How to budget for travel while still paying off existing debt?

For many New Zealanders, travel is a big part of life. But how much do you need to put your plans on hold when you’re in the process of working to become debt-free?

Many people who are focusing on a financial target, such as paying down a loan, often feel that they have to give up most of the “fun” things they enjoy until they reach their goal. But in reality, ensuring you get to do some of what you love can make your efforts much more sustainable. 

If travel is important to you, but you also have debt to repay, here are some tips on how to balance responsible repayment with realistic travel plans.

Start with a clear picture of your debt

It’s generally helpful to start with a stocktake, so you can get a clear picture of your current situation.

List all your existing debts, including personal loans, credit cards, buy-now-pay-later and car loans. What interest rate are you paying on each of your debts? What minimum repayment do you have to meet? And how much time is left on each of your loans?

It might help to rank the loans from highest-interest to lowest, so that you can see which is costing you the most money. Understanding this picture can be very helpful when it comes to making decisions on discretionary spending. Once you have all the information, you can determine which loans to focus all your energy on and for which you could take a more balanced approach.

Assess whether travel is financially realistic right now

If it looks as though you could afford to use some of your budget for travel, there are a few questions you might like to work through.

Are your repayments manageable and up-to-date? Understanding how much of your income is being used by repayments will help you to determine what you could afford to spend on your trip. Knowing when they are scheduled to be taken from your account will also help.

Do you have any missed or late payments? If you’re behind on any payments, it’s important to clear these before you plan any discretionary spending. Late payments can attract fees and damage your credit score.
Do you have a small emergency buffer? An emergency savings account is an amount of money that is there in case an unexpected expense arises. It’s generally a good idea to have this before you go on holiday, because not having a financial buffer in place can leave you vulnerable.

When you have wider financial goals, it may be helpful to consider whether you’re travelling as a planned expense, which is factored into your budget, or on impulse. 

Create a travel budget that doesn’t compete with debt repayments

To avoid taking on more debt or making it harder to repay your existing loans, it may be sensible to put together a comprehensive travel budget.

Break your travel costs down into a number of categories. What will you need for flights? Accommodation? How much would you like to have for spending money? You will probably also need to factor in insurance.

Decide how much you can afford to spend overall, and then divide that amount across the different categories.

Keep your debt repayments as “non-negotiables” in your budget while you save the money you need for the trip. Avoid reducing your repayments to fund your travel.

Use the “debt-first, travel-second” budgeting framework

From time to time, you might have some extra cash to put towards paying off the loan. If your lender permits it, you could put things like work bonuses, tax refunds, income from side hustles, or even selling items around the house towards paying down what you owe.

It could be helpful to discuss this with your spouse ahead of time. Could you introduce a rule for what you will do with any unexpected money, from now into the future? You might decide, for example, that half can be spent, and half will go towards financial goals like saving or debt repayment.

Consider refinancing or restructuring the loan

This framework may help you to hit your debt goals, while also indulging your travel bug.

Step 1: Lock in minimum (or accelerated) debt repayments. 

Make this the baseline that you build your budget around. No matter what else you’re doing, these stay in place and keep you chipping away at your goal. Check that you understand any rules or fees that might apply if you want to pay more than the contracted payment.

Step 2: Allocate savings specifically for travel.

Each time you’re paid, set aside an amount of money for your travel fund. This can build over time to give you the amount you need for your trip.

Step 3: Adjust lifestyle spending to fund travel savings, not debt repayments.

Look at where you can trim spending from your budget to allow more money for travel savings. You may be able to reduce discretionary day-to-day spending. When you return from your trip, you may be able to use this additional money to pay down debt more quickly, if your lender allows it, and it’s a good financial option, taking into account any early repayment fees that may be charged and your other financial goals.

Keeping your travel fund separate from the money you use to pay down debt allows for clear separation and reduces the risk that you’ll end up having to tap into your debt reduction fund to pay for travel expenses.

Smart ways to save for travel while in debt

Here are a few ways you might be able to save to travel, even while you have debt.

• Create a separate travel savings account: This should be distinct from your day-to-day transaction account and the money that you’re using for debt repayments.

• Automate small, regular contributions: Make your debt repayments as they are due, and set up an automatic payment to go to your travel savings account, so that the balance builds over time. Automating the process means you don’t even have to think about it.

