Holidays only mean one thing: taking a well-deserved vacation. Either solo or with family and friends, people love going on vacations.
Whether locally or internationally (pre-COVID 19, that is), traveling is a means of escape from most of us. A time to relax, spend quality time with your favorite people, and forget about reality and work for a while. For some people, taking vacations is a necessity rather than a luxury.
But a very important question still stands, can you afford to take a vacation? Of course, you can easily swipe your credit card to book a flight, book three rooms in a hotel, and eat out at restaurants as freely as you can. But is this the right move to do? Or are you just digging a deeper hole in debt?
According to Learnvest Money Habits, the average American spends 10% of their annual income on travel. 74% of Americans have gone into debt to pay for a vacation, averaging a total of $1,108.
Wealth manager Lee Michael Murphy shares his full-proof checklist to make sure you’re financially ready before going on a vacation you truly deserve.
Join us with co-hosts career advisor Sergio Patterson and attorney Matthew McElroy for a fun, informative, and even semi-argumentative episode about how you should prepare yourself and your family financially and not get into more debt for a vacation
What You’ll Learn:
- Seven steps to ensure that you’re financially ready for a vacation
- How to manage your income and create a travel fund
- How to prevent going into debt for a vacation by being financially responsible
To get the episode, show notes, and share links, please go to our podcast page below. Thank you for sharing our podcast.
[00:00:00] Lee Michael Murphy: [00:00:00] Welcome in ladies and gentlemen, you are listening to the free retirees show. I’m your host wealth managing lead Michael Murphy. And I’m a long side interview coach in Silicon valley. Bet. Sergio Patterson. What is up? Everyone in Silicon Valley’s favorite attorney Matthew McElroy what’s going on.
Not the much boys. When’s the last time that you guys did a vacation.
Segio Patterson: [00:00:25] I just got back from
Matt McElroy: [00:00:25] Hawaii, like a week ago. Yeah. Aren’t you leaving again too?
Segio Patterson: [00:00:31] And we’re going to Mexico
Lee Michael Murphy: [00:00:32] this Friday. Wow. Oh, wow. So Sergio Patterson , uh, financials are going a lot towards vacation. Um, Matt, how’s your, what’s your vacation schedule?
We
Matt McElroy: [00:00:42] went for Sloan’s birthday about a month ago. So it’d be before that though. It was quite a while
Lee Michael Murphy: [00:00:48] before we went on vacation. Any upcoming vacations?
Matt McElroy: [00:00:51] No upcoming
Lee Michael Murphy: [00:00:53] baby vacation is no longer. Now you are.
[00:01:00] Segio Patterson: [00:01:00] A year and a half. Right? So like we weren’t doing anything where like, since
Lee Michael Murphy: [00:01:03] COVID hit really pretty
Matt McElroy: [00:01:05] much, nobody really is.
Right.
Lee Michael Murphy: [00:01:08] So for today’s episode, ladies and gents, we are talking about vacationing and if it’s okay with your finances, We all want to go on vacation. We want to go or do the slow walks on the beach. If you’re Matt Mackelroy , uh, go to Mexico, drinking pina coladas. If you’re Sergio Patterson and we all want to do it, but can we financially afford it?
Are we in the right spot? So this is one of these episodes where I’m going to give you guys a checklist and there’s eight steps that you need to check off before you go on vacation. And then we can fully endorse it and you’ve done all you can. You’ve done all the right steps in your finances and the free retiree show gives you the stamp of approval for your vacation.
So according to learn vest money habits, the average [00:02:00] American spends 10% of their annual income on travel. 74% of Americans have gone into debt. To pay for vacation averaging a total of $1,108. So boys, have you ever been in this club spending 10% of your income on a travel or going into debt , um, Yes.
Segio Patterson: [00:02:24] Yeah. I mean, 10% sounds high, but , um, I have gone into
Lee Michael Murphy: [00:02:29] debt to cover.
Segio Patterson: [00:02:31] Yeah. I mean, I, I don’t know. I, I I’ll let you continue, but I, I think traveling’s necessity for one, so. Well being man, like if I’m going to spend money, like yeah. I’ll spend it on travel versus like Gucci shoes or Air Jordans. Got
Lee Michael Murphy: [00:02:44] it.
