Vacations are important, but they shouldn't leave clients with months of credit card debt.Thx4Stock/iStockPhoto / Getty Images
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Vacations are an important part of work-life balance, but when Canadians book holidays beyond their financial reach, putting them in debt, advisors may need to intervene.
“Spending money is not the problem. It’s how, and where the money’s coming from, that often has a tendency to snowball into a much bigger thing,” says Chris Poole, financial advisor and certified financial planner with CWP Financial Services Inc. at Sun Life Financial Investment Services (Canada) Inc. in Toronto.
“If it’s a one-off vacation, that’s generally pretty manageable. If it’s a habit that comes from saying, ‘I’ll just add a little more on credit,’ that’s where the real problems show up.”
Mr. Poole says he’s not surprised people are spending more on vacations because life is more expensive overall, but when clients are going into debt for a holiday, “It becomes a bit of a pay now or pay later conversation.”
A recent survey from Bankrate, a financial services company based in New York, found that almost half of those surveyed (47 per cent) plan to skip their summer vacation this year, with roughly two-thirds (65 per cent) citing affordability as the issue. Of the other half who plan to head out on holiday this summer, more than one in three (36 per cent) say they plan to use debt to pay for it.
Credit cards are a popular method, with 62 per cent reporting they will use a credit card for at least some of their expenses and 26 per cent saying they plan to carry the balance over multiple cycles.
It’s that last part, where credit card users aren’t paying it off right away, that raises red flags. That’s where financial advisors might want to step in, says Millie Gormely, certified financial planner at IG Wealth Management in Thunder Bay, Ont.
“A credit card is great for booking the flights, getting the points, and having a little bit of recourse if there’s a travel insurance component,” she says. “If you are putting a trip on a credit card and taking six months to pay for it, now that trip has cost you a heck of a lot more than you originally thought it was going to.”
When she first started in financial services, Ms. Gormely says she took a harder line on people using debt to fund their holidays. Now, she says, she’s more inclined to look at the overall context of her clients’ lives.
“If someone in their early 30s is taking out their entire registered retirement savings plan to take the three-year-old to Disney World, I’m probably going to be pushing back on that,” Ms. Gormely says. “[But] just like any financial decision, it has to be made in context with the rest of your life because nobody’s life is a spreadsheet.”
Andrea Thompson, founder and certified financial planner at Modern Cents in Toronto, says she’s seeing pent-up demand for travel since the pandemic and has clients who are travelling more than ever.
“It’s that reprioritization of what’s important to people,” she says. “I think post-COVID, I’ve seen a lot more of that. It’s just been much more prevalent in people’s realizations of what’s important in life.”
While most of her clients can afford their vacations, it does bring up discussion about where the money needs to come from. For her, it’s about discussing the various options for clients and knowing what they can do – and what they shouldn’t.
“They can draw from different buckets – if they’re planning, that’s part of this process,” Ms. Thompson says. “If somebody wants to prioritize travel as part of their life, there are so many different options.”
Mr. Poole says his conversations with clients are going to depend on what stage of the vacation planning process they’re in.
For example, if the client has booked the holiday, then it’s about figuring out the best way to pay for it. But if they’re in the planning stages and looking at more expensive options, he encourages “creativity” in planning: maybe choosing accommodations, destinations and even restaurant options that make more financial sense.
“People need an escape, but it doesn’t necessarily mean it needs to be a huge, full-fledged vacation,” he says. “Maybe a one-day getaway can still do that. Maybe a trip out with your friends somewhere overnight can do that.”
He also tells his clients their vacations need to be based on their circumstances and to avoid trying to keep up with their neighbours.
“We don’t really know how and what means someone else has in terms of affording their vacation, but we do know what our circumstances are,” Mr. Poole says.
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