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Michael Pruser

If you’ve been paying attention to high yield savings rates over the past few months, you may have noticed they’re on their way up. No, not to the 4% – 5% levels we saw about a decade ago. But, slowly, interest rates are creeping in a positive direction.

SmartyPig is one of the high yield savings accounts that has always led the way with top interest rates. Keeping with that trend, they currently offer a great interest rate, making it worth considering for your new savings account.

SmartyPig High Yield Interest Rates

SmartyPig currently offers four tiers when calculating interest for its consumers, based on the average daily balance on the account. So, for example, if today you had $3,000 in your SmartyPig savings account, you would earn 0.90% APY for that day. If tomorrow, you deposited another $8,000, that day would earn 0.95% APY on the $11,000 total in the account. These tier levels are not like tax tables, either… the full balance of your account will earn the APY in the active tier.

  1. $0.01 – $2,500 — 0.85% APY
  2. $2,500.01 – $10,000 — 0.90% APY
  3. $10,000.01 – $50,000 — 0.95% APY
  4. $50,000.01+ — 1.12% APY

In today’s online savings account market, earning 0.85% – 0.95% is still good. However, some competitors can do better. For example, Ally Bank currently offers 1.05% APY on all accounts, regardless of amount deposited. For this reason, SmartyPig is geared toward savers who can keep over $50,000 in their account at all times.

SmartyPig Savings Goals

One of the features that SmartyPig has employed since the very first day it became an online bank was to allow users to create internal savings goals.

For example, if I wanted to create a $5,000 savings goal for a family vacation, I could set up recurring transfers from an external account into my SmartyPig account to track my savings progress. Or, I simply draw from my primary SmartyPig savings account into my goal account. During the saving process, I can track my progress toward my goal. Once I reach the goal, SmartyPig releases funds back into my primary savings account.

The SmartyPig Savings Goals section is largely symbolic. There are no interest rate benefits or negatives to creating goals. If you decide to scrap a goal early, SmartyPig places them back into your main account with all interest earned. The idea here is that visualizing the goal and keeping track of the amount you’ve saved goes a long way towards completing your task.

Resource: Setting Goals You’ll Actually Achieve

Opening Up a SmartyPig Account

The process to open up a SmartyPig account takes all of five minutes. You’ll need your personal information, including social security number and a cell phone, plus a few moments to complete a three-step online application.

  1. Create your login details and enter your cell phone number.
  2. Verify your cell phone number by using the 4 digit code SmartyPig will send you (the stated timeline to complete this step is 14 days before your account will be closed).
  3. Verify your identity by entering your personal information and answering four security questions.

After these steps have been completed, you’ll have your very own SmartyPig high yield savings account. The last thing to do is verify your email address, which is required after your account is active, but before you can set up any external funding source. The login dashboard for SmartyPig looks like this:

Setting Up External Transfer Accounts

In order to fund your SmartyPig account, you must set up an external funding source. SmartyPig is not a bank in and of itself. It’s simply a “product of sorts” that Sallie Mae offers. So, the only way to get money into the account is by transferring it from another account. SmartyPig and Sallie Mae are FDIC-insured for the full $250,000 per depositor. But there are currently no physical locations where you can deposit funds. Therefore, direct deposit and external transfer are your options.

After creating an account and setting up a savings goal (optional), I entered my first external funding source. After this, I went through the standard verification process where SmartyPig made two small deposits to my funding account. This process can take a few days depending on the bank you use. Once the small deposits are verified, you can deposit directly into your SmartyPig primary or goal account.

Related: How Automating Your Finances Can Save You Time and Money

How Much Can SmartyPig Earn You?

Why use SmartyPig? Well, compared to other popular high yield savings accounts, SmartyPig carries one of the best interest rates for high-balance accounts. Popular banks like Discover, American Express, Ally, Capital One, and Goldman Sachs Bank USA offer interest rates above 1% APY but below the 1.12% APY that SmartyPig offers.

Let’s run a small example of how much money a SmartyPig account can earn you on top of the others:

  • As of 5.24.2017, the interest rate at Ally Bank is 1.05%. If you were to deposit $100,000 into your Ally account today and let it accrue interest (compounded daily) at the current rate, you would have $105,393 after five years.
  • If you did the same with your SmartyPig account and it’s 1.12% interest rate, the ending balance after five years would be $105,762. This means SmartyPig will earn you an additional $369.

