ENJOYING A VACATION DESPITE FINANCIAL CHALLENGES

ENJOYING A VACATION DESPITE FINANCIAL CHALLENGES

There’s been a lot of chatter in the personal finance world about what you should and shouldn’t do when you’re in debt. On one side, you have the debt-free advocates who believe you should put your life on hold until you’ve paid off all your consumer debt, channeling every spare dollar toward it. On the other side, there’s the “You Only Live Once” crowd who think life should be enjoyed even if you’re in debt. Let’s break down the scenario with some numbers.

Imagine a family of four with $20,000 in consumer debt, slightly higher than the average American credit card debt of $15,950. This debt has an average interest rate of 15%. They are thinking about taking a one-week vacation and have a few options: they could go on their usual, more expensive holiday, choose a cheaper alternative, or wait until they’re debt-free to take any vacation.

Debt Details:
– Capital: $20,000
– Interest Rate: 15%
– Monthly Interest Payment: $250
– Monthly Minimum Payment (1% of capital): $200
– Total Monthly Payment: $450
– Time to Clear Balance: 404 months (or about 34 years).

Taking Their Usual Vacation While in Debt

Let’s say this family wants to go to Disneyland, which costs $6,000 for a week according to My Money Design. They’ve saved $500 a month for a year to fund this trip. While this is commendable, the $500 per month they saved could have been used to pay down their credit card debt, which has a 15% annual interest rate. If they had done this, they would not have added any new debt but instead have financed the trip on a 0% interest credit card and paid it off over the next 12 months. After the vacation, if they continue to pay an extra $500 monthly towards their debt, they could get out of debt much sooner.

By keeping up with just the minimum payments while saving for the holiday, they will be in debt until 2047, but they would have enjoyed one Disney trip. Alternatively, by increasing their debt to $26,000 but making $950 monthly payments ($450 minimum payment plus the $500 they saved for the holiday), they could be debt-free in 34 months.

Taking a Cheaper Vacation While in Debt

This family still wants a vacation but decides to be frugal. They buy an $80 America the Beautiful National Parks pass, which gives them access to numerous national parks for a year. They use home exchange networks or Couchsurfing to stay for free or stay with friends and family, bringing picnics to the parks. Let’s say they still spend on a couple of motel nights ($200), gas for their car ($200), and a few attractions or dinners out ($220). This totals to just $700 for a week of fun.

Though their kids might miss seeing Mickey Mouse, this vacation is equally enjoyable. If they charge the $700 on their credit card and continue with the minimum payments, their debt-free date might be pushed back by a few months. However, if they continue to apply the $950 per month towards paying off their debt, they could be debt-free in just over two years.

Postponing the Vacation Until They Are Debt-Free

Assuming they can save $500 a month for a vacation, what if they put that money towards their debt instead? They would be debt-free in 25 months. Afterward, by continuing to save the $500 plus the $450 they used to pay towards debt, they could afford a vacation in just six months.

So, they could take a fully paid vacation in 31 months and enjoy life debt-free afterward.

Conclusion

Having never carried consumer debt myself, I can’t judge the urgency to take a vacation while in debt. However, I would express concern if someone dieting had an urgency to eat a family-sized pizza while trying to lose weight. If breaking the cycle of debt is your goal, delaying a vacation might be wise to avoid the slippery slope of “it’s just a holiday” or “it’s just a $500 handbag.” However, if you fully understand the implications and make a mature decision, go ahead and enjoy your vacation.

Personally, my financial goal was to achieve financial independence through aggressive saving, similar to extreme debt repayment. Each day I worked was a step toward my goal, and every non-essential purchase moved me further away from it. I didn’t give up traveling but did it cheaply, often extending work trips for personal travel and staying with friends.

If I had so much debt that it kept me up at night, I would certainly forgo any luxuries, starting with travel and dining out.

What’s your move?