Money talk: expat financial considerations
“Money makes the world go round”, or so they say. Maybe – but money can also be a headache for those travelling round the world themselves. Financial considerations are something of a minefield for expats – whether they are taking part in a global assignment organised by their company, or doing it themselves – and getting it wrong could cost you dearly. At the very least you may find you are missing out on investment opportunities or overpaying bank fees. At the very worst, you may inadvertently fall foul of tax regulations, and find yourself with an unexpected tax demand on your return home.
The answer is of course plenty of planning and professional advice. But we thought we would highlight a few key points to help you structure your financial planning while you are overseas. We have divided the financial considerations of a typical expat into four sections:
- Your costs (how much you need to live abroad)
- Your tax (how much the taxman will let you keep)
- Your bank (how you manage it)
- Your investments (what you do with what’s left)
1. Your costs
The starting point for any financial planning exercise is to know what you need. Depending on your lifestyle, your major costs are likely to be:
- Existing financial obligations (e.g. mortgage)
- Childcare/schooling (if private)
- Healthcare (again, if private)
The cost of living can vary greatly between your ‘home’ and ‘host’ countries, and it is important to budget in advance so that your expenses will balance. In short, ensure you can live within your means.
There are online tools that will help give you a general idea of how the cost of different items varies across the world – or there is always the slightly more frivolous Big Mac Index to give you an idea of your purchasing power in your new location.
2. Your tax
Your tax situation will depend on a number of factors, e.g.:
- Your earnings
- Where your earnings come from (local salary, salary from head office, or receiving other income – e.g. interest, dividends – from ‘back home’)
- Whether you are paid in local currency or other currencies
- Whether you are considered ‘resident for tax purposes’ or not. Note that tax residency is very different to your nationality
- Whether double taxation applies (this often depends on your tax residency, but different rules apply to nationals of different countries)
Tax rules can become enormously complex. While Americans, for example, working abroad do not generally have to worry about paying domestic income tax on their first $97,600 (in 2013) in foreign earned income, they still need to file a return with the IRS and tell them about any other income earned abroad. Also, some countries may try to collect income taxes even after an expat moves abroad, unless they actually terminate their residency.
These examples give an idea of the complexity of national tax laws that every expat needs to be aware of.
3. Your bank accounts
Should you have multi-currency accounts? Many expats find that keeping their home bank account rolling along, and opening a local bank account for the duration of their assignment is the easiest way. However, ‘serial’ expats – i.e. those who spend their whole career moving from assignment to assignment, or who spend a significant amount of time working overseas – may find benefit in setting up multi-currency accounts with a single bank. Again, whether this is advantageous depends on many factors (your location, your income – or indeed, your preferred bank). This may also be useful for those who derive income in different currencies, for example having customers abroad, or perhaps drawing income from investments back home.
A multi-currency account typically makes it easier to transfer money between accounts without punishing transfer fees, but be careful. While your own bank is an obvious starting point for advice on this matter, it’s easy to assume that all banks charge the same (or similar) charges to transfer money and manage accounts. However, many banks make nice big margins on the customers who cannot be bothered to look around – so make sure you’re not one of them! Check out the various accounts and money transfer options online – you may save a lot of money.
4. Your investments (and debts)
Alongside the day-to-day book balancing exercise, you also need to take a long-term view on finances. Your time abroad may be an opportunity to save – or it may be a period of your life that causes financial concerns. The outcome largely depends on the planning you do in advance and the advice you take. Here are a few considerations expats should bear in mind with their long-term financial planning.
Expats frequently find that their assignments bring with them more disposable income and that the assignment is a great time to put some of that money aside. International expats have a greater variety of investments available to them since they may be officially considered as local ‘residents’ for tax purposes. This, in turn, may provide opportunities for tax-efficiency. As always, the aim should be to find investments that match your own personal attitude to risk – and bear in mind that investments overseas may be linked to the strength of the local economy.
Investments back home
Should you retain investments back home or is it time to sell? This question is most pertinent if you own a property. If rental yields exceed the mortgage payments and the management costs, renting out your home may be a great way of earning income while you’re abroad. However, there can be complications (property maintenance, finding tenants etc.) – and you may decide instead that the relocation is also an excuse for a fresh start on your return.
Unless you are drawing your pension and see your relocation as part of your retirement itself, you will want to ensure that your retirement plans are still in place and that you are contributing towards that end goal. If you are part of a corporate pension scheme, you should discuss this with your company and may be able to remain in the scheme as part of your overall package. If you have an individual pension plan, take professional advice on how best to fund it, given the change in your financial and tax situation. You may also contribute to a local state pension during your time abroad (although Brexit has thrown up some confusion over this issue – as this example shows).
Over a three-year assignment, exchange rates can fluctuate hugely. An expat may start their time abroad with an overseas income that translates into plenty of ‘home’ currency to meet their financial planning targets, such as mortgage payments back home and pension contributions. However, this may change and it is a good idea to stay abreast of the currency markets and ensure that this is still the case. There are occasional crashes in the relative values of currency, but more common is a gradual ‘creep’ over time, which may gradually chip away at your ability to meet financial obligations. If you see the changes happening, you will simply be able to ‘tighten your belt’ a little and adjust your spending.
There’s no substitute for good advice
Given the enormous variety of global assignments – to different places, with different earnings, and different personal situations – there is no single answer. But our experience of working with individuals from different countries tells us that those who plan early usually have the best experience, and this is certainly true when it comes to money. Speak to an adviser as soon as you can so you can focus on getting the most out of your life and work during your time abroad – instead of worrying about how you’re going to pay for it.