Admittedly, $369 spread across five years ($74 per year) is not a large amount of money when considering the initial deposit is $100,000. However, we’re all here to save money. If it’s no skin off your hide to spend fifteen minutes setting up and funding your SmartyPig account, why wouldn’t you? After all, $369 for 15 minutes’ worth of work ain’t bad!

Additional SmartyPig Benefits

When SmartyPig was initially launched around a decade ago, it focused more on spending than saving. Backed at the time by BBVA Compass, the bank offered gift cards instead of actual cash when cashing out a goal and earning interest. The benefit then was that specific cards and stores would offer a premium on their gift cards, so an account holder could earn much more than the current interest rate offered. When Sallie Mae took control of the bank last year, the account structure shifted to a more strict savings approach.

However, there is still one feature of the old bank present in SmartyPig. Every account holder has the ability to buy Amazon gift cards within their account. There is no added bonus to do so, though, and your account must be opened for 60 days before being able to purchase an Amazon gift card. So, in terms of how this plays into the SmartyPig platform, it doesn’t.  The best I can do is describe it as an oddity that I suspect will change in the near future.

Other benefits of owning a SmartyPig account are as follows:

  • Refer a Friend Bonus – Every friend you refer to SmartyPig will earn you $10 after they’ve opened an account and deposited $25 within the first 30 days. The bonus is deposited directly into your account! SmartyPig caps the number of new account referrals at 100, so you can earn up to $1,000 extra.
  • Joint or Limited Access to Goals – One of the cool things about your SmartyPig interface is that with each goal you set up, you have the ability to share that goal with family and friends. You can choose to allow them to simply view and keep track of the goal, or to have account access to the goal, where they can deposit funds via their own external funding source.

SmartyPig is a great place to park your savings if you have over $50,000 to do so. Its interface is clean. Getting set up is easy, and tracking your progress is a neat way to stay on top of your savings. If you currently have your money parked in a different online savings account and would benefit from the higher interest rate SmartyPig provides on big balances, consider making the switch.

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Yesterday, the U.S. House of Representatives narrowly passed the American Health Care Act (or as many are calling it, “Trumpcare”) by a vote of 217 to 213. Initially, it was determined by Republican House leadership that the bill was not strong enough to pass a vote. The discussion appeared to be tabled indefinitely. However, after a few amendments to the bill over the course of the last month, there was enough to satisfy the Republican members of the House to ensure a vote would carry with it a passed bill.

I’m going to try my best to discern fact from fiction, remove the propaganda from both Democrats and Republicans, and tell you exactly what this bill means for your healthcare. Depending on who you talk to, you may be hearing things like “tens of millions of people with pre-existing conditions will lose their healthcare,” or “Obamacare is dead, long live Trumpcare.” If you’re on the outside and haven’t actually read the bill, it’s not easy to figure out who is telling the truth and who is lying (SPOILER: in politics, everyone lies).

So, let’s dive right into what this bill does and doesn’t do, and how it could affect your future healthcare.

Pre-Existing Conditions

This single topic is the one that divides the Republican party more than any other. Under Obamacare, anyone that was sick could purchase health insurance through the federal or state exchange. They could even do so at the same price as a someone who had no pre-existing condition.

The idea behind the increased coverage was that by forcing a mandate, more healthy people would pay for health insurance. Their premiums would cover the cost incurred by insurance companies to cover those that were sick, balancing the scales a bit. This meant that millions of Americans, who previously could not get health insurance at an affordable cost, now could under Obamacare. What happens to these individuals if Trumpcare is signed into law, though?

The answer is: absolutely nothing. Any person currently covered under Obamacare who maintains continuous healthcare coverage (which is defined in this bill has not having lapsed for longer than 63 days) cannot be charged a higher premium because of a pre-existing condition. It doesn’t matter what state you live in, and it doesn’t matter what condition or how many conditions you have. Your insurance will be the same as those that have no pre-existing condition.

