A vacation is what you take when you can no longer take what you have been taking.

— Earl Wilson

Let us talk about vacation!

This Post is Not About Cheap Travel Deals

First of all, let us make sure we have understood the title of this post. This article is not about how to save money on your vacation. (The world does not really need yet another 200 word blog post that repeats the same “10 Ways To Save Money” bullets from every other article.) This post is about how to plan ahead for vacation costs, how to work a vacation into your budget, and how to stick to the vacation budget that you have set. Indirectly, of course, you may save money by sticking to your budget and not spending more than you intended.

Why Vacation as an Example?

Any expense could be used as an example of how to do these things, but we have chosen vacation expenses for some specific reasons. Anyone can budget for something small and predictable like a €39/month cable bill. In order to make the post realistic, we wanted to deal with something more difficult by choosing an expense that was large and irregular, yet completely discretionary. We also wanted an expense we could relate to because we did not want this to be a theoretical exercise.

Why We Can Relate to Vacation Expenses

We have are not really into “things”. In fact, it is often hard for us to relate to many of the spending temptations that other people face. We are the sort of people who can go to the mall all evening with credit cards in pocket and not buy anything. In fact, if we had to wander around the mall all week long, we really doubt we would buy much of anything. This does not make us better than others – it is just the way we are wired inside.

We do, however, crave experiences. We like to try new things and go to new places. Furthermore, our entire family is also infected with this openness disease. We are sure you can see where we are going with this. From a spending standpoint, being at a mall or a big box store is not a place of weakness for us. On the other hand, vacation is a time and a place where our spending can easily get completely out of control. First of all, we have the time to do things. Second, we are all geared up to do new things. Third, newness begets newness, and when you are in new surroundings with new possibilities and new people, it all starts to snowball. Fourth, since we have often traveled a great distance, there is the high probability that this may be our only shot to do all that this location has to offer. In short, the most difficult category for us to budget is vacation.

Start Planning for Vacation Early

The best thing you can do to ensure the success of your budgeting for vacation is to start early. Even if your vacation is in the middle of the summer, try to give a rough estimate at the beginning of the year. It should not be that difficult to estimate the major expenses of your trip, such as airline and hotel costs.

If your vacation occurs near the beginning or end of the year, you may need to drag another budget year into the picture. For instance, if you want to take a ski trip in January of next year, you should not wait until Jan 1 to start budgeting for it.

Budgeting as a Yearly Process

We budget on a yearly basis, so if we expect to take the same sort of vacation as the previous year, then we simply carry over the figures from last year. If the vacation cost is materially more because we are going somewhere special, then we recognize many months in advance that we will need to make adjustments to our budget. If you know six months in advance that you anticipate spending, for example, €2,000 more than last year on vacation expenses, then you will probably have time to make the necessary adjustments. Maybe you need to work overtime hours, or maybe you need to cut back on your spending in other categories.

Cutting Back Before Vacation

A while ago, we wrote an entire article about how to make budget choices, and here is a quick summary of the mechanics of it.

1. Order all your spending from most valuable to least valuable to you.
2. Include any savings goal in this list as if it were a spending item.
3. Whenever you need to cut spending, pick from the bottom of the list.
4. If you add new spending, prioritize the new item into your list. If you need to cut something else to make room for the new spending, then again, choose from the bottom of the list.

The main idea is to frame spending decisions always in context and never in isolation. We present the steps above mainly as a formal description of this paradigm. You do not have to follow it rigidly to achieve results. Many people intuitively follow these same steps to cut spending, but it is useful to formalize the idea in case you feel stuck or overwhelmed.

For example, suppose you really, really want to go somewhere or do something expensive on vacation this year. Suppose it will cost €2,000 more than your normal vacation budget. Start at the bottom of your prioritized spending list. If this vacation is so important to you, it should be a lot more important than the spending item at the bottom of the list. Good. Then you are going to trade off that bottom item for part of your vacation. Start working your way up the list. For each item, you need to decide whether it is more important than this special vacation. If the vacation is more important, then trade off the item and keep going. We know it is hard! We all want the vacation and the other item, too! But you have to choose: vacation or item X; vacation or item Y. Eventually, you will either find enough stuff to cut, or you will find that your special vacation is just not worth the cost to you. Either way, you should feel good that you have spent your money in the way that is most valuable to you. For the money that you currently have, you have done the best you could do.

