Navigating Finances as an American Expat
Managing your money as an expat abroad comes with its fair share of challenges. From dealing with local banks and sorting out living expenses to managing taxes and getting a health care plan, the sheer number of affairs to handle can easily lead to mismanaged finances and short-term decision making.
Learn how to identify common financial challenges, plan ahead, find the best life insurance companies and know when to turn to advisors for help.
Identifying Common Financial Challenges
Moving to a different country can have a significant impact on your finances. In addition to tax rules and regulations, you must also be mindful of exchange rates, currency conversions, living expenses and insurance policies. Being aware of financial matters can ensure you’re prepared for the challenges you may face in a new country of residence.
1. Living Expenses
Whether your cost of living gets cheaper or more expensive, managing your cash before and after moving is vital. Aside from flight, luggage and shipping costs, consider expenses like travel insurance, accommodation and transportation before moving. Once you arrive at your destination, think about foreign tuition fees and home or health insurance. You will also have to open a local bank account to make it easier to manage your funds. Remember that being able to rely on yourself financially is crucial, as being in a new country can make it difficult to ask for financial aid from family and friends.
2. Cross-Border Families
Families with relatives who move abroad without their spouse, children, parents or siblings are considered cross-border or transnational families. While a family member may move abroad for better financial opportunities, there are also drawbacks. Living expenses can increase dramatically in countries with a different currency, which can pose a problem without a proper budget and forecast. Expats who move for economic reasons should also think about the cost of remittances, along with the eventual cost of reunification in a new country.
3. Tax Implication and Regulation Compliance
A common mistake that some expats make is thinking they don’t have to or forgetting to pay their taxes. American citizens living abroad must file federal and state tax returns if their income exceeds the minimum threshold of their respective category. If your new country of residence also requires taxes, you may face double taxation. Expats should be aware of tax implications and laws that can affect their long-term finances and plans abroad. Below are some of the most significant U.S. tax laws that American expats need to know and comply with.
- FATCA: The Foreign Account Tax Compliance Act (FATCA) requires that U.S. taxpayers who own financial assets outside the country report said assets to the IRS through Form 8938, which is the Statement of Specified Foreign Financial Assets. For expats, this applies to assets valued between $200,000 and $600,000.
- FBAR: The Foreign Bank Account Report (FBAR) requires expats to report on any overseas checking, saving or investment account they have opened through the FinCEN Form 114. However, this only applies if the aggregate value across all foreign accounts exceeds $10,000 at any point during the calendar year.
- PFIC: A passive foreign investment company (PFIC) is a business located abroad that mainly generates income from passive means. Businesses qualify as a PFIC if 75% of gross income is from investments or if 50% of assets are investments. Any U.S. citizen who owns shares of a PFIC has to file IRS Form 8621 when filing for their tax return.
Managing Finances Wisely
Knowing how to manage and protect your finances wisely when you’re in a different country is vital to ensuring your long-term financial stability. While the process may differ compared to living in the United States, establishing a good financial foundation can be done so long as you maintain discipline and keep your goals in mind.
Allocating Your Cash Flow
Cash management will be a completely different experience once you move abroad, which makes gaining financial literacy all the more important. Your expat tax status, currency management skills, costs of living and life, disability, health and travel insurance will all become essential when you move to a foreign country — especially if you’re bringing your family. Learn how to allocate your cash flow in the step-by-step guide below.
Open a local bank account
By getting an account with a local bank, you’ll get to make withdrawals and deposits without the expensive fees. You can also consider cross-border banking, as some global banks have expat-specific products such as HSBC's expat bank account.
Establish a long-term plan and goals
Determining what you want to do and where you want to be will show you how to manage your cash flow. Ask yourself how long you want to stay in your new country and whether you want to raise your family or further your education there.
Create a budget
Set and maintain a budget and be strict. Factor in costs specific to your area, such as whether you will need to pay taxes in your new country of residence or if you need to convert any money. For instance, if you’re receiving payment in U.S. dollars, you will have to factor currency costs into your budget.
