For many, travelling is an important goal. I am one of them. I like to travel (read this). If time and schedule permit. But in general, I aim to travel to a new location once every 6 months.
So if you too can’t live without travelling periodically but are unable to fund the money to do so, then you should consider saving for your vacation using a Travel Fund. Or you can call it a Holiday Fund.
If you are a regular traveller, then holidays will be a recurring financial expense for you. So you can treat funding your vacation as any other financial goal. It’s just that unlike other important goals of children’s education, retirement, house purchase which generally are one-time goals, the goal of vacation will be a recurring annual goal for you.
So how to go about saving for your vacations?
Generally, a goal of a vacation is a short-to-medium term goal. You can have the following goals related to travelling:
- Travelling abroad every year
- Travelling domestically twice a year
- Taking a vacation once every 2 years
- Domestic holiday once-a-year and foreign holiday once every 3 years
So different people will have different travel/vacation goals. And depending on a person’s risk appetite, available time horizon and flexibility, one needs to choose a financial instrument to save for the goal:
- If your vacation is less than 6 months away, then you can opt for Recurring/Fixed Deposits.
- If your vacation is about 1 year away, you can opt for Recurring/Fixed Deposits or Liquid Funds.
- If your vacation is about 2 years away, you can opt for Recurring/Fixed Deposits or Ultra-Short Duration Debt Funds.
- If your vacation is about 3 years away, you can opt for Recurring/Fixed Deposits or Ultra-Short / Low / Short Duration Debt Funds.
- If your vacation is about 5+ years away, you can go for Ultra-Short / Low / Short Duration Debt Funds and a small portion (10-30%) in pure Equity Funds / Balanced Advantage Funds as well.
Note – Only a handful of debt fund categories are suitable for saving for your vacation / holiday goals amongst all the SEBI mutual fund categories in India.
And what if you want to put in place a rolling corpus that continuously gets funded from your monthly savings and from which, you can withdraw money periodically whenever you wish to travel? So if some years you do not withdraw the money as your travel plans are postponed (like what happened in 2020 with everyone), then the travel fund keeps getting bigger and bigger to fund your larger travel expenses in the future.
So let’s say you have in mindset a budget of Rs 1.5 lakh for annual holidays. So assuming you are pretty flexible with your travel plans and budget in general, you can opt for having Rs 10,000 in Debt Funds and Rs 2000 in Equity Funds. Having debt gives you safety and predictability about being able to save money in time. Having a small equity component can act as a return kicker in good years. So if in one year say you are planning to travel, and the equity returns have been great in the recent past, then you can withdraw from equity funds as well to book your profits.
Mind you that the discussion we are having here is about periodic vacations that people take. Some Indians travel full time. Their strategies will be very different as they need to fund their expenses on the road for long periods of time. I have a friend in Singapore who loves to travel and is a futures trader. He has set up a trading system for himself that helps him accumulate money for his world travels gradually. But trading futures isn’t for everyone and you should Read more and understand what are the pros and cons and more importantly, the risks of trading before you get into it.
If you are an ardent traveller, then it’s best to make vacations a clear financial goal in your overall financial plan. That way, you will be diligently saving for the goal and increase the probability of your goal achievement so that you can travel guilt-free whenever you want.
These days, many people take a personal loan to travel and then pay back in monthly EMIs. But I think that since travel is a discretionary expense and not exactly a critical one, it is better to save for it and then spend on it instead of spending on it and then repaying loans for it. Taking a personal loan to fund a holiday isn’t exactly a wise financial move. So in the debate of EMI vs SIP for this goal, I would suggest going for regular SIP and hence, it’s best to set aside a dedicated savings corpus for this goal and create a travel savings fund to begin saving for your holidays well ahead of time.
Now let me give you a ready reckoner on how much you need to save for different holiday fund requirements over different time periods. You can consider this as a holiday savings calculator. For simplicity, it is assumed that you will be investing only in debt instruments (giving 6% returns), monthly savings will increase by about 5% every year and for further simplifying, we will be ignoring inflation here.