Cutting Back After Vacation

We also find that despite our conservative budgeting and our best intentions, we often overspend on vacation once we get to our destination. Given what we detailed above about our personal preferences, it is not too difficult to see how that happens. However, we have also found that we can still make up that difference after vacation is over. You can cut back in the months immediately following your vacation.

But you might need to ask yourself whether this is truly a realistic strategy for you. It is one thing to avoid consumption now because you really want to take a nice vacation in a few months. However, once the vacation is over, it is an entirely different kind of discipline to avoid consumption just to balance out the vacation you have already taken.

No Silver Bullet

At this point you might be saying to yourself, “Does this article have more to offer than just cutting back in other areas?” Unfortunately, there is no budgeting silver bullet. We do not have any magic to offer you. There are a few creative tweaks such as high return investments, but generally speaking, you have got to make hard choices. If you want to spend more in one area, you have got to cut back on others, or you have to earn more income.

Other articles may offer a canned list of items to cut, but is that really helpful? These lists often contain many items that we currently do not even spend any money on. In other cases, the list may contain the items that we personally value the most. No thank you. We prefer to make our own list, and cut the items where we are currently spending a material amount of money, but value least.

The Importance of Saving

If your budget is accurate, it will explain your financial situation in personal terms:

Income – Expenses = Savings (or Borrowings)

Is this number positive (saving) or negative (borrowing)? We do not encourage routine borrowing (i.e. negative savings), but only you can decide how much saving is enough. Treat this number with respect; do not just say “whatever”. You have long term financial dreams and goals, and your savings is your progress toward those dreams. You may not care about savings in some abstract sense, but you certainly care about these goals. For some people, it is financial independence or early retirement. For other people, it is the dream of sending your kids to college or paying off your home or starting a business. And for another crowd, it is the idea of being able to help others less fortunate, to make a difference in the world. Everyone has dreams of this sort, and that is why the bar needs to be placed very high in regards to savings. Do not settle for paycheck to paycheck living.

If you are already saving a large amount of money, then some moderate amount of overspending is not going to break you. If you are already saving €10,000 a year, and you now overspend your budget by €2,000 this year, you will not go broke. €8,000 is still a lot of savings. The problem is one of long term resolve. It is easy to think €8,000 is almost €10,000 and €6,000 is almost €8,000 and so forth, until you eventually find yourself saving very little. If you decide to cut back your savings, make sure you have really thought things through. Does your decreased savings really fit with your life goals?

The Benefits of Organization

If your budget is complete and accurate and organized, the choices will be clear. The decisions may still be difficult in the sense that you have to give up something. But the decisions will be straightforward in the sense that the choices will be clear within minutes – probably seconds. You will not have to wonder about how much to cut, where to find the savings, and which things you value most. It will all be organized for you and ready for you to make your decisions.

And organized or not, you will still have to make these decisions! But without a good budget, your decision making may be poor. For example, you may guess your spending is low, overspend on vacation, and find yourself in debt. Or you may think there is no way you can afford a trip to Europe and stay home, when in fact, with a little organization and a little discipline, you could be enjoying London, Paris or Berlin.

Net Worth vs Cash Flow

Thus far, we have assumed that you have a budget similar to our, but this is probably not the case. Our family is very fortunate in that we can focus on net worth because: (a) We have a steady, well-paying job, (b) we save 60% of our income, and (c) we invest long-term in ETF. However, many people are not so fortunate. This means that you will also need to focus on cash flow.

This means that in the months before your vacation you will need to save up additional cash in order to be able to pay the vacation bill when it comes due. Cash flow is actually very important. Obviously you need to have money available to pay your bills and your debts on time. We just do not feel that cash flow gives you a very good idea of wealth accumulation or true savings. Net worth and cash flow are two different things, and each must be used only for its intended purpose.