Sunday, September 16, 2007

To V(acation) or Not to V

Usually my vacations are spur-of-the moment, last-minute decisions. And usually, they wind up being to places my kids want to go. This would explain why I've been to Disneyland four times in the past ten years. Or we go to the beach. And, of course, I dig out my handy-dandy credit cards and charge air fare, motels, restaurants, etc.

Now a different opportunity has arisen, and I have enough advance notice to actually think about it, plan for it, and save toward it: My best friend of over 30 years wants to go to Japan in October, 2008. More than than, she's got frequent flyer miles she is willing to donate to my cause, and because she is Japanese-American, she has numerous relatives in Japan with whom we can stay.

Back in my college days, I took Japanese language courses for three years. I barely remember any of it now, but the fascination for things Japanese has stayed with me.

SO--I figure I will need around $2000 for this vacation, and I now have a year to save for it.

OTOH, $2000 would go a long way toward my credit card debt.

Add to that, my concern that although I've been reducing my debt for the past several months, that may not be possible every month. In fact, there is a good chance that repairs to my rental home will have to come out of my HELOCC, which will wind up increasing my debt. Since my tenant and his father are making the repairs as their time permits, I have been able, so far, to pay as they go. But when the new windows go in or the bathroom is gutted, both of which need to happen in the near future, I'll have to tap the HELOCC.

Then again, I usually get $3,000 to $4,000 back income tax refunds in March of each year. I could save vacation money out of that, and put the rest toward the debts.

Or, I could just not go to Japan!

This is not my favorite option. All of my excuses center on the "once in a lifetime" nature of this particular opportunity. If it had come up suddenly, my answer would definitely be not to go.

But I've got a year. . .


Engineering My Finances (EMF) said...

It's always tough, choosing whether to give up an opportunity for longer term financial health. One way you could look at this is that whatever you spend on this trip effectively goes on your credit card since you didn't use it to reduce your debt. And after compounding the cost of your vacation at credit card interest rates over how long it will take you to repay it will cost you -- how much? If your credit card interest is 18%, then the rule-of-72 says the cost doubles in 4 years due to compounding. (Divide your interest rate into 72 to get the number of years to double.) And the cost of the trip is not repaid until everything else is repaid, so it has the longest time to compound.

Have you thought about adjusting your withholdings so you don't have such a big refund and can apply the extra withholdings to your credit card debt now?

If you have a degree of uncertainty as to what your tax bill will be, perhaps because of unknown income and depreciation from your rental house, then you could adjust your withholdings to have at least as much withheld as you paid in taxes last year. (This is to avoid being hit with penalties for under-withholding.) And then transfer the extra amount of withholdings every payday to an online account at EmigrantDirect that right now is paying 5% interest. 5% interest is better than letting George Bush and his tax-cut-and-spend neocons have it interest free for a year, plus you can get your "refund" as soon as you complete your tax forms. But applying it right away to a higher interest rate credit card balance would be even better.

Louise said...

I think go to Japan while you have the opportunity to do it, we never know what the future has in store for us and it will be much cheaper going with your friend than maybe trying to do it later on your own.

This is a wonderful opportunity to travel and enjoy yourself while you still can.

Grace. said...

Geez, EMF, always with the math problems!

I have several (no longer used) credit cards with varying rates of interest. However, when the worst one, with an 18% rate, is gone--there's only $400 owed on it, and it's getting hit with my debt snowball this month--my highest rate is 10.67%;

I did adjust my withholdings to show 3 exemptions, even though I have only myself and my daughter to take.

My rental depreciation is steady because I'm doing the 28 year amortization (or something like that--I may have the language wrong). What varies is my daughter's private school tuition for which I get a medical deduction--with the loss of the scholarship, I may have an even larger deduction, though I'm not quite sure given that I'll be paying it over two years instead of one.

Obviously, if I pay out a lot for repairs on the rental, there will be deductions there.

And finally, I do have an HSBC account that pays 5.25% at the moment--I transferred my emergency fund into it back when it had a teaser rate of 6%. That ended in April, but the 5.25 is good enough that I still keep my emergency fund there.

Thanks for the advice, and for the perspective.