Remember to invest
Investing in savings, stocks and insurance are important ways to increase and protect your finances while you’re abroad and help you gain compound interest. Insurance is especially important if you are in a developing country as you may be exposed to various types of sickness that your body is unaccustomed to.
Maintain a bank account back home
Keeping a bank account open in the U.S. can serve many purposes. Not only can it enable your family back home to deposit money in case of emergencies, but it can also serve as a small savings account for making certain purchases.
Choosing the Right Bank
If you rely on a bank account in your country of origin, you will have to deal with hefty transaction fees, and you may find that a corresponding bank branch does not exist in your new location. Opening a bank account abroad is a wise financial decision for expats. However, the process can be challenging — especially if there are local, tax and regulation compliance requirements to follow. The following tips can help you choose the right bank abroad and manage your money with ease.
- Check if your main bank has local branches: If you have an account with an international bank, try to see if there is a branch near you. If so, you may not need to open an entirely new account.
- Apply for an account before moving: While many banks require that you apply for an account in person, some let you apply online or over the phone. Contact your desired bank to see if you can open an account before moving. This ensures you will have funds waiting for you when you arrive.
- Research fees: Not all banks operate the way American banks do. Some may require you to pay an annual fee to keep the account open, while some may charge you a small fee just for withdrawing. Make sure you’re aware of any fees before signing up, and look out for currency conversion fees to find the most favorable option.
- Consider a bank’s popularity: Pick a bank that has many ATMs located in the area you’re moving to. This way, you won’t have to go halfway across town or to the next city just to get cash.
- Ensure there is online banking: Online banking is crucial these days. Check to see if the bank you’re applying to has an online banking option, and pick a bank with a reliable app that can show your balance, help you make transfers, get support and more.
Working With a Financial Planning Advisor
The financial implications of moving abroad are vast. Seeking professional advice from a financial planning advisor can help alleviate the difficulty of navigating new tax rules and dealing with new living costs. However, not all financial planning advisors will suit your needs. Choosing the right one is important, especially if you want to develop a solid working relationship that can last for the long term.
- Determine your needs: Different types of advisors help with different needs. Think about what you want a financial advisor to help you with, and determine what kind of relationship you want to have. Do you need help with personal finance? Do you need help making an investment?
- Understand the difference between fiduciary and non-fiduciary advisors: There are two types of advisors. The first follows a fiduciary standard, typically works on commission and does what is suitable, but not necessarily the best, for you. The second type of advisors follow suitability standards and are fee-only advisors who are legally bound to act in your best interests.
- Choose the right type of advisor: If you’re planning for retirement, you may want to opt for a retirement financial advisor. If you’re just looking to diversify your portfolio, you may also want to consider robo advisors for ease and affordability. The type of advisor you choose should be based on what you want out of a relationship.
- Meet with and compare advisors: Avoid settling with your first option. Make sure to meet with different financial advisors and ask questions about how they handle accounts. Ask about the fees involved, how they’ll manage your money, how often you will meet them, what information you should expect from them and more.
- Double-check an advisor’s credentials: Your financial advisor will heavily influence some of your financial decisions, so you’ll want to ensure you choose someone legitimate. If you are hiring a U.S.-based advisor, use the U.S. Securities and Exchange Commission's Investment Advisor Public Disclosure site to confirm their credentials.
Finding the Right Expatriate Insurance
Insurance grants expats peace of mind wherever they are in the world. For instance, life and health insurance is vital for expats moving to a country with a poor quality healthcare system. Even if your new country of residence provides subsidized healthcare, there may be gaps in coverage. Likewise, disability insurance will protect your loved ones if something happens to a member of your family. Below are a few resources that can help expats learn more about insurance.
- Expatica: Expatica is an information hub built for expats, by expats. They provide guides and resources for expats looking to purchase health insurance in their respective country of residence.
