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3 Easy Steps to Fund Your Next Vacation — Before You Go
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Save for vacation ahead of time
How to save the money you'll need so you won't face extra credit card bills back home.
From the Merrill Edge Minute e-Newsletter.
Key Points:
  • Saving for a vacation can help you reinforce vital financial skills that you can use when planning for other large purchases.
  • Estimating the total cost of your trip and breaking it down into smaller chunks can help make saving easier.
  • Automatic transfers from your checking account to your vacation fund can help streamline your saving strategy.

Who doesn't look forward to going on vacation? And although many also enjoy planning for it, oftentimes they overlook the vacation budget.

Yet there's plenty of wisdom in setting money aside before leaving home. If you've got your trip covered financially, you'll probably appreciate it more knowing that you won't bring back a suitcase full of credit card bills, which could sidetrack your other important financial goals.

"Vacation budgeting can be a good opportunity to reinforce the benefits of planning and saving, which you can also apply to larger goals, like buying a house or funding college or retirement," says Christopher Vale, senior vice president, products and solutions, Merrill Edge.

Consider these three easy steps to help you pay for and revel in your next vacation:

Step 1: Estimate the trip's costs.
Step 1: Estimate the trip's costs.

Determining how much a trip will cost involves some research. You'll want to estimate costs for transportation, lodging, food and special activities. A daily allotment for incidentals, such as gifts and possible emergencies, needs to be factored in as well. To get you started, consider these questions:

  • As a ballpark estimate, how much are you willing to spend for the vacation, and does that amount fit into your overall budget without impacting other goals such as retirement?
  • What discounts, including age-based ones, are available to you or your traveling companions, through your employers, clubs and affiliations?
  • What noncash options, such as air miles or rewards points, do you have that could lower costs or provide extra benefits?

Once you've answered these questions, calculate the total expected cost of the trip and include incidentals. To cover the unexpected—emergencies and impulse purchases—Vale suggests factoring in an additional 10% to 15% of the overall estimated trip cost. Finally, compare the estimated cost of the vacation to how much you've already saved. The difference represents how much more you need to save before you head off for fun.

Step 2: Build your vacation fund.
Step 2: Build your vacation fund.

Once you've determined what you need to save, figure out how much you must put away each pay period, for example weekly, to meet your goal. If, for instance, your trip is about four months off, then you have roughly 16 weeks to save. Divide your savings goal, say $3,500, by the number of weeks (16). In this example, you would need to save $219 a week to meet your goal.

Build your vacation fund

The video How to Save for a Large Purchase offers easy steps to help you save for a vacation.

Where you keep your vacation fund may depend on how long you have before you plan to take the trip. If your vacation is less than a year away, consider a savings account rather than an investment account to avoid possible market losses.

If the trip is a pricey, once-in-a-lifetime adventure that's five or 10 years down the road, consider investing your money to potentially yield higher returns. This can help you meet vacation savings goals and enhance your vacation experience.

Whichever financial vehicle you choose, think about setting up recurring transfers from your checking account to a separate account dedicated to your vacation funds. When the money moves automatically to your vacation account, you're less likely to miss the funds and more likely to reach your goal.

Vacation budgeting can be a good opportunity to reinforce the benefits of planning and saving...

To save the needed money, some people may also need to temporarily cut back on expenses or find ways to generate extra cash. If that's your situation, consider the following:

  • What everyday expenses can you reduce before your vacation? Would you give up weekday lunches out or special coffees? Can you hold off on buying new clothes or concert tickets for a while?
  • How can you generate extra income? Through overtime or a temporary part-time job? Do you own items you no longer need that can be sold?
  • If you have kids, do you want them to use their own money for some part of the trip, such as souvenirs?

If you don't think you can save enough in time or if limiting your vacation costs is a high priority, consider these alternatives:

  • Delay your trip to give yourself more time to save for it.
  • Travel during a different time of year when rates and fares may be lower.
  • Consider alternate means of travel; perhaps drive versus fly.

While traveling, you can also choose to be thrifty by staying at a condominium or in a hotel room with a kitchenette, which allows you to shop for food and eat in for some or all meals. Public transportation or free shuttles are also viable options for keeping within a budget. And if you decide to pay a portion of your trip's costs on credit, make sure you have a plan to pay those bills promptly so that you don't incur extra interest charges or disrupt your other financial goals.

Step 3: Reap the rewards of your vacation savings.
Step 3: Reap the rewards of your vacation savings.

Once on the trip, pat yourself on the back for putting in place the disciplined savings plan that got you there. As Vale points out, the exercise is a good opportunity to reinforce the benefits of organizing around a goal and saving for it. "You learn to save for later enjoyment," he says, a lesson that's valuable for both adults and children.

Of course, having fun and relaxing are what vacations are all about. So get ready to savor those mojitos on the beach or hot chocolates at the ski lodge. Rest easy knowing that your long-anticipated trip didn't sabotage your regular saving and investing plans, and that you won't come home to extra credit card charges. Your trip will instead become a lifelong memory of an enjoyable time away.

Next Steps

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