This is a guest post by the experts at Ratehub.ca
In the travel industry, it’s known as the shoulder season. It’s the period between summer vacation and winter holidays when prices are at their lowest.
For the astute traveler, it’s the best season. If you have the money saved to travel in the next couple of months, it’s a good time to go on vacation.
The Cost of Vacation
In the low season, a weekend trip for two to New York from Toronto (including flight and hotel) starts at $1,100.
But if you’re thinking about a longer trip, or a different destination, the cost can be much higheer. For instance, an 11-night Caribbean cruise can start at $2,000 per couple while a seven-day trip to Paris for two starts at $3,700.
That’s just the initial amount and doesn’t include any upgrades, which can be more than double your costs.
If you have the money saved, enjoy your trip! But if you don’t have any savings, you shouldn’t spend what you don’t have. Instead, you can develop a strategy to save the cash and start planning for next year, or later in the future.
The Easy Option
For most people that means stashing a little bit of each paycheque into a high-interest savings account. Unlike a chequing account, typically meant for the day-to-day business of paying bills, high-interest savings accounts are intended to be used to save money over a long period of time without a large number of transactions.
As a result, many of these savings accounts pay a higher rate of interest on money that’s deposited. At the same time, they also allow fewer free transactions and charge higher transaction fees than many chequing accounts. High-interest savings accounts pay a higher rate of interest compared to other savings accounts. The best interest rate in Canada is north of 2%.
But it’s a challenge to keep your vacation fund in a savings account. It’s very easy to be tempted to dip into your savings when that item you’ve had your eye on for months suddenly goes on sale. Before you know it, it gets added to your next impulse buy and your veal scaloppini and vino-filled Tuscan villa becomes a staycation in your backyard.
GICs Lead Us Not Into Temptation
If you can’t control your spending habits, there’s another option: GICs. Your money is held for a given period of time – anywhere from 30 days to 10 years – removing the urge to dip into your stash.
If you want to travel a year from now, you can get a one-year GIC. And if you’re planning a big European vacation in 2020, you can choose to purchase a three year GIC.
In a savings account, your money is at-risk of being withdrawn at any given time. While you’re allowed to cash in a non-redeemable GIC, you pay a significant penalty. The principal of a GIC is guaranteed – as well as the promised interest payments – and the GIC rates are generally higher than a high-interest savings account. Right now, it’s possible to get a one-year GIC with a rate as high as 2.5% and a five-year GIC with a rate of as much as 3%.
As an alternative, you can get a redeemable GIC. However, the rates are lower and you’ll be able to get your cash more easily. A non-redeemable GIC ensures you don’t spend the money ahead of time.
Use Your Rewards Points
Using a travel rewards credit card is a good method of forced saving for that dream trip. Your everyday purchases earn travel points, which can later be redeemed for flights, hotels, and any number of other related expenses. But if you carry a balance, the interest costs will wipe out the benefits of earning rewards points. Be sure to use your card responsibly and don’t spend just to earn points or you could end up in over your head.
A further bonus of a travel rewards credit card is the insurance policies that may come with it. It can help your wallet to use your card to book a trip, or to redeem points towards a trip or service. Some of the best travel rewards credit cards also include complimentary travel medical insurance, trip cancellation/trip interruption insurance, flight delay, baggage coverage, and collision or damage insurance for rental cars.
When you’re redeeming your travel points, booking well in advance of your travel date is recommended. Some travel card programs are notorious for limited availability, blackouts, and short expiration dates. Also, some travel rewards credit cards charge a booking fee, taxes, or fuel surcharges.
The Bottom Line
A trip is a great way to reward yourself for working hard, but it can also be expensive. Spending on a trip you can’t afford can lead to debt-related issues down the road. That’s why saving ahead of time is the best option.
Ratehub.ca is a website that compares mortgage rates, credit cards, high-interest savings accounts, chequing accounts, and insurance with the goal to empower Canadians to search smarter and save money.