Expat Financial Planning: Overcome Mental Roadblocks and Get Started Saving

Chad Creveling, CFA and Peggy Creveling, CFA |

As a survey from earlier this year showed, one of the top concerns expats have is how they will finance retirement. We all know that saving for retirement is challenging—just the sheer amount of money required is a barrier for many. Saving for the future goes against human nature. Behavioral economic studies suggest that at a basic level, we're more strongly motivated by short-term concerns than long-term possibilities. We're also more likely to avoid pain before we seek out benefits. It follows that it's only human to resist cutting discretionary spending today (avoiding short-term pain) even if it’s at the expense of getting the retirement we want (a long-term benefit).

In this article we’ll look at some of the specific challenges expats face that get in the way of saving. We’ll then outline some possible solutions so that expats can overcome any mental roadblocks and get started saving for the future.

Challenges Expats Face in Saving for the Long Term

Confusing affluence for wealth: There are two hurdles here. First, since expats operate in a foreign currency devoid of personal historic reference points, we often don't have a realistic idea of how much our current lifestyle costs. This makes it easier to overspend in what sometimes seems to be “monopoly money.” Additionally, in many cases, employers are paying for some living costs by providing benefits such as housing and car allowances, medical insurance, home leave, and funding our kids' education. This leads to underestimating our true expenses, as well as to having little idea of how much is needed to replicate our current lifestyle in retirement. We sometimes confuse being temporarily affluent for having long-term wealth.

Thinking we have all the time in the world: There's a tendency to assume that our situation will always improve, a belief that persists even after our peak savings years are behind us. In part, this is because we don't usually have good points for comparison—expat postings tend to be short (two to three years), and we don't stay in direct contact with the same people over time. It's therefore difficult to get a realistic idea of the earning trajectory of a typical expat career over the long term. It's easy to assume that everyone's paychecks (including our own) will always be rising, and we're unprepared when we find out that this may not be the case.

Out of sight, out of mind: Unfortunately, the strongest motivation sometimes comes in the form of vowing to avoid the mistakes made by someone we know. But expats often don't have visible reminders of what failing to plan looks like. Those who face financial difficulties typically return to their home country where there is support (either family or a welfare network) to help them.

Six Things Expats Can Do to Get Started Saving

  1. Recognize the problem. This is always the first step. If you recognize any of the above challenges in your own situation, you'll be more likely to take action to fix them.
  2. Get a realistic idea of what your lifestyle costs. Include all costs, even those your employer currently covers. It's normal to be optimistic, but try to err on the side of overestimating expenses. Multicurrency personal finance programs such as Quicken or Moneydance can help you track your true spending habits.
  3. Do the numbers. Work out how much you may need to fund your retirement and how much you need to save and invest on a monthly basis if you start now. If you aren't lucky enough to be part of a generation that received guaranteed pension payments from their employer or government, don't be surprised if you determine you'll need to save at least the equivalent of USD 1 million or more before retiring if you hope to replicate your expat lifestyle.
  4. Adopt the view that monthly saving is a pleasure, not a pain. This may require a mental trick such as described by behavioral economist Dan Ariely in his book Predictably Irrational. Mr. Ariely had a medical condition that could be cured only with regular injections that made him physically ill for 16 hours. On injection day, he treated himself to something he liked—watching a movie. He learned to associate the unpleasant short-term injection with a short-term pleasure, and thus was eventually able to gain the long-term benefit of being cured. Similarly, instead of viewing the habit of saving as being a pain or having to do without, view it instead as a pleasure—that of paying yourself first. This involves a shift in your outlook, as well as the physical act of setting aside money at the start of each month, before you pay anyone else or spend it. Learn to really enjoy the "ka-ching" factor of putting money aside for your future.
  5. Substitute other short-term pleasures for spending. Once you're able to quantify your actual spending, you may be surprised at how much goes to short-term consumption such as dining out, compulsive shopping, or expensive hobbies. By changing your habits, you may find you're happy to substitute other activities. Try taking up a low-cost hobby or sport, join a club, learn how to cook your own gourmet food, or even just go for a picnic with the family or a walk in the park.
  6. Resist the urge to keep up with the Joneses. Remember, many expats who appear to be well-off are merely temporarily affluent with employer-funded housing and private schools for kids. Often, they have not yet secured their financial futures and are not actually wealthy. Don't be blinded by fancy cars and high spending habits. There's no shame in avoiding the trappings of consumerism or refusing to follow others into financial oblivion.

Saving—Just Do It

When it comes to saving for retirement, expats face all the normal tests of human nature—we tend to avoid the short-term pain of saving today, even if it may jeopardize our long-term goals such as a comfortable retirement. We also face additional challenges specific to our expat lifestyles. However, by becoming aware of the pitfalls and following the steps outlined above, you can overcome your mental roadblocks and start saving.

This article is a revised and updated version of an article that originally appeared on www.crevelingandcreveling.com on 29 November 2012.