Budget-Friendly Travel Planning

By Eleanor Jacobs

If sky-rocketing gasoline prices, a smaller than usual bonus, or an unexpected job loss has derailed your vacation plans this year, you are not alone.  Many families will be foregoing the traditional vacation opting instead for a “stay-cation.”  Congratulations to the decision maker for selecting this choice rather than using the “go now, pay later” option.

Whether it’s a day trip to the beach or a week in Aruba, vacationing is a big part of our American culture. This crucial downtime allows for rest, relaxation, and recharging from our hectic work lives, not to mention quality time with family and loved ones. While these annual memory-making treks are as American as baseball and apple pie – one look at our national deficit and it’s easy to see that balanced budgeting is not.

Upon your return with fond memories of children building sand castles or your Aunt Mildred’s latest bathing suit fresh in your mind, now is an excellent time to start budgeting for your 2012 vacation. An often overlooked piece of that budget should be a line item for vacations. Without a budget, you lack the ability to guarantee that you will have sufficient funds to meet your future needs – let alone your next vacation.

The ultimate goal of any budget is for sources of income to exceed expenses. If your sources of income are less than your expenses, now is the time to examine your spending habits to reduce expenses or creatively seek additional income sources.

To get started on your budget, we will follow these three easy steps below. Get out your calculator and paper or create an Excel spreadsheet to begin the process.

STEP #1. Annualize all sources of net income. Net income is the amount after all deductions for taxes, insurances, 401(k) contributions, etc. Multiply your net weekly income times 52, biweekly income times 26, semi-monthly income times 24 and monthly income times 12.  Add all of these sources together to calculate your annual disposable income.

STEP #2. Calculate your annual expenses:

A. On an annual basis, identify and calculate all personal financial obligations to banks, credit cards, financial institutions, family, etc. including but not limited to your mortgage, home equity, car loan, educational loans, child support (if not a payroll deduction), alimony, credit cards, etc.  Total these amounts.

B. Using historical data (preferably the past 12 months), calculate all annual personal living expenses paid for rent, utilities, food, clothing, transportation, medical, child care, insurance, taxes, pets, etc. Total these amounts. Since this is an estimate based on historical data, you may want to increase this total by three to five percent.

C. Allocate some amount for retirement and savings (other than payroll deductions) no matter how small that may be. Total these amounts.

D. Determine the amounts you want to budget for gifts, entertainment, vacations and charitable donations. Total these amounts.

E. Combine the amounts from A, B, C and D to calculate your estimated annual expenses.

STEP #3. Deduct the estimated annual expenses (STEP #2) from the annual disposable income (STEP #1).

Hopefully, the result is a positive number which means your annual available cash exceeds your annual cash expenses. Before you become too confident, review each item to make sure your calculations are accurate. If your calculations are accurate, review your budget to determine how you want to allocate the surplus to increase financial security. Consider additional contributions to retirement and savings before you increase any spending categories.

If the result is a negative number, revisit the above items to verify accuracy. If the results are valid, immediate action must be taken to reduce expenses or identify and generate additional sources of income including a part-time job. Participating in your employer’s dependent care plan, flexible spending plan or retirement plan are additional ways to reduce taxes and increase your cash flow.

With the above three steps completed, you should now have a useful budget and a good picture  of your financial health over the coming year. Of course it is highly recommended that you sit down with a CPA to create a more comprehensive budget to include things such as retirement planning, estate planning, tuition planning, capital expenditures and other tax planning strategies.  The budget we just created here will be the keystone of that discussion with your CPA.

Budgeting will provide relief from the anxiety of wondering whether you will have enough money to make ends meet and take that needed vacation in 2012.  Executing the budget and not deviating from your plan are critical to maintaining a comfortable lifestyle without stressing.  Initially it will be a challenge to make financial decisions based upon budget allocations versus impulsive spending; however if you want to take a worry-free vacation, executing a well-defined budget will help you achieve that goal. Bon voyage!

Eleanor C. Jacobs is a Lehigh Valley CPA at Jacobs, Kenneson and Co.