Experience, experience matters. Uh, But, yeah, so this, you guys are going to probably push back on this one. I know you guys, don’t like a lot of my financial rules and you know, they’ll probably be a lot of pushback, but I’m going to give them to you guys anyway for your listeners. I think it’s going to be really valuable for you to be able to go through [00:03:00] these eight steps.
So you make better financial decisions than Sergio Patterson. So. Leave blew me out of it , uh, before we get into it, if you haven’t done. So make sure you like our show , uh, share us. We appreciate that love and support. And if you have questions, financial related Caribbean, and they legally related, send them to ask@thefreeretiree.com.
So let’s go right into it. Step one. If you are trying to work your way towards vacationing and making vacations that we can give you that stamp of approval. Step one is you need to have an emergency fund in place. We’ve talked about this on previous episodes, but the emergency fund, not only is it the first step of your vacation checklist.
It’s the very first step of like building a strong financial picture. So if it’s two incomes, you should have three months. If it’s a single income house, you should have six months sitting in the bank.
Any, any
[00:04:00] Matt McElroy: [00:03:59] problems hearing
Lee Michael Murphy: [00:04:04] here’s the pushback .
Matt McElroy: [00:04:06] Let’s say somebody where, you know, only one of the partners is working and they have to float all the bills and, you know, they have a house rent, kids, whatever. I mean, six months of bills. That’s a pretty substantial chunk of change.
Segio Patterson: [00:04:19] Oh, I didn’t even think about that.
Six months of rent. Let’s just say a
Matt McElroy: [00:04:23] month. Food
Lee Michael Murphy: [00:04:24] gas kicks up. That’s like $27,000. You Matt, I approved of the vacation. If you go to Los Banos , uh, mobile home park , uh, for your next vacation, I will give you the stamp of approval for that one. Step number two. He didn’t even answer your question
Matt McElroy: [00:04:46] like Dodge.
If I’ve ever seen her,
Segio Patterson: [00:04:51] we have to be practical on the show. Lee you’re suggesting we can’t live
Matt McElroy: [00:04:55] up, up in the clouds, right?
Segio Patterson: [00:04:57] Six months of savings. So let’s be realistic. [00:05:00] Most of our listeners, a lot of our listeners in the bay area. If they’re paying, let’s just be conservative three grand a month
Lee Michael Murphy: [00:05:07] in rent.
Segio Patterson: [00:05:09] We’re talking 30, just $30,000.
They
Matt McElroy: [00:05:11] need to have saved up just in rent, food kids, nothing else. Right.
Lee Michael Murphy: [00:05:16] It’s all the expenses. Right. So yeah, you might have $30,000 that you need to have sitting there in cash before you can spend money on that. I know people don’t want to hear it and I’m fine with that. I understand it’s difficult, but I, you know,
Matt McElroy: [00:05:29] but the thing is, is like the question, the question really is, is, is, is that realistic for like the average.
Barely a family
Lee Michael Murphy: [00:05:35] for the average bear, your family. I would say that most of the people that are our age or younger might not have that, but they should. I would say like, yeah, I get it. It’s a reality of where you live. And it’s harder in certain areas like the San Francisco bay area and New York high price of living.
Can’t sacrifice that [00:06:00] emergency fund. And I know people want to say like, well, I live in this expensive area, but technically you shouldn’t take the vacation. Uh, you might need to make some changes to your living situation and move to a cheaper area. Uh, if you’re having trouble getting ahead. But yeah, I can’t guys, I can’t sacrifice.
The, the importance
Segio Patterson: [00:06:15] of the, this is like a ideal, like best case. Can someone, like, I think this is
Lee Michael Murphy: [00:06:26] minimum. If you’ve got two incomes. Sitting
Matt McElroy: [00:06:29] there, like we can really simplify this down, right? We like, we can break this down even further. It’s like clean English here.
this is , uh, so to the past, the scrutiny of these checklists first step is you have to have at least 40 grand, right?
Lee Michael Murphy: [00:06:49] Yes. If that’s your situation, if you’re, if you’re spending well, I mean, but it’s hard to
Matt McElroy: [00:06:52] imagine a situation that wouldn’t require it at least that, right?