So here is your vacation savings calculator:
- How to save Rs 1 lakh for travel in 1 year – Start saving Rs 7-8000 per month.
- How to save Rs 2 lakh for travel in 1 year – Start saving Rs 15-16,000 per month.
- How to save Rs 3 lakh for travel in 1 year – Start saving Rs 23-24,000 per month.
- How to save Rs 4 lakh for travel in 1 year – Start saving Rs 31-32,000 per month.
- How to save Rs 5 lakh for travel in 1 year – Start saving Rs 39-40,000 per month.
- How to save Rs 1 lakh for travel in 2 years – Start saving Rs 3-4,000 per month.
- How to save Rs 2 lakh for travel in 2 years – Start saving Rs 7-8000 per month.
- How to save Rs 3 lakh for travel in 2 years – Start saving Rs 11-12,000 per month.
- How to save Rs 4 lakh for travel in 2 years – Start saving Rs 14-15,000 per month.
- How to save Rs 5 lakh for travel in 2 years – Start saving Rs 18-19,000 per month.
- How to save Rs 1 lakh for travel in 3 years – Start saving Rs 2-3000 per month.
- How to save Rs 2 lakh for travel in 3 years – Start saving Rs 4-5000 per month.
- How to save Rs 3 lakh for travel in 3 years – Start saving Rs 7-8000 per month.
- How to save Rs 4 lakh for travel in 3 years – Start saving Rs 9-10,000 per month.
- How to save Rs 5 lakh for travel in 3 years – Start saving Rs 11-12,000 per month.
- How to save Rs 2 lakh for travel in 4 years – Start saving Rs 3-4000 per month.
- How to save Rs 3 lakh for travel in 4 years – Start saving Rs 5-6000 per month.
- How to save Rs 4 lakh for travel in 4 years – Start saving Rs 6-7000 per month.
- How to save Rs 5 lakh for travel in 4 years – Start saving Rs 8-900 per month.
- How to save Rs 3 lakh for travel in 5 years – Start saving Rs 3-4000 per month.
- How to save Rs 4 lakh for travel in 5 years – Start saving Rs 5-6000 per month.
- How to save Rs 5 lakh for travel in 5 years – Start saving Rs 6-7000 per month.
- How to save Rs 6 lakh for travel in 5 years – Start saving Rs 7-8000 per month.
- How to save Rs 7 lakh for travel in 5 years – Start saving Rs 8-9000 per month.
- How to save Rs 8 lakh for travel in 5 years – Start saving Rs 10-11,000 per month.
- How to save Rs 9 lakh for travel in 5 years – Start saving Rs 11-12,000 per month.
- How to save Rs 10 lakh for travel in 5 years – Start saving Rs 12-13,000 per month.
So given your travel budget, the above list tells you How Much You Need to Save for Vacations.
Some people prefer to accumulate money for a vacation in a savings account. I think that’s not the best approach as, given the instant access to this money that a savings account provides, there is a high probability that they will end up using it for some or the other expenses. So it should ideally be recurring deposits (RD) or investing via SIP in mutual funds. If it’s mutual funds, then you simply need to start a SIP in low-risk safe Debt Mutual Funds to save for your vacations.
With the increasing costs of travel and our intent to live big, it is important to plan for regular vacations as a financial goal and save for them regularly. Dedicated systematic saving can help fund your holidays without depleting your regular savings for other goals or resorting to loans.
So if you are smart about it, you can easily plan your travel and the next big holidays with a Travel Fund and regular SIP in mutual funds. So make sure that you figure out how much money you need to save for travel and then, create a dedicated travel savings fund. So that’s all about how to save for your travel holidays using mutual fund SIPs (2023).
Travel is one of the most enriching experiences that one can have in life. It allows you to step out of your comfort zone, explore new cultures and cuisines, and make memories that will last a lifetime.