How I Use Investments for My Travel Fund

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Vault’s Viewpoint

• Prioritizing goals like travel can help you decide how much money should be set aside each month for different purposes.
• Investments can help you build a travel fund faster, through potentially higher returns.
• When investing a portion of your travel fund, it’s important to understand the potential for loss, as well as your risk tolerance.

How I Use Investments to Build a Travel Fund

Nearly a decade ago, I decided that I wanted travel to be a part of my life. I already used the concept of a “fun” fund—alongside an emergency fund—to engage in spontaneous but sometimes expensive activities. With my travel fund, I wanted to make sure I could say yes to enriching experiences in different places.

As part of my decision to build a travel fund, I decided to use a taxable investment account so that the money would potentially grow faster than it would in a high-yield savings account.

Decide How Much to Set Aside Each Month

The first step was to decide how much I could set aside each month for this goal. I wanted to balance my travel priority with other priorities, including paying for things like housing and groceries. At the time, I was also still contributing to a 529 plan for my son and was dealing with post-divorce finances.

In the end, I settled on a number that was comfortable to me while still ensuring that long-term objectives like retirement and college planning weren’t put at risk and making sure the immediate needs of my son and I were met.

I broke down the amount into a weekly contribution and set up an automatic transfer from my checking account to the investment account set up for my travel fund. I also acknowledged that if more pressing matters came up, I might have to dial back my contributions. However, I hoped that by using investments in my travel fund, it would still grow even if I had to suspend contributions for short periods of time.

Figure Out Which Investments to Use

With my account set up, it was time to decide how to allocate the assets in my travel fund. While not as aggressive as my retirement account, my travel fund is still pretty aggressive: 70% stocks and 30% bonds. I wanted more bonds in my account because they are considered safer.

Plus, I focused on index exchange-traded funds (ETFs) for my travel fund. I don’t like stock picking, so indexing seemed like a good fit for my travel fund. I signed up for a robo-advisor and chose my allocation, and let the algorithm pick the ETFs to do the job. So far it’s worked out pretty well.

I indicated that any dividends should be reinvested automatically to help grow the account faster. Once that was done, all I had to do was set it and forget it.

A little more than a year after setting up my travel fund, I made my first use of it to take my son on a Viking River Cruise up the Danube. Between the regular contributions and gains, I liquidated less than half of the account to cover the cost of the trip. I was hooked on this approach and re-evaluated my finances so I could increase what I was contributing each month.

Understand Your Potential for Loss

I started my travel fund during one of the longest stock market bull runs in history. As a result, the travel fund has done quite well. But it’s important to acknowledge that you might not always come out ahead when you use investments for a travel fund or other goal, like an emergency fund.

Stock market volatility in the short term can lead to potential losses if you decide to travel and sell investments when they’re down. Understanding this risk is important if you choose to use investments in your travel fund.

If your financial or emotional risk tolerance isn’t a match for this approach, consider different assets, such as money market mutual funds, high-quality bond funds or even a high-yield savings account.

Selling Investments to Fund My Travel

When it’s time for travel, I use a two-step process to cover the costs:

1. Pay for travel with credit cards.
2. Sell investments and use the proceeds to pay off the credit cards.

Use Credit Cards to Pay for Travel

Rather than plan to sell assets and wait for the transactions to settle and move the money into my account, I use credit cards to cover upfront costs. Using credit cards serves the following purposes:

• Rewards. Part of my travel strategy includes amassing points, miles and cash back. By making travel reservations with credit cards, I can stack my rewards and earn points and cash back. These rewards can be used later to reduce my overall travel costs.
• Convenience. I take rewards cards with me overseas, choosing cards with no foreign transaction fees. They are convenient and easy to use, and I don’t have to worry about compromising my bank account or carrying cash when I travel.
• Protection. Many credit cards come with travel protections built in, such as baggage insurance and rental car insurance. And if your credit card is lost or stolen during your trip, it’s much easier to protect your money and have the charges reversed.

Plus, when I only have a few days to decide if I’m going to China, having the credit card available to make the airfare purchase immediately (and pay for a service to expedite my visa) is a huge help.

Sell Assets to Pay Off Credit Cards

After making the travel arrangements, I sell assets in my travel fund to pay off the credit card. I usually sell enough to cover the upfront cost of the trip, plus I add a little extra to account for what I’ll likely spend while on the trip.

I follow this process because it can take as many as two or three days (or more) for some transactions to settle. Then once the transactions settle and the cash is available for transfer out of the investment account, it can take up to five business days (or more) for the money to hit your checking account. I plan for seven to 10 business days to get the money. And once that’s done, you still need to make the credit card payment, which can take up to three business days in some cases.

I want to make sure there’s adequate time for me to get the money moving so I can pay off my credit card balance and avoid paying interest.

What You Need to Know About Capital Gains Taxes

Using investments in your travel fund does come with a potential cost: capital gains taxes. Because my travel fund has mainly existed during a bull market, I rarely sell at a loss. That means I have to pay taxes on any gains that result from the sale of investments in my travel fund.

Short-Term vs. Long-Term Gains When Selling Investments

The reason I waited more than a year before using my travel fund for the first time was to take advantage of the lower rate for long-term capital gains.

• Long-term capital gains. These are gains on assets you’ve held for more than a year. They are taxed at a more favorable rate, topping out at 20% as of this writing.
• Short-term capital gains. These are gains on assets you’ve held for a year or less. They’re taxed at your ordinary income tax rate, meaning that they could be higher than 20%.

In my case, I’m usually in the 22% tax bracket for my regular income, but my long-term capital gains tax rate is 15%. By making sure I sell assets I’ve held for more than a year, I’m able to keep my tax bill a little bit lower.

Additionally, it’s a good idea to recognize taxes on dividends and interest. Those taxes are levied in the year they’re earned. Certain qualified dividends might have a favorable tax rate, so it’s a good idea to pay attention to what’s in your taxable account since you might still owe taxes on some of your dividends and interest, even if you don’t pull that money out of your account.

Speak with a tax professional to understand how you might owe money when you use investments as part of your travel fund strategy.

For the most part, even paying taxes on my investment earnings, I’ve still come out ahead and I find my tax bill isn’t substantially higher because of the relatively small amounts I sell to fund my travel. And yet, the fund continues to grow over time.

Looking for Losses

Not everything I have in my travel fund is a winner all the time. And sometimes I choose to sell on a down day anyway. For example, my dollar-cost averaging approach meant that some shares of an index ETF bought in November 2021 were about $10 lower in August 2023 when I decided to sell them to pay for my Hawaii trip. I was able to use the losses from that transaction to help offset some of the gains I had earlier in the year from selling investments to pay for a different trip.

By paying attention to when some of my investments are down, and selling at a loss, it’s possible to use a tax-loss harvesting strategy as part of my travel planning.

My travel fund is designed to be available for me to use for this priority, not for beating the market or building a nest egg—although my travel fund is much bigger now than it was a few years ago. By incorporating losses as well as gains, I manage a pretty good balance while getting to indulge in something I enjoy.