It’s that time of the year when we all wish to fly off to some exotic destination to beat the summer heat. Obviously, it’s not as easy as it sounds and requires lots of research, planning and money. And to make sure you don’t spend all your savings on one holiday you have to plan a bit more.
#1. Save the date:
This means setting a date for when you want to take your trip. The earlier you know this date, the better because:
- Advance bookings are almost always cheaper
- By investing smaller amounts per month (more on this below) instead of spending a lump sum at once or taking a personal loan you can fund your trip.
Setting a date also helps to stick to a savings plan so you don’t get tempted to spend the holiday money on other things.
#2. If you set it, put a figure on it:
Now that you know when you want to go for your holiday, put a figure on it. This obviously depends on where you’re going: overseas or somewhere in India. For example, a trip to Europe might cost you Rs. 2, 50,000 with airfare, insurance, stay and sightseeing included. You might not know the exact figure but you can get a quote from your travel agent or from the internet.
#3. Start planning:
Depending on when your trip is (and the cost of course) pick a way to fund it:
Plan A: By Investing
Saving small amounts per month can help you meet your goal easily. There are 2 ways to go about this, either you invest in safer options like debt investments that guarantee low returns in a short time or go with riskier options like equity that may or may not guarantee returns in a short time
#1. Recurring deposits or short-term funds:
The average rate of returns on these options is 8%. Assuming this rate of return, make a plan like the one below by putting down your trip cost in the first column and depending on how much time you have to save (1 year, 2 years or 3 years) put the amounts you need to invest in them per month to reach your goal:
#2. Equity Mutual Funds & Stocks:
Funding your trip by investing in equity mutual funds and stocks is more like a game of chance. If markets are good you could make more than 20% but if they are bad you could even make negative returns on your investments. This, however, is the case only if you stay invested in them for a short time say less than a year. But for a long time anywhere more than 3 years is good enough for equity to generate returns. So equity investments are suitable if your holiday is planned 3 years in advance. And since these give a high return over the long term, the amount you need to save monthly is also lower. On the flip side if you are planning a vacation within a year, it is better to opt for debt instruments like recurring deposits or short-term debt funds.
Plan B: By Borrowing
Tbh I’m not a big fan of this option. But many opt for it when they haven’t planned their savings for their trip. As a last minute resort, they’d end up taking a personal loan or swiping their credit card.
Personal Loan: Taking a personal loan just for a vacation is as good as drinking diet coke on a diet! It has lesser sugar than regular coke but overall it’s bad for your health.
So a personal loan sounds great to fund your trip because it’s collateral free and will give you money quickly. But overall it’s a bad financial decision because personal loans come with high interest rates (11% to 23%). According to an article published in ET the entire segment of personal loans is considered as bad loans, but taking a loan for a vacation tops it.
Think of it logically a trip costing Rs. 2,50,000 would end up costing you Rs.3,07599 assuming an interest rate of 14% to be paid over 3 years. So you’ll be paying EMI’s of Rs. 8544 per month for three years after your vacation.
Using your credit card for your entire trip is a bad idea, the reasons are similar to borrowing a loan- higher interest payments. Another drawback of credit cards is the possibility of overspending. But unlike a personal loan using your credit card partially for a trip has some benefits:
- Reward Points: Using a credit card for flights and hotel bookings could fetch you reward point, air miles, or cash back. Sometimes using your previous points you may even get a free ticket.
- Perks & Discounts: With a credit card you might even get discounted offers on certain flights or hotel books. Along with that, you can get lost baggage protection, concierge services, discounts on rental cars, free/discounted medical travel Insurance, emergency assistance, and similar benefits.
- Safety: Using a credit card while traveling is obviously safer than cash if someone robs your card you can immediately block it.
- Hotel Check-ins: Usually hotels ask for a deposit or credit card details during hotel booking so in case of any damage they can deduct the charges. If you use a debit card or cash the amount gets blocked till your check out, but with credit cards this doesn’t happen.
Now that you know the different ways to fund your trip, get cracking in on it already and start planning today. For any questions feel free to comment below or ask us at email@example.com.