Lee Michael Murphy: [00:06:56] Yeah. I mean, if that’s what you, if that’s the, for [00:07:00] you, if that’s your six, if you have one income and that’s your six month measurement.
Yeah. You got to have that. And I know no people don’t want to hear that, but it’s, it goes back to that old, you know, analogy. It’s like, you have to build your house on the rock. Versus building it on the sand. If you do it the other way around where you have that low amount of cash life throws you unexpected things that happen like medical bills , uh, you know, and if you don’t have that cash there, you’re going to go to credit cards and those are going to work against you.
So. It’s think of it as, you know, part of the overall plan that you need that strong cash position before you can start investing. A lot of people, you know, that complain about it. They have investments, they have like stuff in the stock market and they’re doing that, but they haven’t built up the cash position.
Yeah. And it has to be cash. Can it be stock? Like it’s got to be cash, liquid money in the bank money when you could sell the stock that you have. Yep. Nope. Doesn’t count because it’s that conflict. So [00:08:00] like the, the, the times, like when a lot of people need them is like things like 2008, when everything crashes real estate crash, the stock market crashes, and those assets become , uh, you know, worthless or they have very little value and you don’t want to touch it at that time.
So that’s where your cash comes in. Right. So
Segio Patterson: [00:08:16] should we let him get to number two, Matt? I don’t know if we should let them get
Lee Michael Murphy: [00:08:19] to number two.
all right. Tip number two. To wipe out your credit card debt, you should never take a vacay. If you have an outstanding balance on your credit card, I know this will be met with scrutiny as well. But
Matt McElroy: [00:08:42] that’s not going to be a short episode yet. Think about
Lee Michael Murphy: [00:08:45] it like this, you know, at one time , uh, for listeners that don’t know, Matt, Miguel was a very talented water polo player and he could swim across the, the pool in his tight Speedos at lightning pace. But if he had a ball and chain on his ankle, [00:09:00] Swimming across would have been much slower, much more difficult.
So that’s the credit card right there. If you have credit card debt, it’s at least like a majestic rock. So yeah, that’s why we got to get those credit cards down. So that’s tip number two, make sure you wipe out your credit. Um,
Segio Patterson: [00:09:16] and you’re talking to me just to context. Are you talking major vacation? Are you just talking like, cause some people might just go down to San Luis Obispo for the weekend.
It’s not that expensive.
Lee Michael Murphy: [00:09:26] Are you talking like a, any like a major vacation, any vacation? Like no one wants to hear it, but you got to have that emergency fund established before.
Segio Patterson: [00:09:37] Any time you leave the house
Lee Michael Murphy: [00:09:38] within an hour or two, it knock on
That is not what we’re talking about here. If you were going to, I know Sergio Patterson loves to go to Pismo and stay on the beach. Uh, that’s , that’s still counts as engaged. It does not matter if you were leaving the country or not. It’s still constitutes as a vacation. [00:10:00] You say to
Matt McElroy: [00:10:01] the person that has very little in their savings and floats their travel on their credit
Lee Michael Murphy: [00:10:06] card.
Say that you need to break that habit and you got to pay down the credit card and you stopped the vacations until right. You get to that point where you have more of that money in the bank to justify it. I mean, you can take vacations whenever you want. You guys don’t need to listen to these tips, but if you’re ever thinking like, Hey, was I in the right?
Yeah. Place to make that decision to make a approved, you know, financial vacation that I deserved , this, this is the criteria, right? So obviously. A lot of us are not going to , uh, listen to these tips. We’re going to take them with a grain of salt, but I’m just saying, if you are in a place where you’re saying, I want to take a vacation, I don’t know if I deserve it or not.
This is how you go through that list. Right. This is for the family. Or the person that’s like, have I done enough? I want to know, , can I take the stamp of approval and say , yeah, this is, this is a smart decision because we [00:11:00] always, as, you know, people that spend money, we’re always like, oh, spending money is bad.
We shouldn’t do it. I don’t want people to have that thought. I want them to say like, yeah, it’s okay to spend money. As long as I got ABC. I really don’t agree with you on this one.
