I have a favorite client of mine who retired a few years ago and is in the midst of publishing his own travel book.   He’s a really great individual and has a true knack for knowing how to budget out a vacation.   One of the principles he’s stuck to over a lifetime while becoming wealthy is to not take a vacation that he did not already pay for in advance of the trip (including spending money).    He may book a vacation to go to Italy one year for now, and if the trip will cost $4,000 he will actually make payments of $333 a month over the next 12 months.    By the time the vacation is upon him, he can really enjoy the excursion to a far away destination because he won’t have the debt lingering over his head when he comes back to the United States.   While we all may not be able to take this exact methodology, let’s discuss some of the key points on how to budget your vacations into your overall household income.

1) Vacations should be a 2% to 3% line item within a normal household budget –  One of the very challenging issues to tackle as the CEO of your family finances is how much of a percentage should vacation and travel constitute of your overall expense load as a family.    If you make $200,000 per calendar year, your overall yearly vacation spend shouldn’t be more than $4,000 to $6,000 overall.   Part of the issue why many households fall behind each year is due to the overspending on categories like meals/entertainment and travel/vacations.    The first key is to set the actual budget within this expense category which will allow you to work backwards on how many trips you can afford and where you will take them.  In my opinion, anything above a 5% spend in this one category is extremely dangerous.

2)   Decide what you want to get out of the vacation-   This statement is all about setting expectations.   We get to see the lifestyles of the rich and famous on regular and reality TV shows alike today all the time.   What you need to begin considering is the following: what is the purpose of my vacation?    Am I making memories for me as a parent as I spend time with my kids?   What kinds of activities am I interested in doing on the vacation?  Is there a part of the United States or the rest of the world that I always wanted to see? Is this about getting family together overall?    What exactly is your raison d’etre for making this spend?   Otherwise, if you are a people pleaser you might pick the fanciest hotel in the nicest of destinations only to see you and your kids having the most miserable time.   I want to underscore that if you are taking little kids away, they aren’t likely to remember many of your trips years down the road, so don’t fall for the trap that a Magic Kingdom memory is going to be something your kids cherish for the rest of their lives.    The part they remember the most is the pool at the hotel and the grilled cheese at the local restaurant.

3) What kind of points do you have available -  Destination getaways are well aware of the prime seasons to hike prices such as summer, Christmas, spring break, etc.   You absolutely need to check into the blackout periods for your airline and hotel point programs to make sure you can actually use them for your trip.  In addition, at certain junctures in the calendar year you can stretch out your points or get a round trip ticket for a lower number of points.   It’s important you maximize these point programs because it may leave you with only paying some basic taxes or ticketing fees.

4) Plan your spending money- It’s vacation, so as you begin to unwind and relax so will your wallet.  What the heck honey, were on vacation!!!   The moral of the story is to not let the plastic run the financial limits it can carry.    Plan in advance how much spending cash you will bring for extracurricular activities, tourist attractions, meals, and souvenirs.   Otherwise, what do you think you’ll be inclined to do once you get there to get the kids to stop screaming for just five minutes?  You will end up opening up your wallet and turning yourself upside down.

Having planned out thousands of family finances over the past two decades, vacation spending is a constant black hole you will have to deal with every year.   Since it is the beginning of 2013, take a step back now to plan out Spring Break, the summer, and holiday season so you can determine just what spending limit you will set to family vacations.  Otherwise what you will end up with a handful of photos, a few vacation trinkets, and a nasty credit card hangover.

Written by:

Ted Jenkin

CFP®, AAMS®, AWMA®, CRPC®, CMFC®, CRPS®

Editor in Chief of Your Smart Money Moves

Co-CEO and Founder of oXYGen Financial, Inc - The Leaders in Gen X & Y Financial Advice and Services

Ted Jenkin  is one of the foremost knowledgeable professionals in giving financial advice to the X and Y Generation.

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