Between transportation, lodging, food, and activities, vacation costs can add up quickly. Vacations are meant to be fun, but penny-pinching and worrying about finances can put a damper on the whole trip.
Using a credit card may be an option for some families, but taking on debt may ultimately add to your worries and prevent you from relaxing. Another option for financing your vacation? Save up beforehand.
You can set aside the cost of the trip months in advance in a special vacation savings account to help eliminate a bit of the planning stress. It's relatively quick and easy to open a new account and start saving for the next destination on your bucket list.
- A vacation savings account allows you to save up for a vacation separately from your emergency fund or other savings goals.
- The psychological benefit of having a vacation fund is that you can stay motivated to reach your savings goal.
- Choosing a high-yield savings account allows you to earn more interest on your balance.
What Is a Vacation Savings Account?
A vacation savings account is a type of account where you deposit money you've earmarked for a future vacation. The added benefit of using a specific account for your funds is that your savings has the opportunity to earn interest, depending on your balance and the interest rate.
Benefits of a Vacation Savings Account
Saving for bigger purchases takes time, patience, and dedication, but a designated vacation savings account benefits you beyond simply helping you save for vacation. It allows you to maximize the benefits of a getaway.
"There’s nothing more relaxing than taking a vacation you can actually afford," Kendall Philbrick of Babe on a Budget said in an email to The Balance. "That’s why I love using a designated account just to save for vacations."
Lumping all your savings in one account can make it hard to determine how much you have saved for vacation versus emergencies and other goals.
"Keeping your vacation savings in a separate account is a great way to easily assess how much you actually have to spend on your vacation so you don't have to stress about going over budget," Philbrick said.
Small wins like adding $100 to your balance or reaching the halfway point can help you stay motivated to continue building your savings.
Vague savings goals can be uninspiring because they lack the anticipation a specific goal can bring. A vacation savings account has a clear goal from the start that can provide constant motivation to stay dedicated.
Assigning a goal that's separate from your everyday spending means you don't have to think about the account as often, especially if you set up regular automated transfers. "[By] keeping that money out of sight and out of mind, you’ll be less tempted to spend it on other things, and more likely to actually reach your vacation savings goals,” Philbrick said.
Maintain Safety Net
With a separate vacation savings account in a well-planned budget, you’ll be less likely to skim from your emergency fund to pay for your vacation. An emergency savings is an important part of a healthy budget because it allows you to handle unexpected expenses without going into debt. Not having one can make it difficult to recover from emergency costs like medical or car repair bills.
With a separate account for your short-term savings goals, you avoid building a habit of dipping into your emergency savings for non-emergency expenses. Instead, you can develop the mentality that taking money from an emergency fund to pay for non-emergency expenses is “off-limits.”
Avoid Vacation Debt
Rather than putting your vacation on a credit card and paying interest, you'll have the advantage of funding your vacation in full. Even better, you can put your vacation on your favorite travel rewards credit card to earn rewards and enjoy travel perks like.
If you put trip expenses on your credit card, use the money in your savings account to pay the balance right away to avoid paying interest or creating new debt.
How To Open a Vacation Savings Account
You can open a savings account with your existing bank or take advantage of a high-yield savings account from another bank.
Compare Account Fees and Features
Whether you're opening an account with a new bank or your current one, check the fees, services, and interest rate on the account. Some savings accounts require a minimum deposit or may require you to maintain a minimum balance to avoid paying a monthly fee.
Some savings accounts have features like goal settings or the ability to name your account that can add more enthusiasm and motivation to saving.
A high-yield savings account allows you to earn more interest on your savings than you'd earn with a traditional savings account.
Apply and Provide Identification
If you're opening an account with a new bank, you'll also have to provide your personal information and proof of identity including your name, Social Security number, and a copy of your driver's license or passport. Most banks allow you to open a new savings account online in just a few minutes.
Make Your Initial Deposit
Once you've opened your new account, you'll be able to link a checking account and make your first deposit. Some banks require a minimum deposit amount. For consistent savings, you can set an automatic transfer into your vacation savings account to save a certain amount at regular intervals automatically.
Frequently Asked Questions (FAQs)
What type of account would be best for vacation savings?
A high-yield savings account is a great place for vacation savings since it pays a higher yield than a standard savings account, but doesn't have the long-term commitment of a certificate of deposit (CD).
When should you create a savings account for vacations?
It's never too early to open a savings account for your vacation. The more time you have to save, the bigger the budget you'll have. To get a more precise time frame, estimate the cost of the trip and divide by the amount you can save each month. The result is the minimum number of months in advance of the vacation you should start saving.
How much money should you have in savings before you go on vacation?
The amount you should save depends on the destination, time of year, number of people going on the trip, and the length of the stay. On average, Americans saved an average of $3,444 for vacations in 2021, according to an Expedia report. But there are ways to travel on a budget that would require less savings. For example, traveling during off-peak season or driving rather than flying can reduce costs.