Q: I’m planning to go on a month-long solo trip to Europe next year and I want to fund it without using a loan as that would involve paying interest. However, I’m slightly concerned funding it only through my savings can damage my financial base. What should be my ideal strategy? — Sujitha
A: It’s understandable that you want to avoid taking a personal loan to fund your vacation, but you’re right if you feel exhausting a major portion of your savings is risky too. Perhaps striking a balance between using your savings and investment returns, and smartly utilising credit products is a good strategy. Since you said your trip is next year, you still have a few months to plan your finances. Here are some tips you might find helpful:
- Make a realistic budget for your entire trip (flights, hotels, meals, shopping commute, etc.) and set it as a financial goal against a timeline. Like “I need to raise Rs. 3 lakhs in 6 months”. This would mean you need to divert Rs. 50,000 per month for the next 6 months to meet your target.
- Once you have a clear goal in place, see how much from your savings you can afford to use for the trip without touching your emergency fund (which should be worth at least 6 months of your expenses for contingencies).
- To mitigate the deficit, you need to chalk out a cost-cutting plan for the next few months to be left with enough funds to meet your savings target while not hampering your other financial commitments. Curtailing wasteful spends like frequent food ordering, cab rides and shopping binges can help you in this regard.
- You can also choose to invest your funds in a short-term fixed deposit or even a liquid fund to get moderate returns. However, do keep in mind that FD returns are taxable according to your applicable slab rate and liquid funds do carry some risk.
- Use your credit card to avail meaningful travel benefits like discounts on flight tickets and offers on hotel bookings. However, do read the fine print to make the most of your plastic money.
- If you feel you won’t be able to raise the required amount through your savings and investment returns, you may want to consider going for a personal loan. However, work on improving your credit score (by being regular with your other repayments) to get the best loan offers (with cheaper rates, i.e.) and compare to find best options. Also, evaluate the affordability of the loan EMIs to avoid accumulation of debt and an impacted credit score.
Hope these tips will give you some direction. Wish you a fun-filled trip in advance!
Have a question on personal finance? Ping me on Twitter at @adhilshetty with the hashtag #AskAdhil. The writer is CEO, BankBazaar.com, an online marketplace for loans and credit cards.