Suze Orman Money Matters

As far as I am concerned, vacations are a necessity, not a luxury. But where I see so many people take a wrong turn is when they spend money for a luxury vacation that they can't afford.

While I think one of the best things you can do for yourself, your family, and yes, the quality of your work, is to take a break every now and then to recharge the batteries, it makes absolutely no sense to book a vacation that will blow your bank account. You end up spending one week enjoying yourself, and the other 51 weeks of the year stressing over the huge new load of debt you racked up by putting the plane tickets, hotel, and restaurant bills on a credit card you have no way of paying off any time in the foreseeable future.

Or even worse, you think it's totally okay to pile up the credit card balance for your vacation, because you think you deserve to indulge yourself given how hard you work!

That's the story I got the other day at the hairdresser. The woman washing my hair and I were chatting and she tells me she has just returned from the most wonderful vacation ... that cost her $4,000. Now this is someone who is probably lucky to make $7 or so an hour plus tips. She then tells me she's got it all under control; she just put it on her low-rate credit card, like all her other vacations. Turns out she thinks 12 percent is low, and, worse, seemed unconcerned about the $25,000 balance she'd rung up so far.

There's no telling what type of reaction I might have had if it weren't for the water hose she had aimed at my head. I remained calm and simply asked her if she could do it all over again, would she try and take less expensive vacations. I was expecting a moment of revelation when she would see the danger of what she was doing. Instead, here's what I got:

"Suze, I work so hard I deserve to treat myself to a great vacation. I don't care what it costs." I asked her if she ever worried about the hole she was digging and she told me, "Only when I think about it. So I just don't go there or I would get too stressed out."

That approach stresses me out! Come on, people. I get that everyone deserves a vacation but here's what you also really deserve: a secure life where you aren't buried in credit card or home equity debt, and the confidence that you are on course to be able to retire comfortably.

If your vacation spending is compromising any of your financial goals I am sorry to say that your brain is already on permanent vacation.

In Five Signs You Should Stay Home, I spell out the major money moves you need to take care of before you start booking a big-time vacation at a five-star resort.

But here's a great rule of thumb: if you will need to pay interest to finance the vacation -- meaning if you can't pay off the whole credit card charge when it comes in -- the hard truth is that you can't afford the vacation.

It's Not in the Cards, or On the House

If you don't have the cash to pay for the vacation you have in mind, the solution is simple: you need to scale back your plans. Look, if you put $2,000 for a vacation on a credit card charging 15 percent interest, and then only pay the minimum balance due each month, by the time you paid for it the actual cost of that vacation would be $3,758. That's because you will ring up $1,758 in interest payments in the 15 years -- yes, you read that right, 15 years -- it will take you to get the balance paid off. Hmm... 15 years to pay off a one-week vacation. What $2,000 vacation is worth that?

And the real cost is even worse when you consider what you could have done with that $2,000. Let's say you put it in a Roth IRA that earned an average annual return of 8 percent over the 15 years. That leaves you with $6,344. Keep the money invested for 15 years after that, and you're looking at a nice balance of more than $20,000.

I also think it is a terrible idea to take out a home equity line or home equity loan to finance a vacation. Actually, I think it is insanity. The only time you should ever tap the equity in your home is for a capital improvement on the home, or to invest in something that you believe is going to appreciate in value. (Even then I think you have to be super careful. If for some reason you can't keep up with the loan payments, you are putting your home at risk.)

And a vacation is certainly not an investment. It's a financial drainpipe. You spend the money and it's gone. Period. Unless you hit the jackpot in Vegas -- an aspiration we all know is likely to increase instead of erase your loss -- there is no way to earn any of that money back. So why the hell would you finance a vacation by taking out a loan you have to pay back with interest, which also puts your home up as collateral? How on earth can anything financed with such risk possibly be relaxing or fun?

There's also the chance that the bill for your getaway could keep rising months after you've taken the vacation. That's exactly what is happening to anyone who financed a vacation with a Home Equity Line of Credit (HELOC) over the past year or so. The interest rate on HELOCs is variable, meaning it moves up and down based on what Fed Chairman Alan Greenspan does with the Fed Funds rate. That rate has gone up over the past year; thus, so too have HELOC rates. So if you used a HELOC to pay for a vacation you are literally seeing the cost of a trip you took six or eight months ago continue to increase. That is nuts.

It's About Downsizing, Not Denial
Now despite my hard line, I meant what I said at the beginning about vacations being a necessity. It is crucial to be able to check out of our demanding routines periodically and really r-e-l-a-x. All I am asking you to do is take a vacation that you can afford. Just get creative:

• Take a five-day trip you and your family can drive to, rather than a seven-day getaway that involves airfare and a rental car.

• Choose a hotel where the room has a fridge and simple kitchenette. Instead of eating three meals out each day, cut back to one or two. Breakfast can be a huge expense for families; it's easy to drop $50 or more a day for a family of four. Do that over the course of a week and you're looking at $350. I bet you could make everyone happy with cereal, eggs, bagels, and fruit for less than $75 for the entire week. Save your money for fun dinners out, or maybe even an extra day at the hotel.
• Take a vacation at home. Don't groan. This can be a ton of fun if you live in an area where there is plenty to do, but you never have the time to do it. The trick is that the entire family must commit to being on a vacation. That means no email. No phone calls. No running errands. No laundry. You and your family are to plot out a bunch of day-trips. Museums. Hikes. Picnics. Tickets to the ballgame. A drive to the beach or a state park you've always meant to check out.

Save Up
If a big vacation is a priority, plan for it. If you're 37 and know you are going to want to celebrate your 40th in style, start putting money aside today. Right now you can earn 3.25 percent in the American Dream Savings Account offered by EmigrantDirect.com, an online banking service. That's a terrific deal, and there is no investment minimum. Stash $50 a month in the account and you will have nearly $2,000 saved up in three years. Manage to save $100 a month and you will have nearly $4,000.

Can't be that patient, or you aren't a big advance planner? Okay, then you need to set up a permanent ongoing vacation savings account. If big trips are a big priority it's up to you to find the room in your budget -- after you've taken care of all your important expenses like 401(k) contributions, Roth IRAs, paying off credit card debt, etc. -- to put some money away each month in your vacation account. Then it also becomes easy to determine when you can afford to take a vacation: you go when there's enough in the fund to cover all your costs.

Kick Back
The surest way to ruin a vacation is to stress about what you're spending. But that's what so many people do. The solution is to sit down before you pack a suitcase and work out an estimate of every vacation-related cost you can think of, from airport parking to boarding your dog or cat at a kennel. The idea is to make yourself totally comfortable with the cost. If the tally makes you antsy, then that's a sign you need to rethink your plans.

Remember, the whole point is to enjoy your vacation. There should be no money worries -- both while you are on vacation and when you get back and have to face the bills.