheap miles ($144 annual for 50K AA miles), plus there are +/- 21K miles bonuses available (+ an additional 1K/referral miles (10K lifetime max). So that increases the miles available for the first year deposit to $144 for +/- 71K AA miles. HOWEVER, you do still give up the earning power of that $50K (+/- $650 at 1.32% CD), but you also do not have to pay tax on that interest (20% bracket = $130). Approximate effective cost for 71K AA miles (after taxes) = AA miles = $665 ($144 + $650 - $130). Is it worth it to you? I cannot buy a business class 1-way international ticket for $665, but I can sign up for credit card bonuses and get most of those miles for free. You could leave the $50K in there for the required minimum of 6 months to get all the bonuses, which would reduce the opportunity cost for 46K miles to $332. ($72 + $325 - $65). I can get that on a CC signup-bonus without the effective cost of $332. ((IF I've done my calculations correctly, which is always questionable . . . ) Hmmm . . .

Hello Darius,

Can I get a referral?

Thank you!

Hi Darius,

Thanks for the informative analysis. I would like to give it a try. Can I get a referral? Thanks.

Sarat Ayyagari

Hi Darius,

I`m a big fan, can i get a referral?


Million Mile Secrets

@Sarat Ayyagari - I sent you a referral!

Hi Darius,

Could I get a referral.


Million Mile Secrets

@RK - Any rate under 1 cent per mile is good, so not a bad rate. It costs 67.5K for a 1-way business class trip using AA miles.

@Cl - Referral email sent!

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