In the world of personal finance, you will often find polarizing opinions. The "live debt free" folks will tell you to never take a vacation until all of your debt is paid off. Other folks will tell you that it is completely possible to take a vacation even if you have debt.
So, which side is right? Like most questions in personal finance, the answer is that it depends. However, there is a framework that can help you think through whether or not you should take a vacation if you have debt.
According to this framework, your money should be doing one of three things. First, some of your money should be sent to build a financial safety net. You want this safety net in place to prevent you from going backwards financially.
Ideally, you want to be moving forward financially, but it is better to stay in the place you are currently than to move backwards financially. This safety net should be consist of strong insurance policies as well as an
emergency fund.
Secondly, you want to send your dollars towards your future. This can include investing for retirement through a
Roth IRA or
401k, saving for your kids' college and more. Thirdly, the money that is left over in the middle can be used for your other bills and lifestyle, including saving for a vacation.
This framework will help you create balance in your financial life, and can help you determine if you can take a vacation even if you have debt. Your first priority should be to set up your safety net. Speak with your insurance agent to ensure you are properly covered on all of your policies.
Then, make sure that you have 3 to 6 months of liquid funds (i.e. cash) for emergencies. If you have enough money left over after putting money towards your future, you can take a vacation even if you have debt. However, if your debt is so large that you cannot put money towards your future, you should not take a vacation.
This may sound confusing so let's look at an example to further explain the concept. Say that you have an after tax monthly income of $5,000 per month. Assume that building your safety net would cost you $500 per month to build.
Let's assume that your other bills and lifestyle expenses are going to cost you $2,700 per month. This leaves you with $1,800 left over. As stressed before, it is important to save money for your future. If you were to save 15% of your monthly income for your future, this would be $750.
You are now down to $1,050 left per month. Assume that your debt obligations amounted to $700 per month which included student loans and credit card debt. After all of this, you could save $350 per month for a vacation, which would give you a budget of $4,200 to go on vacation.
However, say that you had made some very unwise financial decisions and your monthly debt obligation was $1,800. This would not allow you to save for your future as you carry too much debt which means that you are not in the position to go on vacation.
The type of debt you have can also help you determine if you are in the position to go on vacation even if you have debt. Many individuals in the financial world will tell you that you are in debt any time that you borrow money.
However, this is not the most apt definition of debt. Instead,
debt is any financial obligation in which the only way you can repay it is from money you have to earn. Under this definition of debt, things like credit card debt and student loans are true debt. Why?
The only way you can repay them is from money you have to earn, such as money from your job. On the other hand, mortgages and car loans are not true debt. Why? You can sell both of them to relieve yourself of your obligation to pay back the loan.
This creates a new housing or transportation problem, but you no longer have a debt problem. Defining debt this way will help you make a better decision if you are unsure if you are in the position to go on vacation. For example, if you have true debt, there are a couple of things to consider.
First, understand that at some point you will have to pay off that debt. If you choose to take a vacation as opposed to paying off those debts, you will only further delay the pay off. Secondly, you should consider the interest rates on your true debt.
For example, if you have credit card debt at 20%, it is almost guaranteed that a better use of your money would be to pay off that debt as opposed to going on vacation. However, if you had student loan debt that only had 4% interest rate, it can be possible to go on vacation by paying off the student loans slower.
By paying off the student loans slower, you will free up more income that you can send towards your future which may earn a higher interest rate, such as 10% from the stock market over time. If you still have money left over after putting money towards your future, you could use it for a vacation as you pay off your student loans.
This is where personal finance can be a bit tricky to give a cut and dry answer. In some circumstances, it can make more sense to
pay off a lower interest true debt slower, such as student loans, if your excess dollars can earn you more elsewhere.
That covers true debt, but what about false debt such as a mortgage or car loan? Do you need to pay these off before going on vacation? Again, the answer is that it depends. For the mortgage, it is not necessary to pay off your house before going on vacation.
Who wants to wait 15, 20, or 30 years before you are able to take a vacation? Neither do we. This is not even a financial answer, but instead a more holistic answer about life. Not everything comes down to dollars and cents. You have to enjoy the journey along the way.
With that being said, make sure that you have built a safety net, and are saving for the future. Once you do those, the excess money you have after
budgeting for your other bills can be used for a vacation even if you have a mortgage payment.
How about car loans? Under the previous definition, we know car loans are false debt so you can sell them to get rid of the loan. So, do you have to pay off your car loans before you are in the position to go on vacation? The answer yet again is that it depends.
What you want to look at is the interest rate. If you have a reasonable interest rate of 3% or 4%, and are still able to put money towards your future, then going on a vacation with a car loan is perfectly acceptable. However, what if you have a higher interest rate on the loan, such as 12%.
In this scenario, it may be better to pay off that car loan before taking a vacation. With a reasonable interest rate of 3%, the money that you send towards your future may be able to make you 10%. Since there is an arbitrage opportunity, going on vacation with a reasonable car loan is fine.
However, if you have a 12% car loan, it is unlikely that the money that you send towards your future will earn more than this consistently. For this reason, it can be a better use of your dollars to pay down that loan before going on vacation.
After reading the points above, you may have found that you are in the position to take a vacation even if you have debt. If so, you should make sure that you budget and plan for your vacation. The reality is that if you have true debt, such as low interest student loans, the vacation you take may not be your dream one as you have a financial debt obligation.
For this reason, it is vital that you budget and plan for your vacation so you do not add more debt, such as credit card debt, after going on vacation. There are several ways that you can save money when you take a vacation.
First, look at different accommodations. It may be tempting to treat yourself to a 5 star hotel, but if you only plan on sleeping in your hotel room, a budget hotel may be just fine. You may decide that staying in an AirBnb or VRBO property is also a better bet if the costs are comparable.
If you do decide to stay in an AirBnb or VRBO property, you get another cost saving benefit. Most of these properties have a kitchen which will allow you to save tons of money on food by preparing your own meals. Before you get to your destination, it is also a good idea to plan for what you are going to do.
There may be lots of free activities in the area you plan to travel to that are still fun to do. You can also look for discounts ahead of time if you plan to do activities that will cost money. Finally, you can look to save money on transportation.
This may include finding cheaper airfare on travel websites and finding cheaper vehicle transportation once you get to your destination. By doing all of these things, you can enjoy your vacation guilt free knowing that you have a plan for the vacation, as well as a plan to manage your debt when you get back.
This should be an obvious one, but do not use debt to go on vacation. People will often find themselves going into debt by taking a vacation they cannot afford with money that they do not have. If the only way that you can go on vacation is to put it on a credit card without having cash to pay it off or getting a personal loan, you are not in the position to go on vacation.
The whole point of this article is to provide a framework to help you understand that you can still take a vacation even if you have debt. It may be frustrating if you are not in the position to take a vacation right now, but it will only feel that much better when you do it the right way financially.
At the end of the day, balancing your current needs and wants, with your future needs and wants is not an easy thing to do. You may have made some unwise financial decisions in the past which resulted in a debt burden, but you are not alone.
It is important to give yourself grace. You may have read the points above and realized that you are not in the position to go on vacation as your debt is preventing you from creating balance in your financial life. It can be frustrating now, but don't beat yourself up.
It will only feel so much better once you arrive at a place financially in which it is okay to go on vacation even if you have debt. If you do have debt, but realize that it is a false debt such as a low interest car loan, and you are saving for your future, simply remember to plan out the vacation and then enjoy it.
