How to save money for a vacation in 12 months

5 MinsMarch 7, 2022

There are plenty of studies to prove that taking a break from work and switching off can help you avoid burnout. If you are planning a vacation a few months down the line and want to know how to save money for it, read on.

save money for vacation 12-months

To begin with, here’s a 5-step approach to follow:

1: Finalise your destination and estimate the total cost sensibly (account for accommodation, food, sightseeing, shopping, transfers, etc.)

2: Calculate the number of weeks/months left before you travel (to set aside funds and know when to redeem or withdraw them).

3: Take into consideration the inflation factor when estimating the total cost of your vacation.

4: Set aside some money for the vacation and invest it regularly in suitable investment avenues

5: After having planned well financially, in case there is a shortfall, consider availing a Personal Loan.

Since a vacation is a short-term financial goal, it is important to invest in productive, yet fairly safe investment avenues. Following are some options you could invest in for your vacation in 12 months:

1). Bank Fixed Deposit/Recurring Deposit – A bank Fixed Deposit will earn you fixed, steady, and secured returns.

Match the tenure of the term deposit with your goal of a vacation. Preferably choose the cumulative plan and avoid premature withdrawals. Ideally, to ensure automatic savings into a term deposit, opt for Auto Fixed deposit. This will allow you to automatically transfer money in multiples of Rs 5,000 from your Savings Account to the term/fixed deposit when the balance in your savings account crosses Rs 25,000.

Alternatively, you may open a Recurring Deposit (RD) and systematically invest in it every month. Again, invest regularly without any delay and do not stop the investments or prematurely withdraw from the RD account.

Furthermore, if you have received cash gifts or a bonus during Diwali, that too could be deployed into a bank FD for a suitable term to fulfil your financial goal of blissful vacation. To know how much, you will receive as returns, use Axis Bank’s FD calculator.

2). Debt Mutual Funds – The broader objective of a debt mutual fund scheme is to generate a regular income for investors. That said, the investment objective, risk, and returns vary on the types of debt mutual scheme you choose. Keep in mind, debt funds offer market-linked returns and are not risk-free or safe.

[Also ReadEncourage your savings habit by opening an FD account]

For the time horizon of up to 12 months, you may consider the sub-categories of debt funds:

i. Ultra-Short Duration Funds – This type of debt fund invests in debt papers such as Commercial Papers (CPs), Certificate of Deposits (CDs), Treasure Bill (T-bills), Government Securities (G-sec), and Corporate Debt for a duration of 3–6 months. With an accrual strategy followed, the Ultra-Short Duration Funds potentially generates slightly better returns (albeit higher risk) than a liquid fund and a saving account.

ii. Liquid Funds – These funds invest in debt and money market securities with a maturity of up to 91 days only. Typically, Liquid Funds invest in Treasury Bills, Commercial Papers, Call Money, Certificates of Deposits, and so on, which helps keep the interest rate risk to a minimum.

Broadly, here is how you could structure the portfolio if you require a sum of around Rs 2 lakh for your domestic vacation at the end of twelve months from now…

Investment AvenuesWeightageInvestment Per Month (in Rs)Expected ReturnsInvestment Value at end of 12 months (in Rs)
Bank RD50%8,5005.10%104,850
Liquid Fund35%5,5003.10%67,119
Ultra-Short Duration Fund15%2,5003.70%30,608

Note: 1-year term deposit rate of Axis Bank considered for bank RD. 1-year category average return of 3.1% and 3.7%, in the case of Liquid Fund and Ultra-Short Duration Fund respectively as of October 29, 2021, are considered.

(The table above is for illustration purposes only)

Despite planning, if you happen to overshoot your budget for the vacation or if there is a shortfall, you could consider availing of a Personal Loan. And finally, to secure your vacation, consider buying an appropriate travel insurance plan.

Disclaimer: This article is for information purpose only. The views expressed in this article are personal and do not necessarily constitute the views of Axis Bank Ltd. and its employees. Axis Bank Ltd. and/or the author shall not be responsible for any direct / indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision

Mutual Fund investments are subject to market risk, read all scheme related documents carefully. Axis Bank Ltd is acting as an AMFI registered MF Distributor (ARN code: ARN-0019). Purchase of Mutual Funds by Axis Bank’s customer is purely voluntary and not linked to availment of any other facility from the Bank. *T&C apply