There was a time in my life when I had no idea how to save money for travel.
But here I am today, planning an eight-month, around-the-world trip with a budget of $75,000.
How did I get here? And more importantly, did it really involve putting snakes in my piggy bank?
For starters, I need to preface this post with a caveat: As of today, I have only saved $55,000 CAD. However, by the time I begin my around-the-world journey next year, I will have more than $75,000 in my travel savings account.
So how did I save more money for travel than most people earn in a year?
I registered in my employer’s deferred salary leave plan.
What is a deferred salary leave plan?
A deferred salary leave plan is the easiest way to save money for travel.
Basically, you enter into a contract with your employer to set aside a certain percentage of your salary every month. Later, you can take time off work and get paid out of the money that you’d set aside.
(Hint: No snakes are involved!)
Because I live in Canada, I can only speak to the legalities and processes of deferring your salary in Canada. However, I know that similar programs are available in many different countries.
What are the benefits of a deferred salary leave plan?
For me, the biggest benefit of being on a deferred salary leave plan is the fact that it is forced savings. I never the see the money that I am deferring and I have no way of accessing that money until I begin my leave of absence, so I’m never tempted to waste it at Sephora and Starbucks.
Second, the money that you defer is taken from your pre-tax income, which can reduce your annual income tax liability. You do have to pay tax on the money that you set aside, but not until you begin to withdraw it.
What are the considerations with a deferred salary leave plan?
How much salary will you defer?
My employer allows me to defer anywhere between 5% and 33% of my monthly salary. I settled on 20%, which reduced my salary to roughly where it had been five years earlier.
When will you take your time off work?
Initially, I had planned to defer 20% of my salary for three years. This would defer the equivalent of 7.2 months of (pre-deferral) pay, which I planned to stretch over eight months of travel. However, midway through my salary deferral period I received a promotion at work, and became involved in a new, three-year project. I asked my boss if I could delay my time off by a year so that I could see the project through to completion. He agreed, so I will now have deferred 20% of my salary for four years, leaving me with the equivalent of 9.6 months of pay to stretch over eight months of travel.
My workplace only offers deferred salary leave plans for leaves that are exactly six or twelve months, and there are restrictions on how often you can take a leave (at my workplace, it is one six-month leave every three years or one full-year leave every five years).
How will you withdraw the money from your deferred salary account?
My employer offers three different withdrawal options – withdrawing all of the money at once, withdrawing it in two equal payments, or dividing it into equal monthly payments. The first two options would put me at a tax disadvantage (as they would dramatically increase my annual income in the year they came out) so I am choosing to withdraw month. This way, I will receive taxable earnings split relatively equally across two fiscal years.
What are the disadvantages of a deferred salary leave plan?
The biggest disadvantage of deferring your salary is that it reduces your income during the deferral period. Taking a 20% pay cut affects your lifestyle and forces you to really face your financial priorities. I love traveling, so I have continued to save money for travel during winter, spring and summer breaks, despite my lower income. In fact, I’ve traveled to Nicaragua, Honduras, Georgia, Armenia and Germany during the time that my salary has been reduced. In turn, I’ve had to cut back spending in other areas, including dining out and new clothes.
The other big disadvantage of a deferred salary leave plan is that it could have a negative impact on your career. My employer guarantees that upon my return, I can have a job with the same responsibilities at the same salary level. However, they don’t guarantee that it will be in the same department or even the same building. My boss has promised he’ll do everything possible to get me back into the job that I have (and love) now, but I could find myself returning to a work situation that is only nominally similar to my current posting.
So you’re going to spend $10,000 a month traveling?
Remember, my salary was deferred before I paid tax. So, each payment that I receive during my leave of absence will have income tax and other contributions taken out. My rough estimate is that I will keep about 66% of the money each month (about $6000).
However, as a homeowner I will also have to keep up with costs associated with maintaining my home, including mortgage payments, HOA fees and insurance. These average about $2000 per month (I know, right?!), leaving me with only $4000 CAD in my monthly travel budget.
I have considered renting out my guest room while I’m away – I think that the market rate for a similar room in my neighborhood is about $750 per month, but I may have to reduce that in light of the fact that it would be available for less than one full year.
Is this how I should save money for travel?
Every traveler and every situation is different, and a deferred salary leave plan isn’t right for everyone.
In particular, it may not be the best system for an avid investor, who might benefit from investing part of their normal monthly pay in an investment account that has the potential to earn a lot of interest. If you’re a market whiz, you may be able to beat the tax benefits of salary deferral and earn an additional profit just by playing your cards right on the stock exchange.
Of course, salary deferral also isn’t an option for independent contractors or people whose employers don’t support this model. If it sounds appealing to you, but your boss isn’t on board, you might have to look for a new job.
However, I stand by my belief that for many people, deferring their salary is the best way to save money for travel. Again, it becomes forced travel savings with tax benefits during your earning and withdrawing years, and it often offers flexibility in terms of payment terms and periods.
(Oh, if you’re wondering about the snakes, they’re docile residents of the Snake Pagoda in Yangon, Myanmar!)
What do you think? Would you ever consider enrolling in a deferred salary leave plan?
How do you save money for travel?