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Traveling may be one of life's greatest joys, but it's also one of the most costly. While you don't want money to hold you back from exploring all the world has to offer, it's not smart to wreck your financial health for the sake of a vacation.
With some careful planning in advance, there are ways to save up or spread out the cost of a vacation so it's doable for your budget. Here are five ways to finance a trip without taking on unnecessary debt.
1. Sinking Fund
Hopefully, you're familiar with emergency funds. This is where you build savings intended to help you cover large unexpected expenses or stay afloat following a job loss, without needing to take on debt. But what about planned expenses, like your dream trip? You don't want those funds to get mixed in with your emergency fund, which should be solely dedicated to financial emergencies, so it's ideal to keep them in separate accounts.
Savings stashed for a specific purpose like a vacation is called a sinking fund. It helps you meet a financial goal without relying on debt. As you start planning your trip, you can use an existing, rarely used savings account or open a new one devoted to this. Grow your savings even faster with a high-yield savings account.
Once you determine your savings goal and timeframe, budget in contributions to your sinking fund. Make it a no-brainer by setting up automatic monthly transfers from your checking account.
Find High-Yield Savings Accounts
2. Travel Credit Card
Travel rewards credit cards are handy for many aspects of travel. For one, their money-saving perks, which might include priority boarding and free checked bags on flights, airline lounge access, upgraded hotel rooms, savings on rental cars, free TSA PreCheck and more. You can earn points or miles and redeem them for free travel.
If you don't have one, look for a travel rewards credit card with a welcome bonus since these may cover a hotel or flight. Be aware, however, that earning this bonus often requires a hefty minimum spend in a limited time. Don't rack up those charges unless you can afford to pay them off quickly; it helps to time getting the card with a big purchase you've already planned and saved for.
Most travel credit cards offer higher reward rates on travel purchases. For branded cards with a specific airline or hotel, the higher tier might only apply to travel with that company. General travel rewards cards might offer higher point levels for all travel purchases, but no benefits for a specific airline or hotel. Check the terms closely so you can maximize your benefits, and pay attention to annual fees since they could negate your savings.
If you use a travel credit card to finance a trip (and earn rewards), be sure you can pay off the trip before the charges start accruing interest; otherwise, you'll pay more in interest than you could earn in rewards. If carrying a balance for months is unavoidable, consider getting a 0% introductory APR card that gives you several months to pay off charges with no interest instead.
3. Payment Plans
When you're planning a trip yourself, you're purchasing one-off expenses like hotels and flights that require payment upfront. You can spread out costs by making various purchases at different times, though.
If you're traveling by cruise or organized tour, everything is conveniently planned and booked for you, but it also means owing one massive fee. Because of this, these companies typically have financing options.
The types and costs of payment options and plans can vary greatly, so research is vital. For example, tour operator Intrepid Travel offers flexible payment plans. After an initial deposit, customers can pay the rest in installments in amounts and timing of their choosing as long as full payment is received within 56 days of leaving. Similarly, National Geographic's tours only require a 10% deposit to book. Final payments aren't due until between 90 and 120 days of departure, allowing time to save for the bigger payment rather than taking on debt.
Options can also vary by type of travel. For example, cruise lines Royal Caribbean and Carnival have in-house plans allowing most customers to book with a deposit, then pay the remaining balance with scheduled payments. Some travel companies may also offer financing, but be sure to carefully check over any terms and conditions, as well as run the math, to see if this is the right option for you.
4. Vacation Loans
In general, it's unwise to take out a loan for a trip. It's optimal to save and pay in full, or utilize payment plans or no-interest financing. Personal loans are typically best for more critical expenses, such as home repairs, medical bills or debt consolidation.
However, if you have an opportunity to go on a truly special trip and have no other financing options, a vacation loan—a personal loan used for travel—could be a last resort. Interest rates and fees on personal loans can vary greatly, but they generally have fixed interest rates, meaning consistent monthly payments that make budgeting easier. On the other hand, loans increase the costs of travel and leave you paying for your trip long after returning.
One benefit is lenders usually offer multiple terms to choose from; online loans typically range from 24 to 60 months. This may help if you need more time to pay off your balance than other options allow—though paying for a vacation for five years, or even two years, is typically not advised.
The state of your credit can determine whether or not a loan is an affordable option. Those with excellent credit can access low interest rates, especially with online lenders. But for those with credit needing improvement, interest rates can be high. This adds a significant cost to borrowing that may not be worth it.
5. Crowdfunding
Crowdfunding means raising money that isn't repaid. It's not appealing to everyone since it means asking friends and family to give you money. This might not be a wise move for a regular leisure vacation or if you've crowdfunded for travel before. But it could be something to consider for a honeymoon or special experience, like a volunteering or school trip, that your loved ones may want to support.
If you're getting married, consider trying a honeymoon registry like Honeyfund or Joy. Both allow friends and family to contribute financially to your honeymoon travels with no fees. For other trips, try FundMyTravel, or general crowdfunding sites like GoFundMe.
Start Planning Now
If you hope to go on a trip within the next year or two, start planning how you'll finance it now. Starting early can give you time to open a high-yield savings account for your sinking fund and save enough to avoid relying on repayment plans, debt or crowdfunding.
Or, if you have any large purchases coming up, it could be an ideal time to open a new travel credit card and use that planned expense as an opportunity to qualify for a welcome bonus. The points or miles earned from it could reduce your trip's cost. Getting your finances in order well before your travel begins ensures you'll return home with only happy memories—and no debt hanging over you.