- The Association of Americans Resident Overseas: The AARO is an organization dedicated to helping Americans who live outside of the country. They also provide an affordable health insurance option designed for expats, which can be easily moved from country to country.
- Centers for Disease Control and Prevention: The CDC outlines some helpful and insightful information on travel insurance, travel health insurance and medical evacuation insurance that all expats should know prior to moving.
- InterNations: InterNations is a helpful hub on all things related to expat insurance, with topics such as global life insurance and expat health insurance.
Establishing an Investment Plan
Saving and investing should be part of any expatriate’s long-term financial plan. With the number of offshore investment opportunities, ensuring that your hard-earned money works for you can help you achieve your long-term goals. However, this can be difficult for an expat in a new country. As investment options vary across the globe, expats run the risk of getting taxed unknowingly. Thus, identifying the right investment opportunities, developing a strategy and minimizing currency risk are key steps to establishing an effective saving and investing plan.
Where Can Expats Invest?
Consider the tax implications: Before investing, it’s important to consider that popular investment options may be considered PFICs or may require that you report them to the IRS.
Evaluate expat-specific options: To avoid the hustle and bustle of investing yourself, consider investing through international banks. Note that this may limit your investing options.
Talk to your brokerage: Depending on the brokerage service, it may or may not accept clients who do not reside in a U.S. state. It is typically recommended to keep your cash and investments in the U.S.
Expatriates have a number of investment options available to them — but choosing wisely is a must. Keep in mind that FATCA and PIFCs can reduce income due to the tax returns required. Some options that expats have include offshore investment bonds, managed future funds, commodities and more. If you have enough capital, you can also consider purchasing property in your new country of residence and turning that into an AirBnb or your long-term home. If you aren’t sure or do not feel confident in your investment skills, you can turn to expat-specific products from international banks. Some banks have a number of wealth management products designed specifically for expats.
Creating a Strategy
Having a long-term investment strategy can ensure your stability no matter where you are in the world. As an expat, exercising flexibility in your plans is a must — especially if you travel every few years. Compared to those who stay stateside, planning your investments will involve more factors, such as regulatory requirements, fees, safety considerations and more. Use the step-by-step below as a starting point to help you create a long-term investment plan as an expat.
Set your financial goals
Your goals are the driving force behind your investment decisions. Do you want to retire early and in a different country? Do you want to save for your child’s education? Make sure to set a specific and realistic benchmark you can achieve after a given period of time.
Determine your appetite for risk and time frame
While your risk appetite can change as you grow older, understanding your level of risk will determine your investment options. Thinking about your time horizon is also important, as it dictates how much time you’re giving yourself to achieve your goals.
Remember the tax implications
Take a moment to think about the tax implications of certain investments. If you end up owning a property or investing in a mutual fund, you may be subject to FATCA or PFIC laws.
Select your investments
After thinking about your goals, risk appetite, timeline and the potential tax implications, decide on what to invest in. Be sure to consult any sources you usually would if you were living stateside.
Speak to a financial advisor
While you can manage your long-term investment plan alone, seeking the help of a financial advisor can make the process easier. An advisor will essentially be your accountability buddy and can help you stay on the right path to reach your goals.
Minimizing Currency Risk
Investments which are not made in U.S. dollars often pose a greater risk — be it stocks, funds or properties. Good returns can be easily diminished by changes in the exchange rate between the USD and the currency in which your investments are made. One way to minimize currency risk is to have a portfolio that’s highly diversified across currencies. This is best done in countries with currencies pegged against the dollar, such as Saudi Arabia or Lebanon. Another option is currency-hedged funds, which are mutual funds that use futures and options to hedge against currency risk. Expats can also consider investing in rising currencies, which typically come from countries with low debt to GDP.
Diversify your portfolio across currencies: Creating a portfolio that doesn’t rely on a single currency is a great way to mitigate currency risk, especially if pegged against the dollar.
