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Should you invest money for your next vacation?

What’s more relaxing than daydreaming about a fun excursion? It could be a summer vacation, spring break, heading home to see family around the holidays or even planning an elaborate anniversary or birthday trip. Saving for a trip is usually a no brainer. Socking away your cash to fund a dream vacation can be one of the easier goals to save for. It isn’t too far away - and it gives you something to look forward to.

There are several ways you can save for that big trip and putting money in a savings account isn’t the only choice. Depending on the timing of your trip, you might want to consider investing to help pursue your goals.

What travelers want

A recent Ally Consumer Research survey revealed that most consumers plan to travel more this year than they did in 2021. And most of those travelers listed relaxing trips as a top priority. Sightseeing and hitting the beach are about as active as most of the consumers we interviewed want to get. However, there was a group that had outdoor adventures as a priority. Even a simple vacation can be costly though. Airfares, rental cars, hotels, restaurants, and tickets can quickly fill someone’s budget. People expect inflation to impact their plans and are planning accordingly.

With prices escalating, is it worth it to invest to help pay for your vacation?

Understanding risk

Investing is all about understanding your time horizon and goals. This can help you determine what level of risk you can acceptably take. Since most travel plans are often within a one-year window, building your portfolio with safer approaches might be your best bet. If you have a longer time horizon, say three years or more, you can consider different types of investments.

Need some ideas? Consider these methods for making the most of your travel funds.

  1. A high yield savings account. This might be your best bet most times. Look for FDIC-insured accounts that offer a competitive interest rate for your cash. With a savings account, you don’t have to worry about market losses, and you can tap into your money several times per month.

  2. Certificates of Deposit (CDs). Like a high-yield savings account, CDs generally offer interest rates above typical checking accounts. The downside with a CD is that you are required to hold it until maturity. Some CDs allow you to withdraw early, but you might then owe back some of the interest earned.

  3. Short-term bond funds. Let’s step out on the risk spectrum a bit. Considered among the safer investment types out there are near-dated bonds, since you can expect a return of your principal relatively soon versus long-term bonds. Treasury bills and notes, which you can buy through exchange-traded funds (ETFs), have no default risk and they have a minimal interest rate risk. Money market funds are another choice to think about.

  4. Series I savings bonds. When inflation runs high, a Series I bond can feature attractive yields versus other options. These bonds are considered safe as they are issued by the U.S. Treasury. However, there are purchase limits and important withdrawal rules to consider.

  5. Diversification through investing. Earlier, I mentioned your time horizon. If you are planning a big vacation that’s with a longer time horizon, say, three to 10 years out, you might take on some stock market risk. You could buy an ETF that tracks the stock market, as it has the benefits of diversification across industries. You can help reduce risk by looking for a balanced ETF or mutual fund that includes, say, 40% stocks, some fixed income and potentially some other asset classes. A third alternative is consider using a robo advisor for this type of investment.

Here’s another tip: Use technology to your advantage. You can set up automatic contributions and create buckets (a feature of Ally Bank’s Online Savings Account) to help reach your savings goals. When you see an account that’s dedicated to a specific financial goal, (like a travel budget), creep higher, you probably tend to get more motivated. I find that people save and invest more when they separate goals into distinct buckets. Why not give it a shot?

The bottom line

Like saving for daily expenses, future medical costs or retirement, you should also plan for fun activities. Incorporating travel into your long-term savings plan may be just as important. Everything from big-ticket vacations to spontaneous road trips will require a solid investing approach. These investing and saving ideas might go a long way toward making the most of your getaways.

Lindsey Bell is an award-winning investment professional with a passion for personal finance and more than 17 years of Wall Street experience. Bell’s unique ability to connect the dots between data and real life and craft bite-sized money ideas that people can use and apply stems from her deep background as an analyst, researcher and portfolio manager at organizations including J.P. Morgan and Deutsche Bank. She is known for demonstrating why and how an understanding of all things money improves a person’s finances and overall well-being. An ongoing CNBC contributor, Bell empowers consumers and investors across all walks of life and frequently shares her insights with the Wall Street Journal, Barron’s, Kiplinger’s, Forbes and Business Insider. She also serves on the board of Better Investing, a non-profit focused on investment education.

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