Before leaving for Asia I told myself I’d live it up by staying at only the finest 5-star hotels. Compared to America, Asia ex-Japan is relatively cheap. I had just finished paying down $100,000 in mortgage debt seven months earlier than expected and felt like I deserved to be rewarded. Billing 60 hours a week for three months in a row as a consultant in order to expedite my mortgage payoff was also the antithesis of being an “early retiree.”
All excited to start booking my hotels, I clicked the 5-star only search option online for Seoul and Kuala Lumpur. But instead of booking four nights at the Shilla Hotel in Seoul for $350 a night, I decided to book the Centermark Hotel in Insadong for only $120 a night after taxes and fees. The Centermark Hotel was rated four stars and had free wifi. It was walking distance to all the major palaces and the Buchchon village. A $1,320 savings could easily pay for all food, transportation, and attraction tickets while in South Korea!
Then it was Kuala Lumpur’s turn to book a hotel. Originally I was going to stay at Villa Samadhi, a 5-star resort in the heart of Ampang where I used to live as a kid. The hotel looks like an oasis, perfect for a honeymoon retreat. At $250 a night for a suite with a private pool, breakfast, and wifi, it’s pretty good value compared to the prices you’d find for a similar suite in San Francisco.
But here’s the thing. My personal finance brain took over. The GDP per capita in Malaysia is only about $24,500 vs. $35,400 for South Korea and $78,000 for San Francisco! What business do I have spending $250 a night for a 5-star hotel in Malaysia as that would be equivalent to spending around $850 a night in San Francisco, something I’d never do! Instead of booking Villa Samadhi for $250 a night, I decided to book the four-star Impiana Hotel in KLCC for $120 a night. It just felt right.
DECIDING ON HOW MUCH TO SPEND ON HOTELS
Like many of you, I love getting a good deal. I also hate paying inflated prices just because I’m a foreigner. For example, paying 18 ringgit ($5) for a fresh young coconut drink at the hotel feels stupid when I can get one for 3 ringgit ($0.8) several blocks away at the famous hawker stalls of Jalan Alor. My other pet peeve is taxi drivers trying to rip me off by not putting on their meters.
After spraining my ankle one day, I decided to take a taxi back to the hotel for what I thought would be around 5 ringgit. After driving for a minute, I asked him about putting on the meter and he refused. So I adamantly refused to pay him. Luckily, the hotel was just a couple blocks away so I got out and walked. If you’re getting ripped off, stand up for yourself!
After airfare, spending money on a hotel room is generally the number one expense incurred by all travelers. If you can find friends to stay with for free, then fantastic! But after a couple nights, I always feel bad and decide to go to a hotel. I’m also past the stage of sleeping in hostels, but if you’re not, more power to you as you can meet a lot of interesting people there.
Spending $120 a night for a hotel just “felt right” for some reason. And in my gut, spending over $200 a night just felt as wrong as spending a full year’s salary on a car. I’m sure many of you have felt the same way about spending money on certain things. Well, after a bit of thinking, I’ve created a formula to calculate a financially responsible vacation hotel rate.
Calculating A Financially Responsible Hotel Spend With NHER©
1) The first step is to divide your total home living cost back home by 30.5 days. For example, if you own in San Francisco, your monthly home living costs might include a $4000 monthly mortgage, a $1300 monthly property tax, and a $200 monthly utilities cost. This totals $5500. Divide this by 30.5 days and you get $180 a day. $180 is more or less your Natural Hotel Expenditure Rate (NHER)©. The less you spend, the greater the deal you feel you’re getting and vice versa.
If you rent, then simply take your rent plus all living expenses and divide by 30.5. If you’ve paid off your mortgage, then replace the mortgage with a market rate rent in your NHER© calculations.
2) The next step is to see what the current GDP per capita of the country you are visiting. In the above example, as Kuala Lumpur’s per capita GDP is just 1/3rd San Francisco’s per capita GDP, it’s not financially prudent to spend over $180 on a hotel room. At the same time, it may be also difficult to find a decent hotel for less than $60 ($180 X 30%) in a big international city where tourism is the #6 driver of GDP.
The GDP per capita is just a sanity check, because prices tend to “normalize” across larger international cities. So what is the personal finance geek going to do?!? Lucky for us, there’s no need to reinvent the wheel to figure out how much we should spend.
3) The final step is to use the Big Mac Index as a multiplier to calculate your adjusted NHER©. McDonald’s is everywhere in the world. As a result, economists have used the Big Mac index to track prices and purchasing powers across every country where McDonald’s operates. All you’ve got to do is take your Natural Hotel Expenditure Rate™ and multiply it by the the destination country’s Big Mac price divided by your country’s Big Mac price.
For example, a Big Mac costs $2.5 in Kuala Lumpur and $3.8 in San Francisco. Divide $2.5 by $3.8 to get 66%. Now multiply $180 by 66% and you get $118.80. Well what do you know. No wonder why spending $120 a night in Kuala Lumpur felt just about right!
Here’s a cheat sheet if you’re too lazy to Google your destination country’s Big Mac price.
SAVE MONEY ON HOTELS WITH LOGIC
There’s a fine line between being frugal and cheap. Now you don’t have to identify with being either. Instead, embrace your financial acumen by doing some logical calculations to figure out how much you should probably spend.
My recommendation is to stay within 130% of your adjusted NHER© if you live in a more expensive coastal city like NYC, LA, San Diego, San Francisco, Boston, Miami, and Seattle. If you so happen to live a low cost city in the MidWest, then go ahead and expand up to 200% of your adjusted NHER©.
Always try to ask yourself how much you’d be willing to spend before checking out the prices. This is the exercise I always do when looking at open houses. Resist reading the brochure until after I’ve spent time checking out the entire house. I want to test my market acumen. If the asking price is way below (20% or more) what I think it should be, then it’s a good buy indicator. The same thing goes for hotels after you read all the marketing material!
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