Matt McElroy: [00:11:16] But what you’re saying is like, it’s like, it’s like the way it should be. Right. But I feel like people just don’t, they don’t live their lives like that. Now, like to be able to have 40 grand in the bank and no credit card debt to
Lee Michael Murphy: [00:11:26] justify a vacation. This one is, if you have ever listened to this podcast and said, oh, these guys have an agenda.
Like, you know, They all think the same way that you can never say that this listen to this episode, this is why we put the show together to have these difference in opinions.
When
Segio Patterson: [00:11:43] you said, do I, do they deserve, I think I usually measure it. Not like if I’m at this financial spot, but more like, damn I’ve been working like crazy hours for the last three months
Lee Michael Murphy: [00:11:55] because the person who
Matt McElroy: [00:11:56] deserve it.
Segio Patterson: [00:11:58] I deserve it. Matt deserves it because [00:12:00] he’s been like working his ass off as, you know, as a lawyer, like he deserves it versus did I save enough money?
Lee Michael Murphy: [00:12:09] Yeah. Yeah. I like, I like, I like where you’re going with that. I like my way better, but yeah, it’s good. All right. So stem, these are your acquaintance you’re equating
Matt McElroy: [00:12:15] deserving with, with your ability to cause what if you aren’t good saver.
You can’t save that amount, right? That’s really big. I know you guys, but I do not have 40 grand.
Lee Michael Murphy: [00:12:27] I get it. So let’s go to step number three though. So this is building it into your budget. So make sure you are saving every month, an amount of money for your travel expenses.
It’s okay to take vacations, right? But we want to make sure we’ve saved enough money to justify those expenses. We’ve talked about this before the 50, 30, 20 Matt and Sergio hate it. It’s 50% of your stuff should be spent on your essential expenses. 30% on your discretionary and 20% you should be saving and investing.
[00:13:00] We’re talking about the 30%. Uh, so sometimes people come to me and say like, oh, you know, this person is spending, you know, 10% on all their income , uh, for vacations. Isn’t that a bad decision. And I would say no, as long as it works, In those, those , uh, that framework was a 50, 30, 20, and you know, the other 20% of their discretionaries is not going over like, you know, restaurants , uh, you know, uh, you know, going to the game or the ballpark , uh, all those other fun activities.
As long as the total income, isn’t going above 30%. Go ahead know, take use 15% of your income. Uh, Towards your vacation, you know, , but then there’s the other part of it. It’s tip number four. You have to be saving 20% of your investments first. And I know you guys are going to fight back on that one.
Yeah. That’s okay.
Matt McElroy: [00:13:47] Wait, so hold on, hold on. Any clarification, Hurley
Segio Patterson: [00:13:51] number four.
Matt McElroy: [00:13:57] So are you saying that you need no credit card debt, [00:14:00] 40 grand in the bank plus investments
Lee Michael Murphy: [00:14:04] 40 grand in the bank. I’m saying six months. Of your expenses sitting in the bank, if you’re a single income three months, if you have two sources of income.
Matt McElroy: [00:14:15] Well, no, but it should be more based on what your income is, but what your overhead is
Lee Michael Murphy: [00:14:19] of expenses of expenses.
So it’s like,
Matt McElroy: [00:14:22] like for me, like even Sergio too, right? Like kids way more expense than if somebody was just single, you know what I mean?
Lee Michael Murphy: [00:14:28] Yes. The take your expenses, whatever that is. So let’s just for simple math, right? Let’s just say that you’re dual income family and you have two sources of income and you spend $10,000 a month.
You should have $30,000 sitting in the bank. If you only have one source of income, you got to double that. So you just have 60,000 in the bank. If you spend $10,000 a month, well
Matt McElroy: [00:14:53] then how much it’s supposed to be. Allocated, therefore to like, say, say you have this benchmark right for six months for your [00:15:00] savings or whatever, you know, the emergency fund, how do you measure what your investment is?
Like, how much should be invested? You know what I mean? If you have that much, you know, sitting in savings , what, what would you say is an appropriate amount
Lee Michael Murphy: [00:15:10] after you have taken care of their savings amount, then you start putting money towards the investing. So, first thing is you build the foundation with all that cash.
Then after that, you shouldn’t be doing both. You’ve got to get the cash part figured out, and then you go to the investing and that’s 20% of the overall income that you you’re bringing.
