AS SEEN IN THE JUNE ISSUE OF THE CURRENT HUB
Summer is here, which means most of you are go-going away on vacation. Whether you’re hopping in the car heading to the Happiest Place on Earth or flying across the pond to your dream European vacation, the question always remains… how will you pay for it?
Among families with travel plans, 71% plan to put at least part of their vacation expenses on a credit card, with an average charge of $1,019 (Source: Nerdwallet.com Family Summer Travel Spending Report 2018). Credit cards can be a smart way to pay for travel since many offer rewards and trip insurance. They also offer better fraud protection than debit cards or cash. However, it’s important to make paying off credit card balances a priority before interest accrues. High interest charges can quickly wipe out the value of any credit card rewards earned, or travel discounts received.
Based on Bankrate’s online credit card payoff calculator, it would take 60 months (5 years) to pay off $1,019 at the current average annual percentage rate (APR) of 16.41%, assuming a minimum payment of only $25 per month. More importantly, you would pay an additional $481 in interest charges over the five-year period, bringing the total paid for the trip to $1500.
One way to avoid paying more than you bargained for on your next vacation is to save ahead of time. If you saved $85 a month for 12 months prior to traveling, you could use that money to pay off the $1,019 charged to the credit card in full, thus avoiding interest charges. The money saved in interest charges can then be set aside to help pay for next year’s vacation.
But how do you prioritize what bucket that $85 comes from? With budgeting. A budget doesn’t have to box you in, but it can give you guidance on the best use of your hard-earned dollars. Try the 50-20-30 budget. Here’s the breakdown:
- 50% of your after-tax income is spent on basic needs, such as groceries, utilities, housing, transportation, and insurance.
- 20% of your after-tax income is spent on savings and debt repayment. This includes your emergency fund, 401k contributions up to your employer match, and debt repayment.
- 30% of your after-tax income is spent on wants, like that dream vacation, meals out, gifts, entertainment, home projects, gym memberships, etc.
Maybe this is a good time to think about your financial priorities. Can you fit your summer travel plans into your budget? Don’t let an extravagance put you into debt, or worse, derail your retirement planning. Sometimes a staycation can be full of fun and financial advantages.
If you want your all-you-ever-wanted vacation and have to get away, consider planning ahead. We enjoy having meaningful conversations about money to talk about ways to manage a lifetime of financial goals and priorities.
Life is a journey. Navigate it wisely.
Reviewed & Approved: KM 5/21/19