• Use side income, overtime, or bonuses for travel: If you’re going to have extra sums of money coming in, you could think about putting those into your travel fund. You might be able to put in some extra hours at work or even sell things around the house to raise a bit more cash, if it works with your wider financial plans.

• Cut temporary expenses: Can you trim your subscription costs, or stop eating out while you’re saving to travel? You might find there are quite a few discretionary items that you could cut or reduce.

When can travel actually support financial wellbeing?

Travel can be a lot of fun, but it can also serve an important purpose. When you’re working towards a big financial goal, such as debt repayment, it can mean a lot of focus and denying yourself many things you’d normally like to spend money on.

A carefully planned and budgeted holiday could be an investment in your mental health, and give you valuable life experience that can leave you re-energised to work towards your other goals.

Allowing yourself some enjoyment reduces the risk you’ll get burnt out.

Your travel doesn’t have to be expensive and long-haul. Sometimes a short, budget-friendly trip can also be very beneficial. There are so many options when it comes to travel; there is bound to be one that fits your current financial situation.

What to avoid when travelling with existing debt?

Here are some things to watch out for if you’re planning to travel while paying down debt.

• Using credit cards or BNPL for travel expenses: Try not to take on any additional short-term debt for your travel. This could make it harder to keep up with your overall debt repayments when you return.

• Taking out a travel loan on top of existing debt: You might regret adding to your loans if you end up with a larger total to repay.

• Relying on minimum repayments only: If you’ve been paying off your debt at a faster-than-minimum rate, try to maintain that level of repayment. If you drop your payments down again, you’ll carry the loan for longer and miss out on the interest savings additional payments will make.

• “I’ll deal with it later” thinking: While it might be tempting to put it out of your mind while you’re travelling, it’s a good idea to keep track of your financial commitments and goals so you always know how you’re progressing.

Should you ever use a travel loan if you have existing debt?

Although it’s often not ideal, there are situations where you might not be able to avoid borrowing money to travel. Maybe you have a family emergency, or an essential trip comes up that you can’t put off.

It’s important to understand the impact of any loan you take out, and make sure that you have considered alternatives such as delaying the trip while you save up, opting for a cheaper destination or a shorter duration.

Balancing debt repayment and travel savings

A repayment and travel savings scenario might look like this. Someone who wants to save $10,000 for a trip might decide they want to put aside $1000 a month. If they earn $5000 a month after tax and have a $10,000 personal loan, they might be paying about $300 a month in repayments on a 12.95 percent interest rate over 48 months.

After other expenses, they might have about $3400, and that savings amount could be doable. Other people might find it more comfortable to save a smaller amount for longer.

How travelling responsibly protects your long-term goals?

Travelling responsibly can be an important part of your life plan. If you’re making your debt repayments while you do, and not taking on additional debt that adds stress, you may be improving your credit score over time, and your borrowing power.

If you have other goals, such as home ownership, consider how you can keep working towards those in the background, as you’re achieving personal goals.

Having disciplined money habits can make a big difference – but rewards every so often can be an important part of staying on track.

Frequently Asked Questions (FAQs)

Should I pay off debt before travelling overseas?

As long as you can keep up with your repayments, it may well be possible to travel overseas while you have debt.

Is it okay to save for travel while repaying a loan? 

Yes, but think about how it fits into your wider financial goals and plans. 

How much debt is “too much” to travel with?

This will depend on your individual circumstances, your income and goals.

Does travelling affect my credit score?

No – if you’re making your loan payments on time, it may mean your credit score will improve.

What if travel costs come up unexpectedly?

You may need to borrow, but there could also be ways to reduce the cost of the trip to make it more affordable.

Planning a trip? 

If you have any questions about loans, whether you’re planning to go overseas or not, get in touch with the team at better finance™️. We’re personal lending experts and can help with loan applications, debt consolidation or any other questions you have.

Get in touch with the team at better finance™ today 

Disclaimer: Please note that the content provided in this article is intended as an overview and as general information only. While care is taken to ensure accuracy and reliability, the information provided is subject to continuous change and may not reflect current developments or address your situation. Before making any decisions based on the information provided in this article, please use your discretion and seek independent guidance.