l. Price out your vacation. Once you’ve decided where you’re headed and when, it’s time to figure out how much your excursion will cost. The most common approach is to look at the components of your trip—hotel, airfare, rental car, the cost of food—and add it all up. Unfortunately, many people stop there and vastly underestimate the total expense of the trip. Make a list of the other things you’ll need once you arrive: rail passes, theater tickets, or cruise-ship excursions, for instance. Make sure you consider other items, such as new luggage, activity-specific gear and clothing, and vaccinations. If you want to avoid extra charges while on vacation, consider a package that includes meals, activities, tips, and transportation. That way, there is a minimal amount of digging into your wallet once you get there.
2. Know your limits. The other way to decide on a price tag for your trip is to come up with a number you can afford and then find a vacation that fits it. For example, on Web sites such as Farecast.com and Travelocity.com, you input your departure city and budget, and the sites generate a list of destinations sorted by fares. Travel agents—who know which destinations are least expensive and when—are also a valuable resource. You can go to your agent and say, "I have X amount—where can I go?" Or, "I want to go here. Can I do it with X?" Either way, a good agent can work out the details.
3. Use your points wisely. Once you know how much your trip is likely to cost, try to reduce that total by using loyalty-program points. Randy Petersen, founder of InsideFlyer.com, advises booking six months in advance to increase the chance that your points can be redeemed. Try calling the airline directly. If you go online to book a four-leg trip using miles, and one of the legs is unavailable, a Web interface will probably turn you down for the entire journey. "An airline agent can point out where the bottleneck is," says Petersen, "and direct you to nearby cities that might have connections, or suggest other flights that have plenty of open seats."
If miles are plentiful but dollars are short, redeem double miles to secure a seat when all those set aside for rewards are gone. There are also programs, like United Airlines’ Mileage Plus Choices, that allow you to book a ticket on the Chase credit card affiliated with the program and then use miles—at the rate of one per penny—to pay for it. Airfares of $160 cost 16,000 miles, $400 fares cost 40,000 miles, and so on. Often you can "buy" your ticket with these programs for less than it would cost if you had to pony up double miles, Petersen points out, and he expects other airlines to follow suit. "Any time you find an airfare for less than $250, it’ll be cheaper than redeeming miles for the seat."
Consider using points from a hotel-affiliated card (rather than one from an airline), like the Starwood Preferred Guest credit card from American Express (the parent company of Travel + Leisure), which allows you to transfer points to more than 30 frequent-flier programs on a one-to-one basis. You can typically use these points at full value for airline tickets as well as hotel rooms. When you do the opposite—use airline points for hotel rooms—you generally get only half the value.
4. Pad your budget. This process isn’t foolproof. Try as you might to figure out precisely how much your vacation will cost, it’s impossible to plan for everything. The always consistent weather takes a break from consistency and you suddenly need a new raincoat. You find the perfect painting for that impossible-to-fill niche in your foyer. Or the local currency fluctuates—and not in the dollar’s favor. Something always happens. So take your overall vacation budget and build in a cushion of 10 to 15 percent.
5. Start a savings plan. Whether your goal is a new camera, a piece of jewelry, or an extravagant vacation, the best way to reach it is by slow, steady saving. It sounds obvious, but it’s worth moving some money out of your primary spending account every month and putting it someplace where it will grow faster than in a checking account. "Right now, there are more high-yield money-market accounts and six-month CD’s than there have been in a long time," says Ross Levin, founder of Accredited Investors, a wealth-management firm in Edina, Minnesota. A money-market account is a good choice if you will be accruing the money over time. However, if you’re prepared to put aside one large sum and won’t withdraw it for six months or more, you may be better off with a CD. But beware: if you need the money before it becomes due, breaking a CD will cost you three months’ interest, which will represent a big chunk of your return.
At press time, a six-month CD from AmTrust Direct, in Cleveland, has an interest rate of 5.36 percent. Some other money-market and high-yield savings account rates are slightly lower. HSBC Direct, a New York–based bank accessible on the Internet, is offering a savings rate of 4.94 percent with no minimum deposit. Go to www.bankrate.com to find the current best deals on CD’s and money markets.
6. Obtain a low-interest-rate credit card. Paying for a vacation by credit card has a number of benefits. It’s safer than carrying cash and easier than obtaining and using traveler’s checks. And, you can rack up miles and points for future trips. Just be sure that the card you take on vacation is the one with the lowest interest rate you can find. If, despite your built-in buffer, you exceed your budget, you will be able to pay it off at an interest rate that won’t cost you an arm and a leg. After the trip, take the money you were automatically transferring into savings and use it to pay off the credit card.
If you don’t like the thought of adding another credit card to your portfolio, call the ones you’re already carrying and ask for a reduction in your interest rate. If you’re the sort of customer who charges frequently, doesn’t bump up against the credit limits, and pays bills on time, they may give it to you.
The good news is that once you get in the habit of budgeting for a vacation, you’ll be able to do it not only for those vacations to come, but also for your bigger financial goals. A beach house on Barbados, anyone?