As an expat, you probably have worked hard to get where you are now. In this article, we give away 8 actionable tips to grow wealthy as an expat.
With so little time, and with a good salary and bonus flowing in, it’s tempting to put off dealing with boring issues like personal financial planning, insurance, retirement savings and personal investments. In fact, it’s essential – without proper financial planning and investment, you might discover later on that even with an above average income, you can’t really afford to retire as early or as comfortably as you had imagined.
Here are 8 tips to grow wealthy as an expat:
Plan
A period abroad as an expat can feel like a gap year or an extended holiday, and it can be hard to make plans when you are moving about. But try. Consider these important points and budget your expenses accordingly.
- When will you return to your home country, if at all?
- If you have children when how much do you need to pay for education?
- What is your property strategy? Do you own investment property?
- What age would you like to retire at, where, and with what standard of living?
- How much of your monthly salary do you need to save to meet those expectations?
- How much are you currently saving?
- What happens to you and your loved ones if you lose your job, suffer from a critical illness or pass away?
- How much does your investment portfolio need to yield to meet this plan?
- What mix of investments would provide the necessary yield with appropriate risk?
If you need help putting together this personal plan, contact us and we’d be happy to assist you.
Set up an appropriate investment account
For most expats, an offshore bank account is ideal. This is an account in a jurisdiction that offers low or no-tax investments for expats and companies that are overseas. This makes your life easier because you don’t have to move your investments around as you move from country to country, and can rely on useful benefits such as multi-currency banking.
While they are sometimes associated with tax evasion or corruption, there is nothing wrong about offshore accounts, as long as you comply with the tax laws of the country in which you are resident.
Offshore jurisdictions and banks range from very safe to quite risky, especially considering that they are not usually covered by national deposit insurance programmes. Fees also vary widely, so do your research before investing.
Save and invest regularly, starting right now
It’s tempting to think that it will be easier to save once you’ve got that extra raise or promotion, so you might as well spend what you make now and start saving later. Or maybe you can spend all your monthly salary and rely on saving your bonus. Or maybe that’s just something to think about once you’re back home.
Don’t fool yourself – rising stars are passed over, bonuses are cut, and careers are cut short all the time. Even if everything does work out as planned, as it hopefully will, the next step up is also promising, so it will then be tempting to put off saving again.
Develop the discipline to save a fixed percentage of all your income every month – big or small, salary or bonus. Instead of saving what’s left over after spending, spend what’s left over after saving.
Invest in a balanced and diversified portfolio
Investing in an unbalanced portfolio is a common mistake. Some expats put a large portion of their funds into safe but low-yielding accounts. Others rely on the statistic that equities have historically outperformed other investments and pile into stocks. Yet others are familiar with real-estate and so build up illiquid portfolios and find themselves strapped for cash when they need it.
Instead, invest in a balanced mix of the three main asset classes: stocks, bonds and real estate. Remember to also keep some cash available in case bargains show up. If you like, place a small amount in alternative investments such as hedge funds, commodities, and so on. The ideal mix will depend on your risk appetite and investment horizon, and it is best to consult a financial advisor for the fine-tuning.
Within each class either choose a well-managed diversified investment fund, or pick a diversified portfolio of investments with the help of your financial advisor. About 10 individual investments within each class is enough to mitigate risk.
When diversifying, account for your job risk
If, for instance, you are an executive in an investment bank working in Asia, your income is already highly exposed to a number of factors such as:
- The stock market and interest rate cycle
- The economic and political environment of the specific country in which you work
- Market risk across Asia
This is especially true for expats, who often:
- Have pay that is linked to performance of their company, or stock options.
- Work in less stable and riskier sectors and geographies.
- It is therefore important to account for these factors when building your financial portfolio.
In this example, you might want to underweight banking related and Asian investments, for instance.
Don’t gamble with your savings
Feel free to weight your portfolio slightly in one direction or in another depending on your views and concerns on markets, or to select a few names that you find attractive.
But don’t deviate too much from the overall plan: remember that even experienced and successful professional investment managers sometimes make big mistakes. In their case, they might lose their jobs and maybe investors will withdraw their funds. In your case, these are your life savings, your kid’s college fund, your retirement. Don’t make risky bets with them.
If you are interested in actively trading your portfolio, one option is to ring-fence a small portion of your funds and designate that as the part that you will trade according to your personal views and forecasts. It’s interesting to look back on your performance after some time and see how your percentage and dollar returns have compared to those of professional managers. Expats often find that while fun, it doesn’t make much financial sense, especially once the time spent is accounted for.
Keep fees and taxes down
With global interest rates at all-time lows, every fraction of a percent in fees and taxes will make a substantial difference to your net returns over time.
Pay attention to the fees you are being charged, especially on actively-managed funds. One alternative to these funds are index funds that track a specific benchmark index of assets. Because they don’t require active management and often manage very large funds, their fees are often much lower than those of active funds. They are often found in the form of Exchange Traded Funds, or ETFs.
Also plan carefully for taxes. As an expat, while taxes may not be withheld on the investments in your offshore account, you may be liable for them in the country in which you are tax resident, or when you do return home. Also, tax will usually be due on local investments and investment property, and can vary dramatically from country to country. An investment specialist can help you find the best option.
Review your portfolio regularly
Both your needs and the circumstances of your portfolio can change over time. Maybe you have moved country. Maybe your income has improved and you can now afford to make some less liquid investments, such as in real estate. Maybe the tax treatment of certain investments is about to change. Or maybe that stellar fund lost a few of its team-members and has been doing less well.
In any case, it’s useful to review your portfolio at least once a year, ideally with the assistance of a financial advisor. It can even be pleasant, as you see your investment pool growing in line with your targets!
