How I Use an Investment Account for My Travel Fund
Endless numbers of words have been written about the need for an emergency fund. And it’s true that emergency saving is important. However, when things became a little more settled in my life and my finances stabilized, I realized that it’s also important to have a “fun” fund.
I decided to take some of the principles of an emergency fund and apply them to saving for things that I want most to do — like travel. Here’s how I built my travel fund to the point where it’s possible for me to go almost anywhere I want, from a three-day getaway to a week-long river cruise on the Danube.
Why I Use an Investment Account
First, I use an investment account for my travel fund. This method may not be for everyone, but it works for me. A taxable investment account allows you to grow your fund at a faster rate. I’m not comfortable using the same 90/10 stock/bond split I use for my long-term investment account, though. Instead I use a 65/35 stock/bond split for a little more stability in the portfolio. My asset allocation is accomplished using low-cost ETFs.
You can choose your own broker, since most of them allow you to build your own portfolio using mutual funds and ETFs. I like using low-cost index ETFs because you get a larger swath of the market. Your ability to take a vacation won’t be impeded if one or two stocks tank.
I like using a robo-advisor for my account, rather than choosing my own ETFs. Once I have decided on my asset allocation, betterment does the rest, including rebalancing to maintain my chosen asset allocation.
Set Aside a Set Amount Each Month
Just like you would with an emergency fund, decide how much money you can set aside each month for your travel fund. At first, you might only be able to set aside a relatively small amount. When I first started, I put in $80 a month. However, as time progressed and I freed up more money in the budget, I increased what I set aside. Now I put $350 into my travel fund each month.
Make it automatic so you don’t have to think about it. I use an automatic investment plan to make sure the money goes where it should, no matter what else is happening to distract me. I love watching the travel fund grow — and do so at a rate much faster than it would in a traditional savings account.
Because it’s a taxable investment account, you don’t have to worry about early withdrawal penalties and other red tape. However, it can take up to a week (and sometimes more) to get the money in the bank. I get around this by using a credit card to pay for my travel — and reap the rewards. I can liquidate the right dollar amount from my account and use that money to pay off the credit card before interest charges are incurred.
I have yet to completely deplete my travel fund for a trip. When I first started, I planned shorter, less expensive trips. I used the money to reserve campsites or pay for hotels on a spring break road trip with my son. Eventually, I built the travel fund to the point where, in addition to smaller trips throughout the year, my son and I can usually go on a larger trip each summer.
Taxes and Your Travel Fund
It’s also important to be prepared for the tax consequences of using an investment account for a travel fund. If you sell for gains, at the end of the year you will owe capital gains tax. My travel fund has been established long enough that when I sell, it’s a long-term gain, taxed at a lower rate. But be prepared for the tax implications, although in many cases the taxes shouldn’t be huge.
If you sell at a loss, you could see a tax benefit. Last year, I sold a small portion of my portfolio at a loss. I didn’t feel bad about it because I still had plenty of capital in my investment account, I had what I needed to pay for my trip, and, thanks to the tax deduction for investment loss, my four-day weekend getaway was suddenly tax-deductible.
Make Sure You Have the Emotional Risk Tolerance
When you use a taxable investment account for your travel fund (or any short-term goal) it’s important to have a strong stomach. There is always the possibility that the market tanks just before you want to leave on vacation.
You can get around that by paying attention a couple months out. If the market is doing well three months before your trip, and you worry about an even just before you leave, consider moving the money you need for the vacation to cash. The rest remains in the travel fund to capture potential growth, and you have peace of mind that your trip is covered.
The taxable investment account travel fund method isn’t for everyone. But if you have the stomach for it, it’s a way to save up for vacation faster while building up capital for smaller, spontaneous trips along the way.