It would be really unwise for anyone to fund their dream holiday using such costly loans!
A holiday is an important aspect for living a fulfilling life. You get to see several places and interact with diverse cultures that you wouldn’t otherwise see.
Chenthil Iyer, Chief Strategist, Personal Finance, Horus Financial Consultants said, “When it comes to something defined as a ‘Dream Holiday’, it apparently has more to do with being luxurious and exotic and hence possibly expensive. In that case, it makes a lot of sense to plan for it well in advance.”
Instead of making an impromptu holiday plan and placing a stress on family goals, one should plan and invest in advance for such a holiday which has the potential of becoming ‘an experience of a lifetime’ and may be etched in one’s memory forever.
Based on your monthly earning and expenses, determine how much you can save towards all your financial goals. Amar Pandit, Founder and Chief Happiness Officer at HappynessFactory.in, said this process should begin by listing down one's goals. "Your savings need to be allocated towards various important family goals be it child’s education, buying a house/car and planning for your retirement. After allocating money for your important family goals you will be able to decide whether you can set aside the required amount for your vacation,” he explained.Prepare a list of possible expenses for the international holiday and savings required
A Europe tour for a four-member family would at present cost around Rs 8 lakh. Assuming a five year timeframe to achieve this goal, we can safely peg the actual cost to be Rs 10.70 lakh assuming a yearly inflation rate of 6 percent. So, the monthly investment required for this goal at a rate of return of 15 percent per annum works out to around Rs 12,500.Where to invest for your holiday goal?
Most families generally plan a vacation only a year before. Naveen Kukreja, CEO and Co-founder, Paisabazaar.com, said the direct plans of ultra-short term funds is the best option to invest for such short periods. "You can expect 7-8 percent annualised returns from these funds.”
In case you are one of those who like to plan well in advance for a holiday one-to-three years ahead, then short-term funds and balanced advantaged funds will be ideal depending on one's risk appetite and tax-slab.
“Short-term funds can be expected to generate 8-9 percent annualised returns while balanced advantaged funds can generate over 9 percent per annum," Kukreja explained. For investment horizons over three years, one can invest in direct plans of equity funds, preferably in largecap and multi-cap funds.Activate Systematic Transfer Plan while arriving closer to your goal
When you have built your holiday corpus through equity funds and are just one-year away from your goal, you should activate a Systematic Transfer Plan (STP) in your existing funds. “STP will reduce the market risk by transferring a pre-determined sum from your equity funds to low-risk ultra-short term debt funds at periodical intervals,” Kukreja said. Whereas, if you are opt for a Systematic Withdrawal Plan (SWP), the pre-set amount will be credited to your savings accounts generating lower returns than ultra-short term funds. So, don’t activate SWP in your fund.Avoid opting for debt to meet your holiday goal
With loans available from NBFCs and online lending portals within an hour's time, families do not hesitate to take such loans while opting for a holiday. It would be unwise to fund a dream holiday using such costly loans! “In case you do take a loan, ensure you have the capability to repay the amount in full without defaults," Kukreja said.
The last thing you want to get into is a debt trap for a vacation. “High interest rates will rob you off your valuable savings and can pose a potential threat to other important and unavoidable goals in your life leading to a sustained stress,” Iyer explained.
Loans for these purposes are generally without any collaterals and therefore attract high processing fees as well as interest rates. “Even opting for a dream holiday funded using a credit card is a sin as interest rates run up to around 42 percent per annum! Other loans also cost around 11 percent to 19 percent and are therefore quite expensive,” Iyer cautioned. The Rs 5 lakh loan would attract almost Rs 10,000 in processing fees and over a five year period would cost Rs 2.13 lakh in interest.
Alternative to expensive loans
If one wishes to borrow for a dream holiday, Iyer recommends the top up loan route than any other debt option. "If one has a home loan with a bank and repayments are on schedule, banks may offer you a top-up loan with a low interest rate as well as tenure up to 15 years, which may be used for any purpose including a dream holiday."Keep in mind, a dream holiday is an avoidable goal and should feature last in one’s list of priorities. One should try to squeeze in short holidays that will be soft on the pocket and give one an opportunity to de-stress.