You’re in desperate need of a vacation, but what if you don’t have the money saved up? Ultimately, your goal is to cash flow your trip and avoid going into debt. This leaves you with two choices – 1) saving up for your trip in advance, or 2) paying a third party through an installment plan, also called a vacation payment plan.
There are pros and cons to both strategies, and the decision will depend on your personal psychology and what works best for your particular set of circumstances. After all, personal finance is personal.
Saving for Vacation in Advance
Saving for a big vacation in advance creates motivation to build your savings at a faster pace. Once you determine the price of the vacation you want to take and a basic timeline, you’ll need to back into a savings plan. When you see that number, you may find yourself motivated to cut costs in your budget, or create additional income through a side gig, or selling things around your house.
Building your savings in advance drives a sense of urgency. The psychology is different than paying through an installment plan, as an installment plan can be treated like another bill. It doesn’t drive the desire to kick-start a fund in the same way as building your savings in advance.
However, there is a drawback to saving for your vacation in advance. And it’s a BIG one! This strategy requires discipline. You’ll need to be careful to avoid shiny object syndrome so you don’t spend the time and effort to start saving and halfway through decide you’d rather have the brand new PS4 VR.
The best practice is to set up a new account dedicated to your vacation savings account. Keep the account separate from your primary checking and savings account. It should not be easily accessible and ideally would take a day or two to access the funds.
Vacation Payment Plan
A vacation payment plan is similar to a layaway plan – except for your vacation, instead of your Christmas presents. It’s typically done through a third party company and the amount is set in advance. Based on the company you contract with, you’ll choose a set number of monthly payments.
This creates simplicity for your budget process. You have an exact payment due on specific dates. This requires less discipline than saving in advance on your own, as you have a third party you are required to pay.
However, you need to be diligent in choosing the company you are making payments through. The recent announcement of the bankruptcy of British based travel company Thomas Cook highlights the risks in making vacation payment plans. Thousands of people were stranded, weddings ruined, and vacation plans canceled, as a result of their sudden collapse.
Read the fine print when entering into a vacation payment plan. Make sure you’re informed with regards to if and how much interest you are paying, if your deposit is refundable, and are there penalties if you miss a payment date.
What’s your preference when planning for vacations? Do you like to save in advance or make payments? Let us know in the comments below.