One of the most important considerations when planning a trip is the budget. For those with goals of taking vacations on a consistent basis, it's important to add traveling costs to your household budgeting just like you would for any big ticket item. How do you start budgeting for a lifetime of travel? We sat down with financial advisor Heather Saunders, CFP in the spring of 2019 to discuss this topic.
T: Please tell us a bit about your financial background and what you currently do.
H: I'm a financial advisor in an independent branch of Ameriprise Financial. I've been in the industry over fifteen years with six years in this current practice. In addition to using a holistic approach to manage investments and provide comprehensive financial planning, I also deal with net worth, cash flow, short and long-term goals, estate planning, and tax planning.
T: Do you work with many people who include vacations as part of their financial planning?
H: Absolutely, more and more. One of the biggest questions we get, especially from our younger clients who are just starting to really accumulate wealth and plan for the future, is how to balance that out with the present. Student loans, buying a home, planning for a family, and education expenses and what has really become a more common theme from that age group is the desire to travel and to not have to wait to do it.
On top of that, it's not just wanting to travel within the States, which is what a lot of us grew up doing, but traveling internationally, incorporating adventure into travel, and really desiring once-in-a-lifetime types of experiences... things that they feel they might not be able to do if they wait until retirement.
T: What are some challenges people can encounter when trying to budget and save for a vacation?
H: When saving for any major purchases, there are always going to be potential pitfalls. You start with a plan to save a specific amount, but then you overspend (for whatever reason) in your normal monthly budget, so you stop saving to the travel fund, or maybe even borrow from it. There's also the inclination to use credit to pay in advance for a trip, but then of course you will most likely be paying interest. Travel can almost be addictive in a way, so those types of credit charges can really get away from you and add up over time instead of getting paid off.
As far as budgeting, I think the problem is that creating a travel budget is the step that people forget! It's more of a "book it now or do it now" and then figure it out later. It's almost counter-intuitive, but another pitfall can be paying for different parts of a trip separately over time when you are not keeping sight of the full expense of the trip. For example, booking a flight now, and then the hotels a few weeks or even months from now without regard to the total you've already spent. And then excursions and upgrades. By the time you go back and add up the whole trip. it can be that the total is a whole lot more than your original intention. Or on the flip side, you just might be unrealistic about how much it's going to cost to do all the things you want to do, especially if you're inclined to do upgrades all along the way - business or first class flights instead of coach, the balcony room on a cruise instead of something more modest, a private transfer to your hotel from the airport instead of a shuttle, etc. I think this is one of the areas that you can really benefit from working with a Travel Advisor because they can help you stick to that original budget and make recommendations about which upgrades are worth the splurge and which ones might not be.
T: What are some tips you have for people to budget for their vacations?
H: First, figure out the costs of your trip in advance (as best as you can). With the help of a travel advisor or some types of financial software, you can get a handle on the probable expenses for your journey. It can be very difficult to set an accurate travel budget since travel is so different for everybody. Your budget will vary depending on whether you're driving, sailing, or flying to your destination; staying in a hotel or with friends; or eating out or cooking in a rental. You want to know as best as possible how close your projected expenses match the reality.
Set up a Travel Savings Account. Having your expenses paid for by the time you leave the house can remove a lot of stress. One solution is to set up a dedicated savings account. Pick an account that has as high an interest rate as you can get and isn't accessible through an ATM. That way you won't spend the money on impulse, and you can potentially earn more interest than your normal bank account would. Contributing regularly to the travel account and adding extra when you have it will help your travel fund grow. And keep in mind, this needs to be a completely separate savings account than your normal cash reserve which is for emergencies only. Don't wait until you know what trip you're taking to start saving. Go ahead and start it now. That way if an opportunity presents itself, you are already on your way to being able to pay for it in advance.
Use a Credit Card Wisely. Credit cards are the simplest way to book flights, secure hotel reservations, and make other online arrangements, and it is smart to earn rewards that can either give you cash back or book future travel. If you rely on one card for the entire trip, it's easy to track what you spend and where. Just be careful to not let your expenses get away from you just because you are using credit.
Learn about Exchange Rates. If you travel outside the United States, the exchange rat of dollars to foreign currency is going to affect your budget. Looking up the exchange rate before you go gives you a better idea how far your American dollars will really stretch. Here again, another advantage of using credit cards during your trip is that you get a better exchange rate using them than if you swap dollar bills for foreign money.
Consider Taking out Insurance. This is to cover situations where you are medically unable to travel, or if you get sick or injured during the trip itself which can be a huge unexpected cost in addition to your trip. It's just important to know exactly what is and isn't covered. For longer trips, like a year or more, there's also expat insurance that can provide that longer-term coverage.
Consider Working with a Travel Advisor. It's going to be a huge stress reducer, but on top of that, there are a lot of financial advantages. For example, one idea to save on a trip would be to travel off-season... but destinations have peak and slow seasons for a reason. An advisor can really insight on if it's all weather-related, if it has to with the local economies, things like that. And if you decide to travel off-peak, they can give insight as to alternate activities to be enjoyed off-season.
If you'd like to learn more from Heather about budgeting for a lifetime of travel or to get your financial planning in order, you can find her on her Facebook page as well as her Ameriprise business profile.
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