What if I told you the you could go on vacation for free for life? “What’s the catch?” you would say, right? You would then wait for the timeshare pitch. Well, you can go on vacation for free, or at least without spending any of the money that you earn through your work, and all it takes is patience and planning. Here’s how it works:
1. When you start working, save up the $3,000 or so you were going to use for a vacation during your first year. Instead of spending it on a vacation, however, have a “staycation” where you just stay at home and enjoy some of the free things that are local. Take all of that money that would have gone to airline tickets, overpriced drinks, and hotel rooms and put it into a mutual fund. A good choice would be the Vanguard S&P500 fund or the Vanguard Mid-Cap Fund.
2. The next year, take about 10% of the money that is in your mutual fund and use that for a vacation, while investing the $3000 or so that you were going to spend on a vacation that year in your mutual fund. (Of course, you would actually just invest $300 less in your mutual fund because it makes no sense to send money in and take money out, but you get the idea.) Is $300 going to be an elaborate trip to the Bahamas or Australia? No, but just wait, it gets better. For this second year, maybe go with a friend and split the cost of a cheap place within a short drive of the beach with a kitchenette so that you can make most of your meals in the room or picnic on the beach. Buy a six-pack of beer or a bottle of wine for $6.99 to avoid paying those outrageous prices for alcohol in the bars. You should be able to get three of four days out of you $300 this way. Note, so long as you don’t buy a lot of expensive things you don’t eat at home, the cost of the food would not count in the $300 since you’d be buying it anyway at home.
3. In year three you now have about $6,000 saved up, plus or minus depending on how your mutual funds have done during the year. Again, contribute the $3,000 you would have spent on a vacation and take 10% of the account value out. Now you have $600, which allows you to stay a bit longer somewhere or maybe go to a slightly nicer place. See where this is going?
4. By year three you have about $810 for vacation, by year four about $1,030, and by year five $1,250. This all assumes no gains on your stock mutual funds. In actuality, if you’ve had any luck at all, you may well have $1,500 or $1,700 to spend by year five. Let’s assume you begin to spend $1,500 a year on a vacation from year five to year ten. You are therefore investing $1,500 a year into your vacation fund, putting $3,000 in and taking $1,500 out each year.
5. By year ten you’re almost sure to have had some market gains. Assuming a 10% return over that ten year period, you’d have something like $30,000 in your vacation mutual fund account. Of that, almost half would be gains on your investments. You could then stop contributing to the account and it would still be paying you an average of $3,000 per year. You could then take the $3,000 you were contributing to the vacation account each year and instead take a nice, $3,000 vacation each year, or maybe a $6,000 trip through Europe or Australia every couple of years, and the vacation account would, on average, increase in value enough to make up for the money you’ve spent on vacation. It would be like you were vacationing for free. Imagine being in your mid to late thirties and being able to pay cash for a trip like that every couple of years on the interest you were earning. This is right when your coworkers who were putting vacations on credit cards in their twenties would be facing a mountain of debt and paying out thousands of dollars each year in interest. The best part is that over a period of a few years, you’ll see the balances continue to grow despite your drawing funds from it for vacations.
6. The vacation account would continue to compound. Even without contributing a dime to it after the first ten years, it would be worth around $50,000 at the end of year fifteen. At the end of year twenty, it would be worth about $75,000. At this point you could start withdrawing maybe $5,000 per year from the vacation fund and adding it to the $3,000 you were spending on vacations, and your vacation account would still continue to increase. You’re now in your forties and taking $8,000 vacations each year “for free”.
Granted, this is a simplified example and the exact balances that your account would have would not increase linearly. In some years the markets would do very well and your vacation account balance would shoot up. In others the markets would go down and your account would lose value. But over long periods of time you would average somewhere around 10% return each year and you account would be growing to the point where the capital gains from your account more than paid for your vacation each year. By the time you were ready to retire, you’d probably have a quarter million dollars or more in the account. Compare this with the normal family who would enter retirement with minor amounts of credit card debt if they were lucky.
The point here is that by delaying things just a little and putting money aside, you can have some really nice things without needing to work more for them, and especially without needing to work extra to pay interest on credit cards. You can either spend your money each year for a lavish vacation, or you can save for the first few years, take modest vacations, but then be in a position in ten years to take some really nice trips, pay cash, and actually be earning money when you do so. Let the markets pay for your vacations. You work too hard to waste your own money.
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Disclaimer: This blog is not meant to give financial planning or tax advice. It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.