Examples of pre-existing conditions under Trumpcare:

  • Parkinson’s disease
  • Epilepsy
  • Alzheimers or dementia
  • Kidney disease
  • Sleep apnea
  • Multiple Sclerosis
  • Cerebral palsy

So, what is changing about pre-existing conditions? The primary change is for those that do NOT have health insurance–or whose coverage lapses for longer than the 63 day threshold. If these people then do get sick and look to purchase health insurance, it’s going to be expensive.

Federal law will allow for a specific premium increase (right now, 30%) to be charged for each pre-existing condition. Then on top of that, individual states can request a waiver to increase costs for new premiums even further. States must prove that they are requesting a waiver so that they can either lower premiums for everyone OR cover more people as a result of the waiver. In this way, people who choose not to have health insurance and then get sick will no longer be able to buy healthcare at, what I can only define as, an affordable rate.

Income-Based Subsidies Disappear

Under Obamacare, those looking for health insurance could receive government subsidies based on their income. The smaller the amount of income, the more in subsidies.  This allowed the poor to be able to afford healthcare (in some cases, making it free) and ensuring that the rich were not getting benefits from the system. With Trumpcare, however, the subsidies are based on age rather than income level.

Here is a breakdown of the annual tax credits received from Trumpcare:

  • Someone that won’t turn 30 in the calendar year – $2,000
  • Someone that won’t turn 40 in the calendar year – $2,500
  • Someone that won’t turn 50 in the calendar year – $3,000
  • Someone that won’t turn 60 in the calendar year – $3,500
  • Someone over 60 years of age – $4,000

The amount you see above begins to phase out for those that earn more than $75,000 (or couples that earn $150,000), starting with 10% and going down from there. So, the very wealthy will not receive any government subsidy. However, for example, my family of four (me, my wife, and two children under the age of 4) would receive a total subsidy of $9,000 to pay for health insurance. My current income level means it would not phase out, and as our current health care premiums are $800 a month, the subsidy would be welcomed by my family (and our budget).

Related: How to Save Money on Healthcare Costs

This change in policy would affect the lower class more than anyone else in terms of a negative impact. For some families that are completely covered by Obamcare, they would now owe a portion of their monthly premiums. As a result, the fear from many is that they will no longer be able to make their payments, thus fall into the lapse period and then not have the ability to purchase coverage should they get sick.

All of this said, the change in subsidies from income based to age-based would take effect on January 1st, 2020. It wouldn’t be an immediate impact and would allow families to plan for the changes.

Higher Costs for the Elderly

Under Obamacare, the elderly (ages 55 and above) can currently be charged up to 3x the cost of their premium compared to that of a younger person (under 30). That’s not to say that every plan features this kind of charge, however the option is available to insurers. Under Trumpcare, that charge increases to 5x. Because of the ability for individual states to apply for waivers, there is the potential for them to increase that cost even higher.

Read More: How to Afford Healthcare In Retirement

For this very reason, groups like the AARP have voiced their opposition to this bill, as many seniors would see risings costs as a result. When the first version of this bill (that was not voted on) was scored by the Congressional Budget Office (CBO), the average estimated increase in cost to annual premiums for the elderly was ~$3,200. That amount could be off-set by some of the changes being made to the Medicare portion of healthcare; however, it is expected that most elderly Americans will see a rise in their healthcare costs.

High Risk Pools May Fill Too Quickly

One of the reasons this bill has taken so long to pass the House is that some Republican lawmakers were concerned about high risk pools running out of money. These are the pools that will take care of people with pre-existing conditions, who have a lapse in coverage, and who will require the most funding for their healthcare costs. The current law has included $138 billion in funding for these pools over the course of 10 years to help insurance providers subsidize some of the claims made.

However, while $138 billion sounds like a lot of money, some estimate that the actual amount needed to cover high risk pools is in excess of $300 billion. The Upton Amendment, named after Congressman Fred Upton (R-MI), added an extra $8 billion to this pool, which was enough to get a few additional (and much-needed) votes.

But even though $8 billion sounds like a ton of money, it covers less than you’d think. When getting into the weeds of healthcare for high risk individuals, that money is likely only to cover an additional ~100,000 people.

Healthcare Mandate Disappears

Under Obamacare in the 2016 tax year, if you decided not to buy healthcare, you would be charged a penalty based on the income you earned. For example, my mother (who refuses to listen to my advice) was charged a $2,300 penalty for not having health insurance. Under Trumpcare, the mandate disappears, and no penalty is charged.

