Money management is important to avoid debt, maximise returns on your savings or investments, and monitor what you spend, where and why. All these factors may become even more essential when living overseas.
Seemingly simple oversights such as an exchange rate miscalculation, forgetting to budget for the additional cost of making payments in a different currency, or failing to declare an asset subject to local taxes can put your finances under strain.
The good news is that once you have relocated, become acclimatised and gotten used to differences in commodity prices, accommodation costs and tax regimes, most of this will become second nature. Getting started on sure financial footing can make a considerable difference to your experiences as an expat.
The Financial Literacy Fundamentals
Stripping it back to basics can assist with making key decisions about moving abroad, saving for children’s education, or investing in your future retirement.
While the specifics of your income, investment returns or savings will normally need some adjustment following an international move, the benchmarks for sound financial management remain unchanged.
The following are ‘golden rules’ as a straightforward approach to responsible budgeting:
- Earning more than you spend or spending less than you earn ensures you don’t end up with a small overspend each month that could accumulate into a deficit or, worse, exposure to increasing debt levels.
- Keeping an eye on your future finances, such as thinking about the value of your pension or paying down short-term debts as quickly as possible, is beneficial. Even a small amount of savings can earn progressive interest, making unexpected costs manageable.
- Using your money to support long-term wealth through a sensible investment or savings approach can ensure you gradually increase your financial well-being. Informed investment decisions can grow your nest egg with low-risk exposure. Other opportunities could involve running a business or investing in your skill set to improve future career prospects.
Regardless of how long you have lived overseas or whether you are in the early stages of planning a new life abroad, following these guidelines will establish a positive approach to money management.
Managing Conscious Spending Habits
There are necessary expenses, such as rent or mortgage, utilities, groceries, fuel or transport costs, clothes, and insurance. The important factor isn’t so much not spending anything but knowing what you are spending and on which items.
Tracking spending, including variable outgoings, is useful. You can keep a note of costs per month and average it out to start creating a baseline budget.
This is helpful in numerous ways, not least in forecasting the savings you need to cover your expenditure for several months should your circumstances change or calculating your required retirement income to maintain your current lifestyle.
Expats often find that some things cost more overseas and others less – private education fees and health insurance are stand-out examples. Understanding your spending gives you a clear picture of any gaps in your income or pressure on savings to cover additional expenses.
Budgeting for Life Overseas
Once you have monitored your essential and optional outgoings, you can create a more detailed budget, with online budgeting tools available to automatically categorise transactions.
Outgoings are normally split into the following percentages:
- 50% to 60%: fixed costs, including expenses such as accommodation, groceries, insurance, and utilities.
- 20% to 35%: optional spending, such as entertainment, meals out and anything else you enjoy doing in your free time.
- 10%: investments, building your wealth over time with ongoing returns, including retirement investments such as pension funds.
- 5% to 10%: short-term savings, used as a contingency or way to build up sufficient savings to cover higher ad hoc costs such as holidays or purchasing a new appliance.
Immediately accessible savings act as a buffer and allow you to manage unexpected costs, such as a vehicle repair, without needing to take on debt.
These benchmarks can be adjusted as required, depending on your savings pot, income, and how close you are to retirement.
Creating a Savings Strategy
Extra income can contribute to savings or be allocated to your investment fund. Provided you spend less than your earnings, saving for the future is an excellent way to safeguard your finances.
Even small savings can prove invaluable down the line, so making automatic deposits into your savings account is worthwhile. Scheduling a manual bank transfer once a month may not be feasible, so setting up a recurring deposit is often more convenient.
If income is immediately transferred into a savings account, whether an open-access or notice account, the temptation to overspend isn’t there, so it’s far easier to adopt a regular savings strategy.
Many expats may not have significant values in savings following a move, where the costs of relocating, purchasing a property or paying for a year of private education can deplete your reserves.
However, making cumulative deposits into a savings account will earn nominal interest and mean you create a larger savings pot you can use to invest – where the returns available are significantly higher.
Manage Your Money: Investing for Long-Term Wealth
By this point in our money management journey, we have established spending habits, a recurring household budget and a savings strategy, paving the way for investment opportunities that tie into your longer-term retirement and lifestyle aspirations.
Investment doesn’t have to be short-term or high-risk and can include pension plans with advantageous employer contributions and tax efficiencies. Contributing more than the minimum towards a workplace pension scheme is wise, particularly if you are relying on your pension fund to finance your retirement or are approaching retirement age.
However, for expats there are sometimes complex considerations with decisions to make around transferring pension schemes to a new overseas location, access to State Pension benefits and the potential for private plans to fall into a pension deficit.
We advise you to seek independent guidance to ensure you make informed judgements specific to your circumstances.
While many assume investment is complex, a knowledgeable wealth manager can take care of the administrative details and in-depth monitoring and recommend options based on your age, risk appetite, expectations, and capital available to invest.
Taking the first steps towards life-long money management is time very well spent. Working with an accomplished, regulated adviser assures you that you have the best support and can make confident decisions about the right approach for your finances, family, and future.
For more assistance with how to manage your money as an expat, please get in touch with our friendly teams in any of our international locations across Europe and North America.