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The ‘gram’ worthy vacation has become an important annual ritual for many people in the post-COVID world. However, a lack of adequate financial planning to have the vacation of your dreams can prove to be a setback to your finances.
In an age where credit is available in a jiffy, it has become a common practice for people to seek loans or use their credit cards for financing their vacations. But, taking on debt for recreational purposes can strain your finances and also make it harder for you to stay committed to investing for existing financial goals.
Shreya Agarwal, a 32-year-old travel influencer based in Kolkata narrates, “Until a few years ago, when I was still trying to get used to the habit of saving and investing diligently, I would unthinkingly swipe my credit cards for these purposes. I have even used a personal loan for vacation purposes but two years ago when the pandemic hit and my income stream was impacted, I realised that relying on loans and credit cards for vacations made little sense financially – I had to pay EMIs against the loan I had taken for the vacation even when my income had reduced significantly and this made it impossible for me to divert funds for my other financial goals.”
Saving and investing diligently for your dream vacation can not only spare you of the trouble of tapping into your existing financial reservoir for funding it but it will also help you avoid falling into the trap of easily available credit. Mutual funds can be a judicious choice for short to medium term recreational or aspirational goals owing to the flexibility they offer in terms of investment durations and fund types.
Agarwal says, “The first step towards executing a financial plan for your vacation is to choose a destination and the tentative dates. Are you looking at a luxury holiday or are you planning to go backpacking with budget stays and experiences? Also, it is important to factor in small expenses that you would incur on your trip beforehand because many people tend to only consider flight trips and stays while drawing an estimate of the vacation costs but shopping, local transfers, entry tickets at sightseeing spots make a sizable component of your vacation budget.”
Putting aside money in your bank account for your vacation may seem like a convenient thing to do but it may not be a great idea because you would have easy access to the money and may end up spending for other things. The best way to prepare for vacation expenses is to channelize funds in investment avenues that can be accessed easily and carry minimal risks.
Debt mutual funds are suitable in this scenario because vacations are usually a short to medium term goal and they fit into the sweet spot in terms of risks and returns – they carry much lower risks than equities and liquidity isn’t a problem unlike fixed income instruments. Agarwal says, “I generally plan my vacations six months in advance and I have learnt that liquid funds are appropriate if your vacation is 6 months to a year away.” In the case of liquid funds capital is lent to established companies for a short period of time and the interest income constitutes returns for investors.”
You can also invest in ultra short term debt funds. Ultra short duration funds are fixed income mutual fund schemes which invest in debt and money market securities of maturities up to six months. While ultra short term funds carry slightly higher risks than liquid funds, they can also generate better returns. Alternatively, you can also activate a systematic transfer plan where fixed amounts will be trabsferred from your existing equity funds into ultra short term debt funds to reduce risks.
Preeti Zende, co founder of Apna Dhan Financial Services says, “If your vacation timeline is 3 or 3+ years then a combination of Bank RD, liquid fund and arbitrage funds are good options. If it is 5 years or more, then you can have 60% exposure in hybrid equity funds along with ultra short term debt funds and arbitrage funds.”
Action points
- If you are planning to take a holiday in the next 6 months to a year, start looking for hotel and flight deals. Also keep checking for any credit card offers that you may be eligible for because all credit cards provide discounts and offers on domestic and international flight bookings.
- You may consider travel insurance especially if it is a long trip or if you travel frequently. Travel insurance policies provide coverage against emergencies during a trip such as medical woes, flight delays, luggage loss etc.
This article is part of the HT Friday Finance series published in association with Aditya Birla Sun Life Mutual Fund.
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