The upside for the young and healthy is that if they choose not to carry insurance, they will no longer have to pay out of pocket for that choice. The downside is that if those same healthy people all of a sudden get sick, their premiums will be much higher should they decide to then buy health insurance. However, even that is not much of a downside because the money saved over the years of not paying for health insurance may still be greater than the amount they need to pay on top of their new health care premiums. So, in the end, they’ll have likely saved more money.

The Obamacare mandate never seemed to provide a great enough incentive to get healthy young people signed up for health insurance. This caused health insurance companies to take in too little revenue while paying too much in health care costs. The result is what you see now. Every day, it seems as if insurers are pulling out of different state markets, reducing the plans available to residents.

But That’s Not All… Another Insurance Giant Pulls Out of Obamacare

The Final Word on Trumpcare Part One

Depending on whether or not you’re a fan of the above changes, I have good or bad news for you. These details discussed are not yet law, and there could be (and likely, will be) significant changes. The bill that passed the House of Representatives probably will not be voted on by the Senate; instead, the Senate will write their own healthcare bill and vote on that (when Republicans feel they have the 51 votes needed to pass).

This doesn’t mean everything you’ve read above won’t happen, but it does mean that the finished Trumpcare product could look substantially different than the one that was just voted on. If the Senate passes a bill significantly different than the one the House just passed, then both houses of Congress will have to get together and compromise on a bill that they both endorse. At that point, the bill hits President Trump’s desk, and I believe the odds are somewhere in the 100% range that it will be signed into law.

There is another possibility, however: the Senate may not be able to create a law that can pass, and when they vote on the House version, it could be struck down.

There are no guarantees as to how or when the finished version of Trumpcare will take effect, but many expect something to be completed before the end of August. If that’s the case, millions of Americans will soon be shopping for new healthcare plans. When that happens, we’ll do our best to keep you apprised of the different policy options.

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TAX ReformI’ve been fortunate enough to live on this wonderful earth for 32+ years. During that time, I’ve come to realize two things as certainties.  First, the New York Jets are never going to win a Superbowl in my lifetime and second, taxes are unbearably complicated.

One day, I hope to vote for a President who vows to take care of the former. For now, I’d like to discuss Donald Trump’s first attempt to take care of the latter.

Yesterday, Secretary of the Treasury Steven Mnuchin, and Director of the National Economic Council Gary Cohn, went to the WH briefing room podium and spent a good 20 minutes providing a brief outline of the new tax-cutting plan that they hope to pass through Congress. No timetable was provided (because it’s going to take a while), and specific details were not given (because they don’t know them yet). But the first draft of what Donald Trump hopes will be the new tax code was announced.

If you hate paying taxes, and by some small miracle this (or something close to it) is the plan that passes through the House and the Senate, you can start practicing your smiling now.

Donald Trump’s Tax Cut Policy

Here’s a basic rundown of what the new tax cut policy proposes:

  1. Tax brackets will be cut from seven tiers to three, and the top bracket will be 35%.
  2. The standard deduction for individual and married filers will double.
  3. The only deductions that can be added to a return are the home mortgage deduction and charitable donations.
  4. The AMT tax is phased out.
  5. The death tax (estate tax) will be repealed immediately.
  6. The capital gains rate will be lowered to 20%.
  7. The corporate tax rate will be lowered to 15%.

Let’s tackle these one at a time. We’ll explain how each of them will likely affect a middle class, tax-paying citizen of the United States.

Related: How to Pay Zero Capital Gains Tax When You Sell Your Home

(1) Tax Brackets Simplified

The Donald Trump tax cuts plan proposes to reduce the number of tax brackets from seven down to three. The three levels of taxes would become 10%, 25%, and 35%.  This is a notable simplification of the current tax code, with brackets of 10%, 15%, 25%, 28%, 33%, 35%, and 39.6%.

What is likely to happen is that the brackets will merge, meaning the first two income groups will now move into the new 10% bracket (currently 10% and 15%), the next three merge into the 25% tax bracket (currently 25%, 28%, and 33%), and the top two merge into the new 35% tax bracket (currently 35% and 39.6%).

