By Joel Chouinard, ChFC®
February 8, 2024
With the Holidays now behind us, and spring not quite here yet, it’s easy to find ourselves daydreaming about our next vacation. Beach or mountain? Sun or snow? Kids or no kids? But for most of us, after a few minutes of daydreaming, negative thoughts start creeping in. Can I really afford to go on vacation right now? Will I need to tap into my emergency account to pay for the trip? Can I still contribute to the kids’ college accounts if we take this vacation? These thoughts are very normal because we are constantly trying to balance enjoying life now, while also making sure we don’t completely neglect our future selves. The good news is with some basic planning and a little bit of willpower, you can get both. Here’s a four-step process to help plan your next trip without compromising on your long-term goals.
1. Plan Your Trip and Estimate Your Expenses.
Just like any other financial goal, the first step is to envision what you want to accomplish, and determine how much it’s going to cost. Are you wanting to take the family on a luxury vacation overseas, or are you planning a camping trip to the lake a few hours away? Are you going to fly first class or economy? Are you going to get an Airbnb and cook every meal, or are you mostly going to eat at restaurants?
Once you have an idea of your ideal vacation, you want to estimate how much it’s going to cost. I’m not suggesting you plan for every meal and activity, but rather simply have a rough estimate of how much you will spend on food each day, activities, flights, transportation, lodging, etc. If you do not plan to go on your trip for a while, you could even factor in a 2-4% yearly cost increase to account for inflation (2-4% increase is in line with historical averages). The goal is to get to a total dollar amount, which will become your savings goal.
2. Determine Your Savings Needed.
Once you have an estimate of how much your trip will cost, you need to determine how much you can objectively allocate toward your goal each month or each year. To do this, take a good look at your budget to ensure you aren’t compromising on other goals, such as paying off debt or saving for college/retirement.
From there, you can figure out how long it will take to accumulate the money for your vacation by dividing the total amount needed by the monthly savings. For example, if your estimated vacation cost is $3,000, and you can save $250/month, it will take you 12 months to reach your goal. To take it a notch further, if you are saving the money in an account that generates interest, you can use a time value of money (TMV) calculator to factor in the interest you are getting.
An alternative to this would be to pick a date in the future for your vacation, and simply divide the estimated cost of your vacation by the number of months left until your departure.
3. Open Your Vacation Fund.
At this point, you should have an idea of how much you need to save each month and how long it will take you to accumulate the money. But where should you put that money? I personally like to use squirrel funds (accounts with one specific purpose) for short-term goals like vacations or house renovations. On one side, it earmarks the money, so you may be less tempted to use it for other things. On the other side, if you’re someone who struggles to spend money on big things like vacations, having the money earmarked might make it easier for you to spend it.
Having the money earmarked is one thing, but picking the right vehicle in which to hold it is another. My preferred savings vehicle for a vacation fund is a High Yield Savings account (HYSA) or a Money Market account. Both offer higher yields than regular savings accounts, so interest can do some of the lifting for you. In addition, the money is safe and easily accessible, so if you need it for an emergency, it’s there.
You could also use a Certificate of Deposit (CD) and time it so that it matures when you’re ready to leave for your vacation. CDs typically offer a slightly higher interest rate than HYSA or Money Market accounts, but they are less liquid. Therefore, if you need to access your vacation fund for an emergency, you will be penalized for taking the money out early.
Lastly, I would resist the temptation to invest your vacation fund in the stock market. I understand it could cut down the amount of savings (or time) needed significantly if the market experiences a really good year, but also remember that the stock market experiences a bear market (negative 20% return or more) every 3.5 years*. You wouldn’t want your planned vacation to fall in the middle of a bear market, and all of a sudden, you can’t go because you don’t have enough funds.
4. Start Packing!
As you get closer to your vacation departure date, it might be a good idea to re-run your cost estimate. Compare that to your vacation fund and see where you stand. If you have extra funds, you may want to splurge and upgrade your plane ticket to first class or book an extra activity on your trip. Again, that money is earmarked, so go ahead and spend it!
For those of you who use credit cards for Air Miles or points (which I highly encourage), you can still use them for your trip. After your trip, just calculate how much it cost, and transfer the money from your vacation fund to your main checking account.
From there, you can restart the cycle and start planning your next vacation.
Final Note
The cool thing about squirrel funds is you can use them for any short-term goal. If you’re planning house renovations, you can use the same strategy. Determine how much it will cost, then you can figure out how much you need to save each month. The key is to have a good estimate of the total cost.
*https://www.hartfordfunds.com
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