In addition to figuring out how much a vacation will cost, clients need to account for travel insurance coverage and extra funds set aside for unexpected costs related to flight cancellations such as hotel costs, extra clothing or necessities.CandyRetriever/iStockPhoto / Getty Images
Are you a professional financial advisor? Register for Globe Advisor and then sign up for the new weekly newsletter on our newsletter sign-up page. Get exclusive investment industry news and insights, the week’s top headlines, and what you and your clients need to know.
With destinations now having opened up as pandemic-related restrictions eased, many Canadians are ramping up their vacation planning and spending this year after a long hiatus. But with inflation and interest rates also on the rise, advisors are working to ensure clients approach their travel plans with clear budgets, realistic strategies for funding their trips and a few ideas on how to stretch their dollars.
A recent Canadian Imperial Bank of Commerce poll shows almost two-thirds of Canadians (63 per cent) are ready for and excited about travel this summer, with more than half (57 per cent) agreeing it’s essential for their mental health. At the same time, 75 per cent of those surveyed noted that they’re “very concerned” about the cost of vacations because of inflationary pressures.
With vacations long-delayed, Nico Wong, financial advisor at BlueShore Financial Credit Union in Vancouver, says travel is a topic of conversation that comes up in almost every client meeting.
While some are in a position to splurge on a vacation after having accumulated some savings during the pandemic, others are eager to do so regardless of whether they have the cash available, he says. And it’s important for advisors to have travel budgeting strategies for both.
“If they want to travel, they’ve likely decided on it and it’s really my job to come up with a strategy,” he says.
Whether the client is planning a 30-day luxury cruise or a road trip, Mr. Wong says travel will be more expensive this year. As such, it’s important for all clients to do their research in advance to figure out how much each aspect of their trip costs and work with their advisor to create a realistic budget to avoid the “worst-case scenario” of overspending significantly, which may affect future financial plans.
For those without a lump sum set aside for a vacation, Mr. Wong says clients with a six- or 12-month timeline could take a “pay yourself first” approach by setting up a monthly pre-authorized contribution to a savings or tax-free savings account from their paycheques until they have saved the full estimated cost of their trip.
Coming up with a repayment strategy
On the flip side, he says, are those clients who have decided they’re going on a trip soon, regardless of whether they have the cash saved.
“I’ve definitely heard that before,” he says. “Maybe they haven’t had that six months, one year to set up a monthly savings plan, then they’re likely going into, let’s say, a line of credit, maybe even a credit card to make this travelling happen.”
For those clients, he would advise almost a backwards strategy.
“Be very cognizant of how much this is going to cost you and your final bill and come up with a repayment strategy,” he says.
Indeed, those who are itching to travel but plan to use a line of credit in a rising interest rate environment must be extra disciplined after their vacation to come up with a monthly plan to pay down the principal – not just the interest, says Nicholas Hui, certified financial planner with Vave Financial Planning in Markham, Ont.
“In terms of paying off the line of credit, a lot of people have a tendency to take the easy route and that’s just to pay the interest because [with] a lot of these lines of credit, you can,” he says.
“But with interest rates going up, it’s an even bigger hit; where you thought you could afford the interest rate of, say, 3 per cent, and now it’s 5 per cent. Well, it’s going to be even harder to pay off.”
In addition to figuring out how much a vacation will cost, Mr. Hui says clients need to account for travel insurance coverage and extra funds set aside for unexpected costs related to flight cancellations such as hotel costs, extra clothing or necessities.
Do the research and book ahead
Although rising inflation is squeezing clients’ savings, travel plans are important for many at the moment and difficult to remove from budgets because clients want to travel internationally to see family after years of restrictions, or just want to get away, says Caroline Somba, financial advisor and money coach with Topspin Finance in Toronto.
At the same time, she adds, many clients have been approaching vacation spending more consciously by considering less expensive cities, travelling off-season or using rewards points.
“I’m seeing more caution than I’m seeing the willingness to splurge,” she says.
“The first thing that comes to most people’s mind is, ‘Where can I go that I’ll be able to stretch my dollar? Instead of visiting Paris or London, which are expensive cities, can I go to Portugal and Morocco?’”
Indeed, in the current environment, Ms. Somba says it’s important for clients to account for the impact of inflation and not to build future travel plans based on the cheaper prices seen during or prior to the pandemic.
She also advises clients to make reservations as they save for the rest of the trip, which they do by allocating to a sinking fund after they have covered their non-discretionary expenses.
“I encourage them to do their research well, plan early and also book as you save,” she says.
“For example, if you’re planning to spend $3,000 on a trip next year, don’t wait until you have the $3,000 to start booking. Because by the time you do that, the $3,000 may not be enough.”
Ultimately, in a more challenging economy, discretionary expenses such as vacations are an area in which many Canadians cut back, says Mr. Wong of BlueShore. But it can be possible for clients to retain travel as a financial goal with sufficient time to plan, budget and pivot.
“That’s maybe not to say, ‘Don’t vacation,’ but going back and looking at the costs, really doing your research and figuring out what you can afford,” he says.
For more from Globe Advisor, visit our homepage.