Friday, February 17, 2012

Travel Budgeting 101

Written by Karen
Two of the most frequently asked questions that I receive about our upcoming around-the-world travel adventure relate to our budget: How are we budgeting for this trip, and how much do we think this trip will cost us?
Setting aside from this discussion the unknown and possibly significant costs that may result from taking ourselves out of the workplace for a year or so, as well as not making regular contributions into our retirement and long-term savings funds, here’s how we developed our travel budget.  Well, actually more like how we developed our travel budget guidelines.

We focused on three areas: (1) We looked at how we live and how we travel; (2) We looked at our current cost of living and compared our current costs with other costs of living in the states (USA), regions and countries we were looking at visiting; and, (3) We read about other couples who either had recently or were currently traveling around the world and how they budgeted their time and their funds.  
Our premise for developing our budget – based on these three areas of focus – is that we should be able to travel slowly around the world for the same amount of money – proportionately – that we currently spend now.  
This is a concept that I still find difficult to fully absorb.  What I discovered through my research is that the cost of living in so many other places around the world does not even come close to what our costs of living are in the Bay Area.  You can live well in many places in the world for far less money than you might think possible.  How many of us know what our average daily cost of living is?  I certainly didn’t know.  We have a budget and we know roughly how much money flows in and out of our banking accounts each month.  But I didn’t know exactly how much money we spent each day to fund our lifestyle.  
So, I ran the numbers.  We have been tracking our expenses fairly closely as part of our ongoing downsizing and simplifying our lifestyle project, so it was fairly straightforward to pull together all of our monthly costs, separate them into descriptive categories, and then calculate the average daily cost of our current life.  It’s a pretty sobering exercise.  The number is probably higher than you might think.

It really does come down to the financial concept of it is not how much money you make, but how much money you really need to live well and prosper that matters.  
It turns out that there are a multitude of places around the world where a couple can live comfortably for $50, $100, or $150 a day, depending on whether you are visiting a lower cost of living, a medium cost of living, or a higher cost of living area.  

Once you know what your average daily lifestyle cost is for your current living situation, it’s difficult to fathom that you can live well for so much less than what you are currently spending.  We can sleep, eat/drink, travel and explore life for an entire day in a different locale for the same amount of money that we spend on a night out with dinner and drinks here in the Bay Area?  Apparently so.  
These potential daily costs of living only become a realistic possibility if you take the approach of traveling slowly and trying to integrate into the local community as much as possible.  In other words, not just being a tourist dashing from one place to another, but being willing to travel slowly and off the beaten path.  This was welcome news to us.  
Our preferred method of travel is to try to blend into the local community: rent a small flat, and then eat, drink, shop and explore the area as locals.  The idea of traveling slow and blending into unfamiliar neighborhoods and communities for weeks or months at a time is extremely appealing for us. 
As you can imagine, these lower cost of living numbers that are common in places around the world are significantly less than what we currently spend each day maintaining our current lifestyle.  But, if you take the percentage of what we currently spend each day and compare that to the percentage of our expected costs while we are traveling, then we might be comparing apples with apples.     

So, how do these lower cost of living numbers of $50, or $100, or $150 dollars a day actually stack up proportionately with our current cost of living? What can we expect to spend each day if we take those lower cost of living numbers and place them into our current budget?
I took our current budget and placed the relevant expenses and percentages that we currently spend each month into four travel categories:  Shelter - 45%; Food/Drink – 28%; Travel – 18%; and Fun – 9%.  
I took a look at our daily costs from our recent trip to South Korea to see how those expenses fit into this matrix.  Our average cost per day was $135.63 in South Korea, with roughly 57% being spent on shelter; 28% spent on food/drink; 13% on travel; and, 2% on fun.  
South Korea is considered an industrialized and modern country, and thus rightly falls into the higher cost of living category.  Our shelter costs were a little higher, but were offset by the lower costs spent on travel and fun.  (It’s not that we didn’t have fun - it’s just that South Korea doesn’t charge entrance fees!)  We were spot on with the food and drink expenditures.  So, all in all, our budget guidelines seem plausible.  
But - and this is a big but - these guidelines are based in part on our past travel experiences.  We have always had to fit our vacations into a pre-approved period of time, which was always constrained by the awaiting work obligations as soon as we returned.  
Up until this point, the longest period of time that we have traveled was three weeks. A big difference for this upcoming sojourn will be the ability to travel on unscheduled time, with no time constraints.  I think this difference will have an impact on our budget.  The longer we are able to stay in one location, the more our daily costs will go down.  It’s when you are always on the move that you have make compromises and wind up paying more than you anticipated. 
I have recently seen a House Hunters International segment on HGTV that featured a very nice two-bedroom apartment rental for $350/month in Cuenca, Ecuador (or $11.50/day); another historical apartment in downtown Vienna, Austria for $1300/month (or $42.74/day); and a charming apartment in Cork, Ireland for $1100/month (or $36.16/day).  When we were in Munich and in Berlin in 2010, we saw apartments for rent for $900/month (or $29.59/day).  So, long-term - more affordable - housing is out there if you seek it out. 
We have a general idea of what countries we would like to visit.  It has turned out to be a melange of lower, medium and higher cost of living states, regions and countries. We split our anticipated travel year into thirds and multiplied the cost of living numbers by each third of a year: 120 days at $50/day; 120 days at $100/day; and 125 days at $150/day.  This calculation brings us to $36,750.  We rounded up, tossed in a bit extra for unforeseen expenses, and settled on $38,325 for our year-long travel adventure budget.  This works out to be $105 per day.  

It may work out that we spend more time in the lower or medium cost of living places.  In that case, we will create a bit of a savings cushion.  On the other hand, we may wind up spending more time in those higher cost of living places in which case we will have to dip into our savings a bit.  The most probable assumption is that our budget will ebb and flow depending on our circumstances and is expected to equalize around the $105 dollar amount.  
This, of course, remains to be seen - and we will let our readers know.  Over the next year or so, it’ll be interesting for us to track just how on-point our assumptions and premises were, how valid our travel budget guidelines were, and what our actual budget worked out to be.  Stay tuned! 

No comments: