How To Create A Travel Fund

If you’re looking to go travelling, then saving for the trip might be a significant source of stress. Having a dedicated fund whose sole purpose is to facilitate your holiday can be very helpful. This fund, often called a ‘sinking’ fund, can make the process of saving much simpler.

Understand the Concept of a Sinking Fund

So, what exactly is a sinking fund? Put simply, it’s a pot of cash set aside for a specific future expense – like a holiday. It’s not a separate account – but it’s a way of tracking how much money you’re putting in, and taking out, for a particular purpose. You might have several sinking funds in action at the same time – each one there to make a specific purchase happen. A sinking fund is distinct from an emergency fund, in that it’s there to help you deal with a specific expense, rather than an unknown one.

Calculate Your Travel Budget

In order for your sinking fund to work out, you’ll need to know exactly how much you need to save for the holiday. This figure should include every area of spending, from accommodation to transport to food. When you’ve come up with the headline figure, you can divide it by the number of months between now and your holiday. This should give you the figure you need to save every month in order to make the holiday happen.

Of course, in practice, it’s a good idea to save slightly more than your calculations might suggest. This will give you a little bit of flexibility, so that you can handle unforeseen expenses. If the cost of your airport transfers suddenly rises, this will give you the funds to deal with it.

Explore Investment Options to Grow Your Fund

Simply setting aside the cash might not be the optimal strategy, especially if you’re saving over many months or years. Through the right investments, you can make your money work for you. You might look at low-risk investment options, like an index fund that will track the performance of a market index. Index trading tends to yield higher returns than a savings account – although you’ll need to remember that your investments are at risk.

Automate Your Savings

If you’re having to manually transfer money into your travel fund each month, then you might be tempted to skip a month in order to meet your short-term financial needs. Making the payments automatic will help you to avoid this temptation. The result is a change of mindset: You’ll be forced to cope with the payments, in much the same way as you cope with other financial commitments, like your debt repayments. The difference here is that you won’t need to worry about interest.