Saving for Vacation
Just like with other large expenses, first and foremost, saving for vacation takes careful budgeting, some smart advance planning, and the right account in which to grow your dollars. Let's take a closer look.
Budgeting
Constructing a solid working budget is an important first step in starting to save for your trip. Even the most savvy financial professionals know that the principles behind a smart budget - having more money coming in than going out, keeping credit card spending at bay, or maintaining an emergency savings fund - are the cornerstones to any comprehensive and effective financial plan.
Determining Your Net Worth
When developing a budget, it is first important to quantify where you are starting out so that you can have a more accurate idea of where you are headed. Determining your net worth is a quick and simple way to do just that. - Net worth = Assets - Liabilities
Determining your cash flow
In addition to calculating your net worth, determining your cash flow is another useful way to measure your financial health. The two go hand in hand - that is, your net worth is a cumulative measure of your cash flow over time.
So then how do you actually determine your cash flow? These easy steps will get you there:- Get organized
- Determine exactly how much you make
- Evaluate how you spend that income
- Lastly, see what, if anything, is left over. If you are left with a balance, you have a positive cash flow. If, on the other hand, you find that you spend more than you make, you have a negative cash flow and will have to adjust your budget accordingly.
Let's look at each more closely.
Get Organized
In order to accurately determine your cash flow, you are going to have to keep accurate records of your finances - from your monthly bills down to your ATM receipts. Come up with a filing system that works for you and keep accurate records for at least three months so that patterns in both incoming and outgoing money can be detected. Remember that budgeting is about modifying your overall financial pattern and habits- not just correcting one-time mistakes.
Determining your income
It may sound obvious, but many of us don't know exactly how much we earn, both before and after taxes. Technically speaking, your income consists of:- Earned income (i.e. your salary, any commission, tips, self-employment income- money obtained from working)
- Unearned income (i.e. income from your investments and savings)
It is important that you factor both into your overall financial plan. One without the other is simply incomplete.
Evaluate your spending
Now that you have an accurate read of what you have coming in, it is time to look at what you are spending.
Write it all down. Get a notebook and let your pen hold you accountable for everything you spend. The process of writing things down can be eye opening and informative- you may discover you are spending more than you thought on certain items that add up like restaurant meals, your morning coffee or even magazines. Be sure to be realistic when you are going through this part of the process. If you know you end up spending at least $80 a month on entertainment, don't budget $50 - while it's admirable that you wish you could spend less, inaccurate numbers will only throw you off in the end.
What is your cash flow?
Now, just like with determining your net worth, determining your cash flow is simply a matter of subtraction. When doing this calculation, be sure not to forget to factor in any taxes you may owe.- Cash flow = Income - Spending
If you arrive at a positive number, then you have a positive cash flow and a surplus at the end of each month. If, on the other hand, you have a negative number then you have a negative cash flow - an important indicator that you may be living beyond your means. You will have to make the necessary adjustments to your budget to get this figure back in the black. We will address each scenario separately next.
HerTip:The golden rule of budgeting is as follows: The amount of money you have coming in should always be considerably more than the amount of money you pay out. As long as you stick to this basic principal, you can't stray too far from achieving your goals.
If you fall into the category of those with a negative cash flow, or even have a positive one but would like to increase its value at the end of each month, then you are ready to look for places where you can spend less and save more.
Here are a few rules to remember:- Cash is king. Instead of relying on the credit card to cover your daily purchases and transactions, pay in cash. If you can't pay for it in full at the time of purchase, then it is unlikely that you will be able to when the bill comes.
- Make the differentiation between wants and needs. For the spendthrifts among us this is easier said than done, but if you are serious about making a budget you can stick to, then you will have to think seriously about separating the two. Miscellaneous expenses like entertainment and luxury items are the first place to look to cut back on. Cast a hard eye on these expenses -- this category is the easiest to pare back.
- Look closely at your personal banking strategy.Can you bank cheaper? The world of personal banking has evolved greatly in recent years and that spells more and more options for consumers. Look closely at your accounts and the fees you are being charged in exchange for the services you are receiving. In many cases you might be surprised at what you find, and may want to reconsider your package. For more information on banking, please visit our basics of banking class.
- Lower you credit card interest rate.You should have a credit card available to you for emergencies. They certainly won't advertise this, but the credit card companies can and will be flexible on your interest rate if they feel that they will lose your business with your current package. Renegotiate your rate and don't take no for an answer.
- Examine your monthly bills like phone and utilities.Where can you make adjustments? Believe it or not, turning the lights off before you leave the house for the day or making a few less long distance calls at peak hours can spell real savings.
- Re-evaluate your insurance policies.The insurance business is a competitive one. If you are paying too much for your policies, try to negotiate a better rate with your provider or look elsewhere. For more information on insurance as well as quotes, visit our insurance center. Remember not to cut back too much. If you do, your budget will not be sustainable. Try to strike a balance between saving and spending that factors in having a fulfilling life. Pinching every last penny will only frustrate you in the end.
HerTip: Be sure to factor in an emergency savings fund into your budget. Most experts agree that you should have a cash reserve of at least six months at your disposal - be sure not to trim this out of your budget.
Opening the Right Account
Once you have you budget set up you will need to open the right account in which to accumulate your savings. For short-term investments, which your vacation fund will most likely be, money market funds are a smart low risk place to hold your cash while it is idle.
Here is how it works…
A money market fund is a mutual fund that invests in a number of money market vehicles (CD's, T-bills, etc.) These funds are designed to pay the owner interest, as well as provide the owner with the ability to sell at anytime. The fund manager's are primarily concerned with holding's credit quality, tax implications of investments, and investor safety.
HerTip: An investment in a money market account is not insured or guaranteed by any government agency and although many funds seek to preserve the value of your investment at $1.00 per share, it is possible to lose money.
At WFNInvest, we offer money market funds with no minimum balances and free check writing privileges. We even give you payee detail in your monthly statements so you can keep track of all of the checks that you write. What's more, you can set up direct deposit into your account quickly and easily. Just tell us how much* and how often you want to contribute to your account and we will automatically transfer the funds for you. As always, there are no hidden fees and no minimum balances. Simple!
*Must be a minimum of $100 per transfer
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