For a married couple that earns $200,000 in taxable income in 2017, the federal taxes owed would be $42,884.50 with the current brackets. That same couple in the new tax brackets above would pay only $38,615.00, which is a savings of just over $4,000.

(2) Standard Deduction Bump

The standard deduction is one that most tax filers take. For 2017, it is currently set at $6,350 per person and $12,700 for individuals. This means that if you don’t have a lot of deductions to claim on your tax return after this year is done, you can simply take the “standard deduction” and reduce your taxable income by this amount. The newly-proposed standard deduction is $12,000 for individual filers and $24,000 for married filers, though, making it nearly double what we see right now.

Effectively, this means that the first $12,000 of every tax filer’s income is earned federal income tax free. So, for those earning less than $75,000 a year (who would likely fall in the new 10% income tax bracket), this is a savings of $565 per person. My mother and father, God bless ’em, have taken the standard deduction every single year, so this one feature of the tax cuts plan would add $1,100 to their wallets each and every year.

(3) No More Deductions

Now, the bad news. To offset the savings, Donald Trump and his economic team have decided to remove all deductions, except for the mortgage interest deduction and charitable donations.

Anyone who doesn’t routinely take the standard deduction could potentially suffer a bit on this front. Of course, it mostly makes sense to itemize if your eligible deductions are higher than the standard deduction. With the standard deduction being raised, however, this might be a moot point for a lot of people. If you were itemizing in years past because your deductions were a couple thousand dollars over the standard deduction, they should now be below that line… meaning that itemizing is no longer your best option anyway.

Some of the most common deductions that will disappear are:

  • Moving expenses to take a new job
  • State income tax
  • Student loan interest
  • Home office deduction
  • Property taxes
  • Self-employment tax

I can tell you that from the list above, my wife and I take FIVE of those deductions every year. The total of them is greater than the new, proposed standard deduction of $24,000 so, unfortunately, this means we could be paying a little bit more in taxes due to the removal of deductions.

Related: How to Calculate and Pay Quarterly Self-Employment Taxes

(4) Alternative Minimum Tax Phaseout

Essentially, the government says to every high-earning tax filer, “No matter how good you think you are at saving money on your taxes, we’ve got you.”

The Alternative Minimum Tax (AMT) is a safeguard of sorts for the IRS, which makes higher income earners run their taxes twice. Once through the regular tax code and again through the AMT tax code. Whichever number is the highest is the amount of taxes they need to pay. This particular tax has generated tens of billions of dollars in revenue over the years from skilled tax loophole extraordinaires, who would have otherwise avoided a large(r) tax payment.

No specific details were discussed by the White House just yet, in terms of how the AMT would be phased out. However, simply using the term “phase out” would suggest that it will take a few years before the tax is repealed entirely.

(5) Bye Bye, Death Tax

While the death tax gets a lot of publicity, it affects only around 0.2% of Americans. When someone with less than $5.49 million in assets passes away, they can transfer their wealth to their loved ones, tax-free. However, for those with assets greater than that amount, a very heavy estate tax of between 18% and 40% is imposed on what their heirs inherit. Twelve different tax brackets were created for the estate tax (why they needed that many, I have no idea) but the new tax cuts proposal would axe the whole thing immediately.

My personal assumption? The annual gift tax limit— which allows people to give no more than $14,000 to anyone they want each year tax-free–would also be removed as a result of the removal of the estate tax.  Again, this is simply my assumption… there’s no fact-based evidence to back it up just yet.

(6) Capital Gains Rate Down

A capital gains tax (CGT) is a tax on capital gains, the profit realized on the sale of a non-inventory asset that was purchased at a cost amount that was lower than the amount realized on the sale. What was that?

I know it sounds complicated, but as an example: let’s imagine that you decided to buy $50,000 in either Apple stock or a fixer-upper home. When you go to sell either of those, you may be subject to capital gains taxes. The capital gains tax kicks in on any profit made from the sale of your Apple stock or home renovation project… so if either of them are worth more than $50,000 when you sell, you’re taxed on the growth (or gain).

Related: What I Learned from Flipping a House (and Why I’ll Never Do It Again)

The highest capital gains tax rate is currently 28%, but the Trump administration has said it wants to reduce that rate to 20%. This is a tax cut that is most likely to affect wealthy filers, as heavy profits made from investments would be taxed at a lower rate. However, this would also impact some small business owners and entrepreneurs, such as SPEC home builders.