Consider currency-hedged investment options: Investing in currency-hedged funds, which use futures and options, can help mitigate currency risks.
Look at rising currencies: Rising currencies typically come from countries with low debt to GDP and can be a good investment.
Planning for Retirement
Building retirement savings early is the key to enjoying life after your working years. While it’s possible to continue contributing to an individual retirement account (IRA) you may have, it’s not wise to have that account be your only source of money. Think about international savings accounts or other investment opportunities that can grow your money before retirement, and don’t forget to think about the tax implications. Keep in mind that different countries have different rules regarding taxation of retirement savings. Even foreign retirement account distributions are considered taxable income by the IRS.
Maximizing Benefits From Tax-Advantaged Accounts
Employing the benefits of an individual retirement account (IRA) or Roth IRA can provide tax savings, asset protection and estate planning. Starting as early as possible can help you compound tax-free funds during your working years.
Navigating Life Insurance, Wills and Trusts
Living abroad comes with certain safety risks that need to be mitigated with life insurance and proper estate planning. For instance, your new country of residence may lack quality healthcare. If you end up sick, you may be leaving your family with no source of income. Purchasing health, disability and life insurance policies are a must for any expat. For those who travel frequently, travel insurance is also something worth considering.
Planning ahead in case of an untimely death is equally important. Create a will to ensure all your assets go where you desire. If you have children, you may also consider creating a trust.
Managing Estate Planning
While having a will is one of the fundamentals of estate planning, it’s important to remember that you have two inheritance laws to consider: that of the U.S. and that of your new country of residence. Consider making two wills: one for property and assets located in the U.S. and one for property located abroad. The easiest way to do so is to hire an estate planning attorney who can help identify the laws and tax regulations you need to consider.
Expert Insight on Financial Planning for Americans Abroad
From dealing with complicated tax regulations to finding the best investment options, managing finances can be tricky for any American expat. To provide further insight for expats around the globe, MoneyGeek interviewed three experts.
- What special considerations should someone take into account when building an investment portfolio while living abroad?
- What happens to U.S. investments if you move abroad? Should you keep your cash and investment in the U.S.?
- How will diversifying your portfolio while living abroad help improve your investment returns?
- What finance considerations should you remember when you plan to retire abroad as a U.S. citizen?
- What tax-saving strategies are there for expats?
Founder and CEO of Tax Samaritan
Founder & Principal Advisor at Elgon Financial Advisors
Managing Director of Westwood Tax & Consulting
Additional Resources for Americans Abroad
The resources below provide more information about how expats can manage their finances, invest wisely, plan for retirement and mitigate risks.
- American Citizens Abroad: ACA provides a page dedicated to providing resources for American expats. From finding tax preparation services to knowing how and where to vote, it covers a vast number of sites where expats can get help with their concerns.
- American Citizens Abroad's Estate Planning for U.S. Citizens Living Overseas: This resource from the ACA explores estate planning for U.S. citizens residing overseas. It outlines the validity of U.S. wills abroad and how property laws can differ in every country.
- InterNations's Expat Insider: The Expat Insider 2021 from InterNations provides a look into how expats around the world are managing their finances. This can give you good insight into the best countries to move to when it comes to financial matters.
- InterNations's Financial Checklist for Expatriates: This financial checklist for expatriates offers a brief look at what expats need to consider when it comes to setting goals, building up reserves, making projections and more.
- Internal Revenue Service: To have a better idea of the taxes to pay and when, the IRS has a number of resources that can help clarify when to file, what to file and how to file.
About the Author
- Financial Crimes Enforcement Network. "Report Foreign Bank and Financial Accounts." Accessed November 4, 2021.
- Internal Revenue Service. "Do I need to file Form 8938, “Statement of Specified Foreign Financial Assets?." Accessed October 25, 2021.
- International Trade Administration. "Foreign Exchange Risk." Accessed November 4, 2021.