I run into a lot of people who dream of traveling round the world in search of something more. They’d love to explore new places, meet new people, and just have a better understanding of what’s really out there.
The age-old problem though, is that traveling takes money. And while our careers provide that money, our careers also demand so much time that we can’t spend our newfound wealth on anything truly life-changing. It’s a vicious cycle really.
Just like our previous post, Travel on Equity, there are certain prerequisites for this strategy. Firstly, you must currently have a job that pays relatively well. Secondly, your country of residence must have increasing marginal tax rates (see below for more info).
In most countries, income tax is paid on marginal rates that increase as your income increases. So as you earn more money, you don’t only pay more in tax, but your rate of tax also increases. Your income tax is paid directly each time your employer pays you based on a few assumptions about your income for the full year. Then, at the end of the financial year, those assumptions are reconciled with reality (did you really earn what you expected?) and you either owe the tax man (boo!), or he owes you (yay!).
Let’s say I make $100k per year. Let’s also assume the average tax rate at that level of income is 35%. So I pay $35,000 in tax for the full year.
But in January I start to get itchy feet and decide that a round-the-world trip is just what the doctor ordered. By the end of January, I’ve worked seven (7) months of the financial year, so I’ve earned about $58,333 and paid $20,417 in tax.
At $58,333 of income, let’s say the average tax applicable is 15%. That’s because we have a tax free threshold (a level of income where no tax is paid) and tax rates for lower income earners are much less. So if I leave my job now, I only owe $8,750 in tax, rather than $20,417, which means I paid $11,667 too much.
Technically, that additional $11,667 is not the government’s. But it would have been the government’s if you didn’t take a break to travel the globe. So in my crazy world, which I don’t try to understand for fear of it not making sense, I see this as the government paying me $11,667 all because I decided to take a round-the-world trip.
Sure, you may need more money depending on the length of your trip, but either way, $11,667 is a nice donation to your RTW fund. If your country has even more disparate tax rates, your tax refund will be larger, and if you make more money, it may also be larger.
Firstly, you need to leave your job at the right time. If you leave just after the start of the financial year, you wouldn’t have paid enough tax. If you leave at the end, you won’t be eligible for a large refund. Generally, if you leave between 5 and 7 months into the financial year, you’ll receive the greatest refund.
Secondly, in most countries, you can’t access your tax refund until the end of the financial year. So you may need to use your savings, or more likely, a credit card, and then repay those funds once the tax refund comes through. Make sure you account for interest on any credit cards before going too crazy planning your round-the-world trip.
The main caveat relates to your country’s marginal tax rates. They may not be disparate enough to make this work. The solution is to use unpaid vacation leave to supplement your trip budget. Then of course there’s eBay. If you’re going to be away for a while, don’t let your material possessions depreciate, sell them on eBay and spend the proceeds unwisely.
If you’re looking for a reason to travel round the world, this may be it. If you time it properly, you won’t have to save nearly as much to take the plunge. Happy travels.