This article first appeared in the 4th quarter 2017 edition of Personal Finance magazine.
Taking a gap year is popular among young adults in South Africa and the rest of the world. According to website gapyear.com, a gap year can come in many guises: backpacking, travelling, a time out, a sabbatical. It usually involves travelling, volunteering or working abroad, or a combination of the three.
Taking a gap year when you are not certain about what you want to study or what career path you want to follow may be a great way to discover your passion.
However, not earning an income for a year will put a strain on your finances, so you need to plan for your gap year carefully.
Entrepreneur and realtor Julie Solomon says she was horrified when her daughter, Nicole, intimated that she wanted to take a gap year.
“I had the idea that a gap year was just an excuse to delay the inevitable growing up and becoming a responsible member of society, a good excuse to have fun at the parents’ expense. In my era, gap years were not something we did or even knew about. In an effort to understand my daughter’s insistence at this desire, I turned to Google in search of some understanding and answers. I wanted the gap year to form part of learning about and understanding the world, about different cultures, meeting people from different backgrounds, and to have an understanding that we are part of a bigger picture,” Solomon says.
“Nicole and I looked at various options and decided on working on a yacht, becoming a stewardess, and this gave the option of travelling the world. We learned that a qualification was necessary, so we applied to a yachting college in the US, Florida, and I agreed to fund this course. I believed that, once I had equipped Nicole with the knowledge she required, she would be able to take care of herself. We learned how to structure a stewardess CV, and she started applying online for several vacancies. She applied to various charter companies, and she managed to line up several interviews before she had left South Africa and before enrolling in the college.”
When should you start saving for a gap year, and what is the best way to minimise the financial impact?
Steven Schultz, head of investment marketing at Momentum Investments, says travelling is often accompanied by significant financial sacrifice and therefore requires extensive saving and comprehensive financial planning. “As with most discretionary expenses, the sooner one is able to start saving, the better.”
Schultz says although it is best to have saved enough to cover all the expenses before travelling, this is often difficult in practice. In this case, parents will have to budget supplement their child’s income while travelling abroad and transfer money on either an ad hoc basis or regularly – hopefully, the former if the traveller is able to secure part-time employment abroad.
Schultz says there are risks to “paying-as-you-go”. First, unexpected expenses at home may reduce a parent’s ability to send money abroad. Second, factors beyond your control – for example, the weakening of the rand – can significantly increase the costs associated with travelling.
Apart from the cost of air fares, parents need to prepare for other expenses. Solomon says she anticipated possible medical expenses and living expenses until Nicole’s first pay cheque arrived. She suggests that a parent should set a monthly allowance and to stick to it. “Otherwise, it’s easy for your child to continue to view you as ‘the bank’. My daughter needed to learn to budget and realise that you cannot have everything you want without having to work for it.”
Schultz says it is important that adequate provision is made for unexpected expenses – for example, an emergency medical procedure. Although most medical schemes cover foreign medical expenses, this cover is often limited to a certain number of days.
Travel insurance is another important consideration. “Given the alien environment, it is often important that, should any of the traveller’s necessities be unexpectedly misplaced or stolen, the traveller will have access to adequate means to immediately replace them,” Schultz says.
It is prudent to make provision for the traveller to be able to return home on short notice. “While the detailed planning of one’s travels expenses is essential, the reality is that ‘life happens’, and unexpected developments may result in the need for an immediate flight home,” he says.
Schultz says, much like budgeting at home, it is important that travellers’ spending patterns are aligned with a comprehensive budget. In this regard, a number of easy-to-use mobile applications and web-based services may prove useful.
Given the euphoria of exploring new surroundings, it’s easy to lose track of your expenses. “It is often invaluable to conduct research prior to one’s departure and to budget adequately for the associated major expenses. In addition to known expenses, it is important to create an estimated general allowance budget for variable expenses like food and transport,” Schultz says.
He says some people are attracted to the idea of saving in a foreign currency while abroad and returning from their gap year with a substantial lump sum. “Evidence has, however, shown that the prospect of saving aboard while on a gap year is often far more challenging than many travellers initially appreciate. Given the short-term nature of a gap year, part-time labour – as opposed to long-term employment – is often the most suitable mutual alignment of employer-employee expectations.”
In addition, although foreign currency salaries/wages often appear generous when converted to rands, it should be remembered that the cost of living in a foreign city may be high.
Schultz says the more you can reduce your domestic expenses while travelling the better. But you should be careful about which expenses you eliminate in case you jeopardise your long-term financial well-being. “An example of the importance of this balance can be referenced in the potential benefits of renting one’s primary residence to avoid the unnecessary expenses related to disposing and purchasing a property as a result of a temporary residence abroad. The consequences of temporarily cancelling one’s medical scheme membership and any potential waiting periods before re-admission to the scheme similarly warrant careful consideration and preferably consultation with a qualified financial adviser,” she says.
Apart from saving, there are other things you should check off to ensure that you will return from your year-long excursion unscathed. Schultz says it is advisable to know the location of and route to medical facilities and to the nearest South African embassy or consulate. If you intend to work abroad, you must be in possession of the correct visas and understand the potential tax consequences of earning a foreign income.
TIPS TO HELP YOU SAVE TOWARDS YOUR GAP YEAR
“Whether you are a young person who needs more time to consider future goals, or you plan to travel before settling into your studies and, ultimately, your career, once you decide what you want to do in your gap year, you need to plan how you will fund this experience,” says Stephan Buys, the head of strategic business development at FNB Cash Investments.
Set your savings goal: Whether you plan to spend a year travelling or volunteering, you will need money for food, accommodation and transport. List what you want to do, where you want to go, and how you will get there, and find out what each item will cost. This will enable you to know how much you have to save.
Open a savings or an investment account: Once you know how much you need to save, open a savings or investment account for your gap year. Find an account that will work best for you, because savings and investment accounts have different features.
Get a part-time job: A part-time job will enable you to put aside money for your gap year. You may even be able to work two part-time jobs. Working long hours will give you less time to spend money on entertainment.
Cut unnecessary expenses: List your monthly expenditure to identify items you can cut out, or where you can cut down, such as convenience foods, daily snacks and treats. Less spending means more money to put towards your gap year.
Volunteer or take a gap-year job: Research gap-year programmes that enable you to travel and explore different places but also provide food and accommodation.
Buddy up: Partnering with a friend not only means you will have someone with whom to share the experience, but you will also be able to share some of the costs.
Set monthly targets: Each month, settle expenses, such as obtaining a visa, airfare, accommodation and travel bags. In this way, you will be able to settle major expenses before the trip commences.
“Taking a gap year is not a cheap exercise. However, it’s possible to take a gap year without incurring debt. What’s most important is to start planning early and ensure the plan is adhered to,” Buys says.