For many hardworking, planning a vacation is an important milestone to look forward to throughout the year. Taking advantage of time away can be a great way to relax, recharge, and spend some quality time with family and friends.
However, if not planned carefully, getting out of town may turn into a costly expenditure rather than a restorative break.
Holiday trips are doubtless among the best memories people create for themselves. With rising levels of income and higher spending capacities, more and more Indians are taking to leisure travel and in greater frequency.
While many people plan their travel bookings three to six months in advance, it is equally important to plan for vacation as a financial goal, much in advance.
Based on our experience, until the last three to five years people didn’t actively consider vacations as a financial goal to be planned for. However, since then, we have seen an almost 80% rise in the number of people consciously setting aside money for their travel goals. In addition to this, we have seen a 20% increase in the budget allocated for travel.
Any goal that incurs spending needs to be budgeted and planned for. Travel is one such goal where the amount spent can run into a few lakhs, and hence certainly needs planning.
A domestic trip to destinations like Andamans, Kashmir or the north east can cost a family of four nearly Rs 2 lakh. Similarly, a budget vacation of five days in Singapore can cost up to Rs 2.5 lakh and for seven days of holidaying in Europe you need at least Rs 5 lakh.
When people don’t feel the need to plan for lifestyle spends like travel or a gadget upgrade, they are being biased with the tendency of mental accounting. What is mental accounting? It refers to the mindset of treating money differently depending on its source and intended use. Mental accounting is the reason why you feel you can buy that LED TV on landing a bonus; an expense you were holding off to make prudent financial decisions. Mental accounting makes people take irrational or less than optimal decisions with money and investments.
People who take vacations without planning for them as a financial goal usually meet the expense using a bonus or some recent windfall gain. This strategy, while not great, is better than digging into funds meant for other planned goals like retirement, which some end up doing. So, start planning the money part for the next holidays you wish to take in the next five years.
For holidays that are four to five years away you can invest in balanced mutual funds. These are funds having a mix of equity and fixed income components in their portfolio. For goals that are three years away we typically recommend debt funds. Debt funds invest in fixed income instruments like bonds and debentures. If your holiday is less than three years away, you could consider investing in arbitrage funds. Arbitrage funds are low risk-low return funds that are treated as equity funds from the tax perspective. Mutual funds offer greater flexibility and potential performance than fixed income instruments like Recurring Deposits.
With the practice of holidaying picking steam, financing options are evolving too. But these come with strings attached, conditions with respect to change of travel plan, cancelation charges, etc.
Typically, you should redeem investments a little before the goals are due. For your vacation goal, this can be three to four months prior to the travel date, as and when the tickets and accommodation booking is being done.