How much is too much to spend on a yearly vacation?

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At a time when Canadians are being urged to pay down their debts, Ulla Meredith and her husband have set themselves a different goal: spend at least $5,000 a year on travel.

The couple, who live in Claresholm, a small town south of Calgary, are busy planning a dream vacation to Tuscany this fall. "We are going to rent a car and drive around the countryside, pretend we are college students," Ms. Meredith said.

The $5,000 travel budget is not pocket change – roughly 5 per cent of their pre-tax household income. The couple are squirrelling money away each month for the two-week trip, but it might not be enough.

"If we have to borrow the money, we will. I am okay with going into debt if it is a conscious decision," said Ms. Meredith, who is 48. "I am actually a pretty frugal person, but I also realize that the time to travel is now, before it's too late."

But how financially sound is that decision? Although there are well-known guidelines of what people should be saving (at least 10 per cent of their take-home pay) and how much they should have stashed in an emergency fund (three to six months of living expenses), there are no such rules on how much they can spend on holidays each year.

Rubina Ahmed-Haq, a personal finance blogger with alwayssavemoney.ca, says Canadians should allocate no more than 4 per cent of their after-tax income to yearly vacations. "Unless you have no debt, spending more than this amount will erode your long-term savings."

Canadian debt loads have soared to record highs. Despite worries about how large mortgages and other consumer debts have grown, as well as how few people are adequately prepared for retirement, Ms. Ahmed-Haq still sees holidays as essential. "It's important to take a break and have some time to recharge," she said from the Mayan Riviera. (She clearly follows her own advice.)

However, going into debt for a holiday is not a good idea, she said. "Never charge your holiday on credit unless you have the cash already in the bank. If your take-home pay is $50,000, your holiday budget is $2,000. Want to spend more? Save longer."

It is, of course, possible to take a break without spending a pile of money. You can take a road trip, visit family or friends, or have a staycation.

Kurt Rosentreter, a certified financial planner at Manulife Securities Inc., says each household must decide how much they can spend on vacations based on their own specific situation, factoring in their income, debt, savings and overall priorities.

"You should decide your vacation after doing your annual budget, so you can see what you can fit in," he says. "Maybe you will need to be happy going to Algonquin Park once a year as opposed to flying to Sicily."

The key, he says, is finding a balance among financial commitments such as paying off your mortgage, saving for your child's education and setting money aside for retirement, and discretionary spending such as travel.

"You cannot totally ignore the total financial picture," Mr. Rosentreter says. "If you tell me you have not made an RRSP contribution for three years because you have chosen to travel instead, that will at some point involve trade-offs."

Chartered accountant Robin Taub, who is based in Toronto, believes that that if your finances are in good shape, a family vacation might be worth far more than the monetary amount of the trip. "If it is a special family trip, that kind of experience might have a lot of value to you."

She and her husband have travelled extensively with their children to Jordan, Japan, Israel, Belgium and the Netherlands. "We come up with a rough budget before we go. … We figure out the major costs and we try to guess how much we will spend on a per-day basis."

As for Ms. Meredith, working with seniors at an assisted-living facility has left her determined to not have any regrets. Although she admits that she and her husband do not have enough of a retirement nest egg, they are making travel a central focus of their budget.

"So many people say they will travel when they retire, but most don't. Their spouse might be older or sick and it isn't that much fun hiking around Italy in bad health and with bad hips."

Ms. Meredith and her husband want to sell their home in three years, when her third and youngest child graduates from high school.

They plan to travel around the world, house-sitting in various places. "I think the next 10 years, they will be the most important years of our life. That is what will sustain us when we are older, sitting in an old-age home."

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Trip tips

Trying to decide how much to spend on your holiday? Chartered accountant and financial consultant Robin Taub gives us these things to consider:

•Make sure you can afford all your needs before you start spending on wants.

•Examine your values and let them guide your financial decisions. If your goals are tied to your values, they will be more compelling.

•If you value adventure, then travel may be a priority for you. However, if you value security, then maximizing your RRSP contribution may be a more compelling goal.

•If you do decide to take a trip, create a budget to determine what it will cost. Try to be as detailed as possible: airfare, hotels, transportation, meals, entertainment (including admission costs for museums, theatre tickets) and shopping.

•Put aside money in a "trip fund" to save for the cost. As tempting as it may be, do not charge the trip to a credit card unless you can pay it off immediately. This is an example of "bad debt" and the trip may end up costing you much more, once you factor in the interest expense.

•Book travel items such as airfare and hotels online in advance to take advantage of special promotions and savings. Waiting until the last minute always costs money.

•Use frequent-flier miles or other travel rewards to save money.