Plenty of people dream of seeing the world. If you want to be one of the few who actually makes the dream a reality, you’re going to have to do a lot of planning. Financial planning for the future means taking steps to make sure your retirement funds remain intact and curtailing current spending so you can put money away in a savings account. Here are some things to consider when strategizing to fulfill your dream of traveling the world:
Understand Opportunity Cost
Life is about choices. International travel isn’t cheap. Are you willing to make the necessary sacrifices? You must be willing to make a tradeoff and learn how to gain financial freedom so you can travel the world. Every time you commit to something, you’ve effectively decided that it’s preferable to the alternative. This is known as opportunity cost. The opportunity cost of a life of travel may be giving up luxury items, driving your cars for longer than you otherwise would, and foregoing regular meals at fancy restaurants.
Now or Later
Do you want to travel now, or do you plan to wait until you’re closer to retirement? There are advantages and disadvantages either way. You may want to travel when you’re young and in good health, but devoting a significant portion of your life to travel means you won’t be generating income in your prime working years.
On the other hand, if you wait until you are retired, you may not be in the right physical condition to enjoy the things you would like to while abroad. Hiking Machu Picchu isn’t the same at 70 as it is at 30. Decide how travel fits into your long-term plan.
Live Below Your Means
In order to live below your means, you need to spend less than you earn. Conventional wisdom says that housing costs should be 30% of your budget. For most people, housing is their greatest expense, so if you can reduce your housing costs to 25% or even 20% of your budget, you’ll free up a good chunk of money that can go toward travel. Choose a smaller home, or consider living with roommates.
Going out to eat is another expense that adds up quickly. Even if you are only buying your lunch from the McDonald’s value menu, that’s still likely more than you would spend if you packed your lunch. Leftovers from last night’s dinner are generally healthier and cheaper than a fast-food bargain lunch.
Pay Off Debt
If you want to free up money in your budget to use for travel, start by paying off debt, particularly high-interest debt like credit cards. Financially, it makes sense to use the avalanche method, paying off your highest-interest debt first. Some people prefer the snowball method, in which you work toward retiring smaller debts first to keep you motivated. Once your debt has been cleared, divert the amount you would spend on debt directly to your travel fund.
Investing in stocks offers a better rate of return over more liquid assets like savings accounts, but the tradeoff is greater volatility. If your travel plans are at least 3 to 5 years away, consider investing in an ETF (Exchange-Traded Fund). Rather than buying individual stocks, which is risky, an ETF allows you to buy a little bit of the entire stock market. Unless you’re a financial whiz, stick with an ETF over a unit trust. The rate of return doesn’t justify the higher fees.
Consider a Travel Rewards Credit Card
Getting bonus rewards on the money you’d be spending anyway sounds great, doesn’t it? It can be, as long as you are aware of the drawbacks. First, most rewards cards are only available to people with excellent credit. Second, rewards cards tend to carry higher interest rates than non-rewards cards do.
So, you should only consider a rewards card if you pay off your balance in full on time, every month. If you do, then it’s fine to look into getting a rewards card. Be sure to look at cards that offer rewards in both travel and non-travel categories. You may find that the restrictions on how you can redeem rewards make it less cost-effective than a simple cash-back card.
Prioritize Retirement Over Education Savings
Your Central Provident Fund Ordinary Account can be used to pay for housing and education costs for yourself or a family member. Whatever is left over when you turn 55 will be combined with the funds in your Special Account to create your Retirement Account. If you plan to travel in retirement, any money you spent on a child’s education won’t be there in your RA. Students can take out loans to fund their education, but seniors can’t take out loans to pay for retirement expenses.
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