(7) Corporate Tax Drop

The current corporate tax rate has a few brackets of its own, but any company that earns more than $335,000 falls into the 35% tax bracket. One of the biggest talking points of Donald Trump’s campaign was reducing the corporate tax rate to 15% to make companies in the United States more competitive. After a few months of ,”Well, maybe we’ll get it to 20%,” the decision was made to attempt a tax code overhaul where the corporate tax is 15%.

The immediate effect this has on the US taxpayer would not be found in their tax filing, but rather in the general overall health of the US economy. A lower corporate tax rate is likely to bring more overseas companies back to the United States, which means more jobs and higher-paying jobs for those already here. Small businesses would also see higher margins, allowing for an increased ability for growth, expansion, and hiring.

Related: How to Minimize Capital Gains Taxes on Investments

Conclusion

Doesn’t it all sound terrific? Well, the truth of the matter is that what you see above and what is to become legislation–if it becomes legislation at all–will probably be very different. Concessions are likely to be made, both to appease the House and Senate and to ensure the US doesn’t increase the deficit to the point of no return.

Three brackets may become four, the corporate tax rate may go from 15% to 25%, and the Alternative Minimum Tax may simply be reduced rather than phased out. No matter what, though, getting tax reform passed this year is something that most American would welcome with open arms.

We’re a long way away from the finished product. So, put your feet up, relax, and enjoy the show! It’ll be a while.

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Overbooking ImageAs the entire world has likely seen by now, United Airlines removed Dr. David Dao from his Sunday evening flight, by selecting him at random and then dragging him off the airline.

While the United apology tour took a good 48 hours to get started, they finally came around and said they were very sorry for overbooking the flight, and they promised to do better next time. Chris Christie, governor of New Jersey released a statement that said Airlines should abolish the practice of overbooking to avoid situations like this in the future and has asked President Trump to consider the idea.

It’s time to separate the fact from the fiction.

United Flight 3177 Was Not Overbooked

Let’s get this out of the way first. The irony of this whole situation is that the United flight from Chicago to Louisville was not actually overbooked. The flight was full; however, the number of ticketed passengers equaled the number of seats on the plane, so the outrage about overbooking isn’t quite right.

United needed four seats opened on their plane to get crew members to Kentucky for work the following day, so they’ve chosen to hide under the “overbooking” policy. What happened here was that everyone who had a ticket was boarded; there were no additional passengers to board, and United decided to forcibly remove four passengers from the plane in order to board non-paying, non-ticketed employees.

The Process of Overbooking

When handled properly, the idea of overbooking makes sense for everyone. Allowing airlines to book 220 passengers for 200 seats may seem like a bad idea, but when you consider the economic principles behind it, the consumer and the airline both come out on top.  For example…

Assume Southwest has a 200-seat passenger plane and a flight on July 1st going from New York (JFK) to Florida (FLL). The flight is available for purchase six months in advance, and Southwest decides to make 200 seats available for purchase. By April 14th, the flight is sold out and taken off the board. All 220 passengers have confirmed tickets to board the aircraft in a few months, but the airline knows that 20 of those purchase agreements will not be honored.

A funny thing then starts to happen beginning May 1st. Every once in a while, a passenger calls up Southwest to ask to cancel or change their flight because their plans have changed. So one by one, couple by couple, family by family, the 220 tickets held for the flight on July 1st begin to dwindle. You have 218 down to 215, down to 210 and so forth. Then by June 30th, the day before the flight takes off, Southwest now has only 205 confirmed passengers for this flight.

On the day of the flight, Southwest is now tracking the number of ticketed passengers who check in, assuming 100% of the passengers that check in make their flights. Attendants show up at the gate. Boarding is about 15 minutes away from getting started, and the full count is in: 202 passengers have checked in for the flight. Three more people either didn’t make it to the airport on time or decided not to take today’s flight, leaving Southwest with a bit of a problem. They’ve overbooked this imminent flight by two passengers, and they need two people to step aside and take a different flight to Ft. Lauderdale. Let the auction begin!

