The 7 Financial Steps to a Year Off

There are many steps you need to take before embarking on your year-long journey around the world. You need to work out a leave of absence from work, travel vaccines and insurance, store your material possessions, and figure out where to travel. But the most important steps you need to take are arguably the financial steps.

Let’s walk through the 7 financial steps you should take before your Year Off. Remember, there are potential financial consequences to a Year Off and by completing the steps below, you are minimizing your risk of these consequences.

First and foremost, you need to get a good idea of how much money you make and your spending habits. Figure out how much debt you have. Get your spending in order and start saving extra money each month. Once you get the savings ball rolling, jump into the following 7 steps.

1. Create an emergency fund

You need about 6 months worth of living expenses in an emergency fund to cover any unexpected emergencies before your Year Off. This money will also be your emergency fund while you’re away traveling and for when you return home and start working again.

Keep this money easily available in a savings account. I would not recommend investing your emergency fund because of the rise and fall of the markets. And you may need the money immediately, but it takes several days to liquidate any stocks or mutual funds.

It’s important to avoid the temptation to spend this money during your Year Off. Make it untouchable in your mind and vow to only spend it on true emergencies (not on beer if your alcohol fund runs dry).

2. Pay off credit card debt

If you have credit card debt, pay this off first after establishing your emergency fund. If the interest rate is really high, maybe even pay off your credit card debt before establishing your emergency fund.

Interest is your enemy when it comes to debt and will keep you from reaching your Year Off age when you want to. Pay off high interest credit card debt ASAP and don’t accumulate any more.

It’s OK to keep credit cards and use them for day-to-day purchases. Just make sure to pay off the balance every month. You can earn nice rewards points, even on credit cards that don’t have annual fees.  And you’ll build your credit score so if you want to buy a home or new car in the future, you have a good credit score to help with that.

3. Pay off student loans

After paying off your credit card debt, start knocking down your student loans. Increase your monthly payments on them or keep making the minimum monthly payments and plan on making one big lump sum payment to pay them off.

Keep the money for your lump sum payment in the same savings account as your emergency fund. Once again, you don’t want that money going up and down with the stock market. So I recommend a savings account over stocks or mutual funds.

Some people may advocate investing over paying off your student loans. You may get a better return to offset the money you’re paying in interest. But remember, you need to pay off all your student loans before you travel long-term. You can invest the money for a couple of years but when you’re ready to pay off your loans, the total value of your investment might be lower because of the volatility of the stock market.

Is it possible the money will grow during the few years you have it invested? Absolutely. But it’s possible that it will lose value as well. If it loses value, then you either take a loss when you pay off your student loans or you have to wait for the stock market to rebound to gain the value back. This will put you farther away from paying off your student loans and starting your Year Off.

One other thing to definitely consider is consolidating your student loans to get a better rate. Look into this as soon as possible to maximize the benefits of consolidating.

4. Start 401k/IRA contributions

Start paycheck deductions for a retirement fund as soon as possible. If the company you work for offers a 401k with a company match, it’s OK to contribute to get the company match while you are paying down your student loans. Don’t say no to free money, even it means delaying the final payment on your student loans.

Remember, you need to reach an exact amount of money saved in your 401k before your Year Off. You will likely have an itch to pay your student loans off as quickly as you can. But start your 401k savings before making that last payment to take advantage of the company match and to reach your target amount of money saved in your 401k sooner. If your company does not offer a 401k, look into traditional and Roth IRAs instead.

Whatever retirement fund you choose, make sure you have a good amount of money saved before your travels begin. Try to get at least one year’s salary worth of money saved in your retirement fund. This allows you to take advantage of compounding interest for a longer time and acts as an emergency backup to your emergency fund if you get into big financial trouble.

5. Start saving for your Year Off

Once your credit card debt and student loans are paid off and you’ve started your 401k contributions, start saving for your Year Off. Keep this money in your savings account with your emergency fund. Once again, you don’t want this money rising and falling with the stock market. Let the money in your 401k do all the rising and falling.

I recommend saving $40,000 for a Year Off, but it’s important to check how much money you are feasibly able to save. If it will take you a long time to accumulate another $40,000, then plan on living cheaper during your travels and only save $20,000. Or just decrease the amount of time you are gone to maybe 6 or 9 months and save 20-30k for that amount of time.

6. Increase 401k/IRA contributions

Simultaneously to starting your Year Off savings, increase your 401k contributions. If you can, increase your payroll deduction to reach the maximum amount the IRS allows you to contribute in a year ($18,500 as of 2018). Remember, the goal is to save the equivalent of one year’s salary in a 401k or IRA before starting your travels.

At this point, you should have all your credit card and student loan debt paid off. You have no other debt (no mortgage and no car loan). You have an emergency fund with at least $10,000 in it. You are working your way towards having the equivalent of one year’s salary in your retirement fund. And you are working your way towards having $40,000 for a Year Off.

So there’s only one more financial step to go before starting your Year Off……

7. Add more money to your emergency fund, finish your retirement savings, and finish your Year Off savings

Once you’ve paid off all your debt and reached your goal amount of money saved in your 401k, it’s time to finish off your Year Off savings and top off your emergency fund. If you had to use some of your emergency fund, make sure to get that back up to $10,000 or more. Get your Year Off savings up to $40,000.

That means your savings account should have at least $50,000 in it. And your 401k or IRA should have a year’s salary in it. And you are completely debt free.

Once you’ve reached this point, congratulations! I think you are financially stable enough to take a Year Off. So it’s time to set out on your journey around the world!