Most people have budgetary limitations when considering what can be spent on a vacation. Of course, you can always budget for vacations just as you would for clothes or groceries, and plan for big-ticket items, such as transportation and lodging. What is most difficult in budgeting for a vacation are the little things like food, drinks and entertainment. These sorts of expenses tend to be difficult to plan for because your desire to purchase these items tends to be spontaneous. (For more on creating a personal budget, check out Budgeting 101.)

Unfortunately, the laws of economics never take a rest, and vacationers are faced with a major financial risk: the risk of coming home broke. One solution vacationers should consider is the all-inclusive vacation package. Here, we'll take a look at all inclusive vacations as a form of financial risk management.

Stay on Budget
All-inclusive packages can be an ideal because these vacations allow you to virtually eliminate the risk of going over budget as resort operators will agree to cover all your variable expenses in exchange for a fixed fee. Essentially, these packages work like an insurance product.

For example, every year you pay a fixed fee for auto insurance and, in exchange, the insurer guarantees that out-of-pocket expenses won't exceed your deductible. All-inclusive resort operators are essentially doing the same thing. You pay a flat fee and they bear the risk of gluttonous consumption on your part. In other words, you transfer the risk of eating, drinking and entertaining yourself to them. This trades a highly variable cost for a fixed cost. To use an investment term, all-inclusive packages are a swap agreement in which you pay a fixed amount and someone else bears the variable cost. If you're someone who hates worrying about money on vacation, this is good option, but there are also drawbacks.

The Tradeoff
With a traditional approach to vacationing you can do anything you please and can spend as much or as little as you like, meaning you have complete discretion to consume any good or service you please. With an all-inclusive package, you can only eat, drink and be entertained at the resort. Of course, you can always leave to spend as you will, but that would only reintroduce variable costs.

Another very important thing to keep in mind in this regard is that once you commit to an all-inclusive vacation, you are committed for the duration of your vacation regardless of what you find when you arrive. So if you find yourself someplace that doesn't live up to your standards, you are stuck. This is a big tradeoff because if you choose the traditional approach you can always leave and spend your money elsewhere. Therefore, you have to ask yourself what flexibility is worth to you.

The big differences between all-inclusive and traditional vacations can be summed as follows:

  • A traditional approach allows unlimited flexibility, but also entails potentially unlimited expense.
  • An all-inclusive approach is structured and limited in nature, but has a fixed cost and no risk whatsoever of incurring variable expenses.

So how do you mitigate the risk of disappointment? Keep a few simple things in mind.

Quality Considerations
First and foremost, you need to determine the level of quality you're looking for in your resort. Do you want to spend your vacation eating macaroni and cheese and hot dogs at a buffet line, or do you prefer to eat at nice restaurants and buffets that serve high-quality gourmet foods? Furthermore, do you want to only drink soda and beer on vacation, or will you want to enjoy mixed drinks, wine and high-quality liquor? These are essential considerations during a vacation because you're going to want to enjoy your meals and drinks, and quality varies widely among resorts. Don't forget to research entertainment and the quality of the accommodations as well as the caliber of customer service.

One of the easiest things to keep an eye out for is the difference between the all-inclusive and super all-inclusive resorts. All-inclusive resorts usually charge extra to dine at their restaurants or drink alcoholic beverages, whereas super all-inclusive resorts include everything. If you're really looking to limit those variable expenses, the super all-inclusive packages are the way to go. They cost more of course, but you get a lot more in return.

Make sure you've fully vetted the services offered by potential resorts. The marginal cost of going to a nicer resort and getting additional services is often a very efficient tradeoff from an economic and risk management standpoint.

Bottom Line
Approach your vacation planning with a budget in mind. Think of all-inclusive vacations as an insurance policy that protects your budget and keeps your spending in line and remember that a vacation is the time you're most likely to overspend.

For more vacation saving tips, read Seven Saving Tips For Summer Getaways and Travel Smart By Planning How You'll Pay.

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