Dreaming of an exotic vacation? Learn to save for it first
Posted by: Uma Shashikant on May 29, 2017, 06.30 AM IST
By Uma Shashikant
Travelling to exotic destinations is quite common today. It is on the agenda of not just the well to do, but even families with limited means. People want to see the world. From mere tourists who want to tick places off their bucket lists, to travellers who want to soak in the local experience in unfamiliar corners of the world, the desire to go out there and enjoy seems to be pervasive and growing. So how should we go about organising the money to join the club?
First , we need to have that attitude which will let us place experiences above material things. It is easy to spend when the end result is a material possession of some sort. To spend money and return with memories and experiences is immensely more valuable, only in a somewhat elevated philosophical sense. It takes effort to see such spending as important and worthwhile. Even those who are willing to do so find themselves cutting corners. The tourism industry is filled with deals and offers, discounts and rebates, only to accommodate this dilemma about spending for the experience and deciding how much is too much. The mental growth from tourist to traveller can take a lifetime of journeys.
Second , a budget is a good place to begin as is often the case in personal finance. Many of us dislike the idea and are put off by the detail orientation that we associate with the word 'budget'. The simple thing to do is to define what proportion of our annual income we are willing to spend on travel. If we get a month's off from work, or the blessed 30 days of privilege leave that the employer usually offers, we could say that we are willing to spend a month's earning on leisurely travel every year. This kind of relative and aggregate budgeting enables control, while not getting too tedious in detail. For a family that earns Rs 10 lakh annually, a holiday that costs Rs 5 lakh is extravagantly indulgent!
Third , a travel fund is a good idea to pursue. Not every holiday is the same. One that involves trekking to a mountain and staying in a camp could bring a great experience of the outdoors and provide excellent bonding opportunities for the family, and come at a reasonable cost. Another that involves an exotic beach and underwater exploration might come at a steep cost. To have a corpus that is earmarked for travel, in which money is put and drawn out as needed, will ensure that there is adequate buffer for interspersing luxury experiences with the ordinary.
Fourth , contributing to the fund will have to take place systematically and over time. There are two ways of doing this. The traditional route is to save and invest a small portion of the income every month with the discipline of setting aside something regularly. The other option is to draw on our ability to do mental accounting- treating some incomes differently from the routine income. The annual bonus is a good target to hit. Taking the holiday soon after the bonus and spending it on the holiday is a reasonable and relatively easy choice. Earmark some money and ensure that it is set aside.
Fifth , invest the corpus sensibly so that it can also work for you. If you set aside your bonus in year one, and take a simpler holiday that uses half that amount, you allow the other half to be available to grow in value and enable a better holiday later. In personal finance, delayed gratification is not just a virtue, it also represents time that you give your money to appreciate. Just five years of saving and investing will create a corpus that is a comfortable amount that can be tapped into, regularly.
Sixth , the travel corpus that you have now created should serve two purposes: ability to grow in value, and ability to fund a regular withdrawal for annual holidays. The first one is a growth objective and needs equity investing; the second is an income objective and needs debt investing. How much your withdrawal is compared to the corpus will determine what your asset allocation should be. If you begin with a corpus of Rs 5 lakh, your first bonus, and spend Rs 4 lakh in the first year, your asset allocation, given your withdrawal need, is 80% debt and 20% equity. It is easy to learn asset allocation when you work with simple goals like travel. For young earners who consistently juggle spending and saving, the travel corpus can be a good exercise in learning the principles of personal finance.
Seventh , check your corpus to see if you are postponing your holidays too much. Use it as a check point for taking rejuvenating breaks. We all know of senior citizens with a large corpus and a lot of free time, but weak limbs that won't take them to the places they dream of. If you are not drawing on the corpus, the only purpose is to fund another holiday that is coming later. If that later holiday is postponed over and over again, the corpus surely grows, but age won't be on your side when you finally decide to draw on it.
Eighth , keep your ears open to the changing trends in the travel business to make the most of the spend. The tourism business seems to be slipping out of hotels and resorts into the hands of individuals who are renting their homes, serving home-cooked meals and taking their guests on private guided tours. The Internet has emerged in a market place where rankings and ratings enable collaborative decision-making on a scale we have not seen before. Take a keen interest in the travel ideas you like to pursue and give yourself the opportunity to strike value deals.
Ninth , avoid the cardinal sin of holidaying on borrowed funds and overspending on credit card while travelling. It is easy to spend first and pay later, but the compulsion of allocating future money to a benefit that had already happened, is not a joyful experience at all. It compromises the uses you can put your income to, and it feels burdensome.
Tenth , stay clear of that granddaddy of all leisure plans-building yourself a home in the hills, to which you will retreat and enjoy your life with books and coffee on the porch. Sinking all your money into a single asset is not a very wise idea. Avoid locking yourself into one place, unless you have enough to own a farm and still be able to take annual holidays. Get out there and enjoy the lonely planet!
The author is Chairperson, Centre for Investment Education and Learning.
Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of economictimes.com This article appeared in Economic Times dated May 29, 2017, 06.30 AM IST