Matt McElroy: [00:15:30] I guess what I’m asking is more of like, what, what amount should you have in investing before? Like, cause you know, you kind of setting an amount with six months for your income, right?
, what, what, what should that amount be for like personal investments before you
Lee Michael Murphy: [00:15:41] 20% of your income? So of all the money you make, right. 20% of that you should peel off towards , uh, your investments. First part, let’s just say we’re starting from the beginning. That 20%, like maybe we want to build up, right.
The 20% needs to go to savings. So that 20% before you [00:16:00] invest before you,
Segio Patterson: [00:16:00] before you invest, say before you invest,
Lee Michael Murphy: [00:16:02] so you should start with the 20%, just build up the savings account over time. Maybe it takes you a year. Maybe it takes it to you two years, depending on your situation, maybe more than that, but you build that up first and then you go to the investing.
Makes sense. All right. So tip number five, started slowing step number four, make sure you’re saving 20% into your investment. 20%. Got it. Okay. Tip number five, start a savings account for your travels. You can do a bank account. Like we said, think of that number every month. That is going to go to your travels.
You start, you have theoretically done all the first steps. Now you’re saying, all right, well, I’m going to start putting some money towards my travels every month. I’m going to say. Couple hundred dollars , uh, put into the bank account, like its own its own bank account, like a travel fund. And if you don’t, I want to do that great thing that works for a lot of people is just having a jar in there.
You know, you take a jar, you know, put, put some money in for vacation. And then, you know, in six months you have a nice, nice bucket of money there for your vacation. So of all
Segio Patterson: [00:16:59] the tips, this [00:17:00] is the best one
Lee Michael Murphy: [00:17:02] savings account. Put money into it. They’re awesome. I got a
Matt McElroy: [00:17:07] spin on it, but I’m not sure. I don’t wanna speak out,
Lee Michael Murphy: [00:17:11] speak your mind.
Matt McElroy: [00:17:17] You could accomplish, you could do like kill two birds with one stone, right? Like your, I like your example of like, Hey, you know, put a little bit of an, a jar away, you know, like a savings fund. But what if you coupled that and did it like an investment that you put a little bit into a stock and that’s your, that’s your travel fund.
Right. And you’re gonna pull it out when you’re ready to do that vacation. Same thing with like a cryptocurrency and, you know, You know, whatever percent in every month and then it’s growing instead of staying stagnant possibly. But we also dip as well, but you know, you know what I’m saying? Right. What would, what do you think of that?
I totally
Lee Michael Murphy: [00:17:43] get you on that. The only thing is like going back to the beginning, we’re talking about building on a rock versus building on the sand. That cash is kind of the foundation, because anything could happen, right. Uh, we’re, we’re, we’re trying to plan for the worst case situations, obviously, financially, you know, the economy [00:18:00] is great right now, but what if we have a bad downturn?
What if you lose your job? Like, there’s all it’s for the unexpected things. Right? So that’s why we have to have that cash just for the unexpected.
Matt McElroy: [00:18:12] No. I was talking about the little savings for the travel only , not, not, not your savings. Keep that in the bank, right? Oh, I’m talking about like, like your travel fund, you’re saying start a travel fund, but
Lee Michael Murphy: [00:18:21] even for travel,
Segio Patterson: [00:18:22] you’d still want leave.
You’re still saying you want the cash. You don’t want the cash
Lee Michael Murphy: [00:18:27] to fluctuate. It’s just a little riskier way of going about it right now. Yeah, I would say the, for the cash. It’s really not. If it’s just for your travel. It, I think it’s okay to just keep it in cash. I wouldn’t, I wouldn’t invest it. I would just keep it in cash and use it as fun money.
Um, because if then if you invested, I mean, it seems like , uh, a big headache to go through for not a big bucket of money that you’re going to spend down in the near-term future. So I don’t think it’s worth investing. Just keep it in cash. Same thing as like, you know, uh, any purchases you’d make out, you know, All right.
Uh, like if you go [00:19:00] to the mall, you got to treat it kind of at the same category. So I would not invest the travel money. Not a bad idea though, but I just think if it’s minus risky, right.
