Bridging the gap year: stay out of the red in the wild blue yonder

From savings to insurance, Esther Shaw shows how to manage your finances while you see the world

For those seeking the experience of a lifetime while they're still young, a gap year spent working or travelling overseas offers school-leavers and graduates the perfect opportunity for sun, sea, sand and a taste of adventure before going to university or settling down to the world of work.

The experience can have a serious purpose too, and more and more "gappers" are opting to learn new skills, increasing their future employment prospects in the process.

But globe-trotting does not come cheap, with figures from comparison site Fairinvestment.co.uk suggesting that the average gap year now costs more than £4,000. So financing your extended break is just as important as deciding where to go.

The key to a successful gap year is forward planning, and while you may like the idea of working your way round the world, it may also be worth getting a job in the UK before you go. This will allow you to build up a cash reserve that should be held in a low-risk, accessible savings account with a decent interest rate. Anglo Irish Bank, for example, is currently paying 6.4 per cent on its easy access account, while Bradford & Bingley offers 6.51 per cent on its Internet Saver.

You should also think about making the most of your mini-cash individual savings account (ISA) allowance, as you can now save up to £3,600 a year into this tax-free. Icesave is currently paying 6.1 per cent on its easy access ISA.

Further, if you've already been to university and have a graduate account, you could try to negotiate a larger overdraft.

One of the most important tasks is budgeting carefully. Draw up a list of all the big expenses you might encounter, such as transport, food and accommodation, and take the time to research the local cost of living. A good starting point here is lonelyplanet.com/destinations.

Another important consideration before you pack your bags and head off is how you are going to gain access to your savings overseas. You may be planning to use your debit card for everyday transactions, but you need to be aware that most debit – and credit – card providers levy a "loading fee" of around 2.75 per cent on all purchases made abroad. Many also charge a "handling fee" of up to 2 per cent of the transaction if you use your card to withdraw cash from a foreign ATM.

"Gappers should con-sider getting a Nationwide Flex current account, because it is the only UK provider that doesn't make foreign-currency charges on purchases and cash transactions anywhere in the world," says Steve Willey, from the financial comparison site Moneysupermarket.com.

He adds: "Those looking to take a credit card could consider Nationwide Gold, Abbey Zero, Post Office Platinum and Thomas Cook, as none of these levy foreign-exchange fees on overseas purchases."

If you are stuck with an uncompetitive debit or credit card, you may want to pack a prepay currency card, which can be "reloaded" with money either online or by text.

"The FairFX and Canton FX prepaid cards are good options," says Mr Willey. "They can be topped up easily by your parents if need be, and they are good for budgeting as you can't spend money unless it is on the card."

Further, you are gaining a strong measure of protection from criminals. "The chip and pin technology makes it much harder for fraudsters to clone the cards," explains Stephen Heath from FairFX.

However, you need to be aware that while prepaid cards offer both convenience and security, some can carry quite punitive charges, such as a monthly fee of up to £5 and an application fee of around £7 on average. Many of the cards will also charge you for taking out cash at an ATM.

Brian Brown from financial analyst Defaqto adds that as cash soon runs out, and credit cards can be lost or damaged, it may also be worth taking a "mixed wallet" that includes some traveller's cheques as a back-up.

One of the key things you need to pack in your luggage is a travel insurance policy. If you head off without cover and are involved in an accident, say, you could find yourself with medical bills and repatriation costs that run into thousands of pounds.

If you are travelling in continental Europe, you are strongly advised to carry a European Health Insurance Card (EHIC).

These cards, which replaced the E111, offer reduced-cost or sometimes free medical treatment in 28 European countries.

However, they are not a substitute for comprehensive travel insurance in that they won't cover you for major expenses such as an emergency flight home. Moneysupermarket.com recommends a policy offering at least £2m of medical expenses cover, £1m for personal liability, £3,000 cancellation cover and £1,500 for baggage.

If you already have annual travel insurance, do not assume this will protect you on your gap year travels as many of these policies cover short trips only, limited to, say, a month.

One option is a specialist insurer offering an extended policy of up to 18 months. This may also include cover for adventurous sports such as parachuting, bungee jumping or white-water rafting.

"Many specialist insurers will cover you for such activities as standard but there are some that do not, so check the exclusions within your policy before you leave as you may have to pay extra for this," says Peter Gerrard from Moneysupermarket.com.

"Also remember that your insurance needs to cover belongings such as your iPod, phone, and any other items of value."

If you think your travel plans could be subject to change, check the cancellation cover as some policies don't include this.

Lana Clements, from the insurer More Than, warns: "Make sure you declare all medical conditions prior to travelling, as failure to do so can invalidate policies. And, when drinking abroad, bear in mind that many policies will not cover accidents as a result of alcohol consumption."

Further, when taking out insurance, make sure that it covers all the countries you want to visit, and remember that no insurer will pay out claims relating to countries that the Foreign Office has advised British travellers not to visit. Go to fco.gov.uk for an up-to-date list.

Finally, if you plan to call home from overseas, think carefully about your mobile phone deal and use.

"If you are staying in one country for a while, then buying a local Sim card is your best option," says Mr Willey.

"But if you are globe-trotting then you need to weigh up whether buying a global Sim card or signing up to your provider's international discount tariff is likely to work out cheaper."