Imagine that you save $500 every month, and don’t touch the savings after the fifth year. With an 8% annual return, your savings will be $37,400 after the fifth year.
If you take 8% from $37,400, it will give you approximate $3,000.
That’s enough to cover your travel budget as you planned.
If you continue to save $500, by the 7th year you will have a total savings of $54,000.
8% from $54,000 is $4,000.
Although you stop saving $500 monthly in this travel fund, the capital of $54,000, will give you 8% annual returns. It means you have $4,000 to cover your vacation cost every year.
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