Matt McElroy: [00:19:08] It’s just that, you know, you could, you could, you could end up losing a
Lee Michael Murphy: [00:19:10] little, if you say, like, I only take a vacation every decade, right?
Yeah, sure. Then invest the money. But if you’re like normal people that take one or two vacations a year, then it doesn’t make sense.
Cool. Cool. All right. So number six, don’t book it until you saved for it. You guys love that one. That’s all. That’s all I gotta say on that one. Uh, tip number seven. And this is actually a really good one that I think that our listeners are going to get a lot of value from make sure you can afford travel insurance.
So, especially at this point of time, it’s not that much money, but you’re right now in the world of COVID-19, we’re getting cancellations on trips. You want to make sure you’re reimbursed for all that. And plus a lot of the travel insurances have medical. Yeah. That’s huge. Yeah. You might go to another country and your health insurance more than [00:20:00] likely probably won’t cover you if you’re in, you know, Thailand or England or whatever, like another country.
You might not have medical coverage and that’s a big problem. If you have something like you drink the bad water and you got to go to the emergency room, you might be looking at a 40, $60,000 bill , uh, on emergency medical that could really set you back. So, uh, I think that’s a huge one for this one. Make sure you get the travel insurance, make sure you have your medical insurance.
Um, so you can avoid, you know, uh, you know, potential. Debt from your vacation. Um, and then last one, you guys are gonna love number eight. I promise you. You’re not going to give me any push back on this, have fun and spend money on your vacation. Right. You’ve worked hard,
right. It looks as if these are baffled. Yeah. Um, but yeah, you know, like you did all the steps, right? Uh, theoretically, you’ve gone through all these steps. You’re you’re, you’re, you’re being financially responsible. When you go on a vacation, you should have fun and blow the money, right. You [00:21:00] budgeted for, it makes you have good experiences.
Good memories. You don’t want to be , um, saving too much on your vacation where you feel like, Hey, the trip, wasn’t that good? I need another one. Right? You want to where they say a Yolo, right? You want a yellow?
Yeah, so guys, thank you for this all guy.
Matt McElroy: [00:21:28] You missed a big thing that I think that could actually, I mean, we’ll, we’ll see what you guys think of it, but I think it could add a lot of value to anybody that’s looking to travel in the future and like, you know, planning way ahead is. You know, those credit cards, they give travel rewards points, you know what I mean?
You, you go on a cycle, those and do those things. I mean, you can get a thousand dollars of free travel, like nothing.
Lee Michael Murphy: [00:21:47] That’s great. You’re actually right. I actually was going to put that on like another potential episode on , uh, saving money on your trip. Uh, but that’s a great point. Um, I have a Southwest credit card for I’ve had for [00:22:00] probably, six, seven years.
Now I haven’t really paid for a domestic flight , uh, since I’ve had that card pay 99 bucks a year, but really it’s totally worth it. I endorse that. If you don’t keep a balance on it, if you keeping a balance on your credit card, your travel card, you’re losing, you’re losing to the credit card company.
But if you are someone that’s responsible and you pay it off every single. Yes. That’s I think it’s really great. Get a travel credit card. Uh, but I love my Southwest card, anything that’s , uh, with the airlines that doesn’t charge a large amount on the annual membership is a pretty good idea.
Matt McElroy: [00:22:34] Yeah. And they, they have some NerdWallet and all those things have some really great reviews on what the top ones are. They’re always kind of rotating promotional stuff, but yeah, there’s a lot of good ones out there.
Lee Michael Murphy: [00:22:43] Check that out. Really all these tips help you, help you guys. Uh, thank you for bearing with us and , uh, yeah.
Listening to the battle of the free retiree show. Uh, like I said, , uh, we want to give you guys content where we don’t all agree, or we all have our different opinions and it was a good one for today. Cause , uh, you know, Matt Sergio don’t agree with [00:23:00] me. They they’re. Okay. It’s okay. But, you know,
Matt McElroy: [00:23:02] we shouldn’t change the name of the episode, travel tips for the rich and successful
Lee Michael Murphy: [00:23:06] All right, guys, you’ve been listening to the free retiree’s. So
Segio Patterson: [00:23:10] since we’re the top 1%.