How to build a Vacation Fund and enjoy dream vacations without any last-minute stress

Published: October 29, 2018 11:04:42 AM

With increasing exchange rates and cost of travel, it is important to plan for a vacation as a financial goal, much in advance. Here's how to do it.

travel, travel abroad, Vacation Fund, how to build Vacation Fund, dream vacations, invest, With travel becoming more accessible to everyone, financing options are evolving too.

Devika and Karan Gupta, both aged 30, love to travel and dream of visiting 50 countries before they turn 50. Newly married, they have already visited Australia and New Zealand and plan to visit Singapore during the Diwali holidays.

Like most other millennials, Devika and Karan are part of the ever-growing section of society that believes in exploring the world, enabled by increasing earning capacities. However, unlike most of their friends who plan a vacation last minute and use their credit cards while booking flight tickets and hotels, Devika and Karan have meticulously not only made a list of all the countries they want to visit but also invest Rs 15,000 a month to build their Vacation Fund for all their dream vacations.

Travel, like any other goal that requires financial backing, should be planned and budgeted for. At Happyness Factory, while helping our clients take their dream vacations and build Vacation Funds, we noticed that until the last 3-5 years people didn’t actively consider vacations as a financial goal to be planned for. However, since then, we’ve seen a rise of almost 80% in the number of people consciously setting aside money for their travel goals. In addition to this, we’ve seen a 20% increase in the budget allocated for travel.

With increasing exchange rates and cost of travel, it is important to plan for a vacation as a financial goal, much in advance. Unlike Devika and Karan, most people arrange the money for their vacations from their recent cash flows or utilizing a recent bonus or windfall gain. While this strategy is not great, it is still better than digging into savings meant for other planned goals like retirement or health corpus – which some end up doing!

So, how can you be a smart investor by building a Vacation Fund and enjoying your dream vacations without any last-minute stress? Start with the 4 Steps To Planning Your Next Vacation and once you have decided the budget for the vacations you want to take and placed them on a timeline it is time to start investing towards them. That’s where the most important question arises –

Where to invest for your vacation goals?

Leaving your excess money in a Savings Account definitely gives you access whenever you want, but it also faces the risk of being utilised for other purposes. Investing your money in either Fixed Deposits or Mutual Funds will help you maintain a separate fund for your vacations and give you access when the need arises.

Depending on when you plan to take a vacation, this is where we recommend you invest your money –

# For vacations that you plan to take within 1 year invest in Liquid Funds or Short-Term Funds

# For vacations that are 2-3 years away consider investing in Arbitrage Funds

# For vacations that are 3-4 years away we recommend Debt Funds

# For vacations that are 4-5 years away invest in Balanced Funds

With travel becoming more accessible to everyone, financing options are evolving too. A certain travel agency allows tourists to book packages with them a year in advance and simultaneously start a 12-month Recurring Deposit (RD) with select banks it has tied up with. While the bank pays regular interest on the deposit, the travel agency adds 1 month’s installment to your 12-month contribution in the end. This may sound like a lucrative deal, but it comes with conditions with respect to change of travel plan, cancellation charges, etc. You are better off investing towards your dream holiday through Mutual Funds because they offer unmatched flexibility and greater potential performance than fixed income instruments like RDs.

When to redeem investments for vacation?

Typically, you should redeem your investment 3-4 months prior to the travel date, as and when the tickets and accommodation booking is being done.

Follow the above recommendations and you can take that Adventure Sports vacation to New Zealand and Shopping Spree in Thailand without worrying about lack of funds or last-minute scrambling to put together money. So, start planning your finances for holidays you wish to take in the next 5 years!

(By Amar Pandit, CFA, and the Founder of HappynessFactory.in)

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