I find myself writing about serious topics a lot, like how to save for retirement, or the worst mistakes your kids are likely to make when they go to school -- with your money.
But you can invest for other goals too, like a life-changing vacation. A vacation like that could cost a lot - tens of thousands of dollars. But if you plan for it a few years in advance, you'll actually be able to take the vacation, instead of just dreaming about it.
Imagine you're planning a vacation to Lima, Peru for your family of four. The total cost might be $12,500 for airfare, an 8-night stay in Lima, and two or three nights at an eco-lodge near Macchu Pichu. You want to take the trip one to two years from now.
Here are five steps to make your dream vacation a reality:
1. Set up an account, and name it Macchu Pichu.
Set up automatic deductions from your bank account, and name it after your vacation destination to help motivate yourself. (Do this after you've ensured you're meeting your retirement goals of saving close to 10% a year of your income.)
2. Understand your savings scenarios.
If you start with nothing and set aside $500 a month each month for the next two years, and assume a return of 5%, you could reach $12,500 and be on your way to Peru in 24 months.
If you have more time to save, say four years, you could put $1,000 aside now and add $250 a month. At a 5% return, you’ll be good to go (with almost $700 extra in your pocket) four winters from now.
3. But remember to watch your fees.
The average Canadian equity fund charges you some of the most expensive fees in the world, taking almost 2.5% of your money each and every year. Whatever return you get will come after you've subtracted your fees from your return. Keep your investments simple, shop around, and ask about the fees. For example, without watching those fees, that extra $700 we just talked about would end up in the pockets of your friendly mutual fund company instead of yours.
4. Be prepared for downswings.
You could invest for a vacation -- and have the bad luck to be doing so right when the market takes a turn down. This might mean that investing for short term goals isn’t as appropriate as investing for longer term goals. If you are absolutely certain you’re going to need the money in the next year or two, then make sure you remember to be conservative and with your asset allocation.
5. Understand your vacation account can double as your emergency savings.
If you need to tap into it, then you need to tap into it. Life happens. Emergencies happens and it may put off your vacation for a year or two, but saving for something fun also might help motivate you to save more if you see that it helps make you financially more secure.