The normal process from this point is to have the attendant at the gate alert the crowd waiting to board that the flight is oversold. They need two volunteers to come to the table and schedule a different flight (sometimes on the same day; other times on the following day). Opening offers generally start in the $300 travel voucher range, and the attendant will continue to raise the price until two passengers come forward to volunteer their seats.

In the instance where there is no reasonable amount of money to entice the crowd to volunteer their seats, Southwest will pick passengers at random. They will offer them the maximum amount of compensation allowed, $1,350, and call it a day. You can see from the chart below how often passengers volunteer their seats, versus the ones that are forced to schedule later flights. In the 4th quarter of last year, 106,000 passengers across all US airlines volunteered their seats to others, while 9,000 had no choice.

Q4 Booking Standards for Flights

So, this begs the question… why is having 9,000 passengers forced to take flights they don’t want a good thing for the market?

Cheaper Flights

Imagine the scenario above where Southwest sells only 200 tickets initially instead of 220. As passengers begin to fall off the rolls, Southwest reopens the flights online. The later and later this happens, though, the less likely they are to find passengers to take these now open flights. They will be able to re-book some of the seats, but not all.

For argument’s sake, let’s say on the day of the flight, the airline gets the number of ticketed passengers back up to 190. Then on the day of the flight, the three people who missed their plane in the first scenario do so again, meaning Southwest has taken in ticket revenues for 187 passengers. That’s 15 less than scenario #1, which means lower revenues for the airlines.

Yes, the airline will have to compensate the overbooked passengers, but it rarely, if ever, comes out to more than they’ve already taken in. Even when they have to give the full $1,350 to passengers who do not volunteer, they’re still likely in the green (assuming a modest $250 ticket price in our scenario above, 15 additional ticket sales means $3,000 in revenue vs. $2,700 in compensation to involuntary bumps). And the chart above shows that for every 11 passengers who accept modest compensation, only one does not… so the added revenue per overbooked flight can be quite substantial.

Flexible Options

Another reason why overbooking is essential in the marketplace is the freedom to cancel and change flights. Some airlines offer no cancellation or change fees, while others charge a small to moderate fee. If overbooking was not allowed and airlines were forced to book only the number of seats they had available, it’s very likely the ability to change flights would be restricted, or at least much more expensive, than it is today. Airlines are now a bit more forgiving when it comes to schedule changes because they know they have “reserves” available to take your place if needed. In their eyes, it’s no biggie.

Many airlines also offer their own branded airline miles credit card, which offers perks to allow customers to change their flight plans at no cost. As is standard operating procedure with airlines, if they’re forced to spend more money or end up taking in less revenue, the first thing to disappear is usually the quality of their rewards program.

Added Revenue for the Consumer

Some travelers are flexible when it comes to getting to their destination. Perhaps they’re heading home from a vacation and wouldn’t mind spending an extra day around town. Perhaps they’re headed out for a business meeting that can easily be pushed to Tuesday instead of Monday. Why not take the opportunity to cash in a few free flights down the road for a few hours’ inconvenience? There are well-established online travel bloggers who show in detail how they do this. They’ve earned thousands of dollars in compensation, simply for the willingness to take the next flight available. Some even show how you can tackle this more than once a day and almost consider it a profession!

Of course, there’s no such thing as a free lunch, and there is one obvious negative attached to the concept of overbooking. If you are one of the nearly 9,000 passengers last quarter who did not want to leave your flight because of a commitment you could not miss, $1,350 may not be good enough.

This is the very reason why many advocates of the policy are looking to have the maximum compensation amount revised or altogether removed to allow for a true bidding process. If the airline is forced to keep adding to their offer in order to ensure 100% of passengers voluntarily give up their seats, the right flight could yield quite a large number. Even so, in the rare instance that happens, the airlines and the marketplace will still be thankful that they’ve overbooked the flight.

There is no denying that the way United staff handled the United Flight 3177 issue was the exact wrong way to do it. Add on the non-apology from their CEO Oscar Munoz, and for years, people that book their flights will remember this incident. Many of them will even look elsewhere for their travel needs.

But nothing about this PR disaster has anything to do with the concept of overbooking. When executed properly, it’s an essential practice to keep costs low for all consumers. If the day should come where maximum compensation amounts are lifted, overbooking will become an even greater asset to the airline community.

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