Twelve Financial Resolutions to Help Expats Enjoy a Prosperous New Year
By Chad Creveling, CFA and Peggy Creveling, CFA
Many of us expats look forward to a new year with a renewed desire to make positive changes in our lives. From a financial standpoint, improving our circumstances largely requires instilling good habits, being consistent, getting started early, and possessing a basic understanding of finance and investing concepts. To help you enjoy a more prosperous new year, here are 12 financial New Year's resolutions. Start at the beginning and aim to knock off at least one each month. By the end of the year, you'll be on much firmer financial footing.
- Set up an emergency fund. If you don't already have one, this should be one of your first priorities. Unexpected things happen to everyone, maybe more so to those of us who live outside the safety nets of our home countries. Job loss, forced repatriation, loss of expat benefits, illness—these are all things that can happen to expat families. An emergency fund helps insulate you from some of life's curveballs. Plan on setting aside living expenses of six months or more. Don't get clever with these funds; put them in risk-free deposit accounts in the currency you will likely need.
- Create a family budget. Expats typically operate in a currency other than their home country's, which can cause a loss of perspective when it comes to spending. Many of us spend in foreign currency amounts we would never consider if priced in our home currency. Nevertheless, for your long-term financial well-being, it's vital that you figure out how much you're spending, and on what. For most of us, a significant amount is wasted on impulse purchases, avoidable fees, poor planning, and the inappropriate use of debt. To get a handle on what you are spending, use a multi-currency personal financial planning software program like Quicken to help you translate your finances back to a currency that has meaning to you.
- Set financial goals. Where do you want to end up? What are your life's dreams? This should be a fun exercise. Remember, if you don't know where you're going, you're not likely to get there. Toward this end, set specific, quantifiable financial goals that answer questions like who, what, when, and where. Goals don't necessarily have to be so daunting that you never get started, like save $3 million for retirement in 30 years. Set near-term goals that support longer-term desires. For example, create a family budget and save $10,000 for retirement this year, or open a 529 plan and contribute $500 a month toward your child's education.
- Enjoy saving. This is critical and where many well-intentioned New Year's resolutions get derailed. While forming habits such as saving may be difficult at first, once you get started it becomes much easier. Learn to enjoy paying yourself first. For more help, see "How Expats Can Overcome Mental Roadblocks and Get Started Saving."
- Pay off debt. The inappropriate use of debt is one of the quickest ways to jeopardize your financial security. Use cash or a debit card for purchases, not a credit card. Pay off or consolidate consumer debt to lower your interest charges. Look into refinancing mortgage debt or swapping variable rate debt to fixed rate if you haven't already. Be careful of the amount of debt-financed consumption; you're borrowing from your future.
- Contribute to your employer's retirement plan. This can be one of the best deals out there, assuming you get a tax deferral and your employer matches your contribution. If you don't have a company retirement plan, look at other tax-advantaged options. In Thailand, Provident Funds, Retirement Mutual Funds, and Long-Term Equity Fundscan all be useful. Depending on their situation, Americans may be able to contribute to individual retirement accounts, even in some cases nondeductible ones. However, beware of many offshore investment-linked insurance schemes often billed as savings plans, pension plans, or education funds. These are not the same as company or national retirement plans. Their high fees will quickly erode any long-run investment returns you can hope to achieve and will subject Americans to complex tax and reporting requirements.
- Read a good book on investing. There's a lot of "noise," conflicting advice, misconception, and faulty "market wisdom" surrounding investing. Investing doesn't have to be complicated, but many people lack the knowledge and context to make informed decisions. As a result, they often get drawn into the type of short-term, emotion-driven decision-making that destroys wealth. Do yourself a favor and read a book on investing. Some of the best are:
- The Investor's Manifesto: Preparing for Prosperity, Armageddon, and Everything in Between by William Bernstein
- A Random Walk Down Wall Street (11th Edition) by Burton G. Malkiel
- The Global Expatriate's Guide to Investing: From Millionaire Teacher to Millionaire Expat by Andrew Hallam
- Develop an appropriate investment strategy. Once you've read the book, either on your own or with the advice of a competent, unbiased financial advisor, create an appropriate long-term investment plan that is suitable for your unique situation and financial goals. Strive for consistency and do your best to avoid the classic investment mistakes that many expats make.
- Review your insurance coverage. Review your need for insurance, as well as your existing insurance policies. Look at health, life, disability, homeowner or renter, auto, liability, and if you are over 55, long-term-care insurance. Make sure that you have adequate coverage, but don't buy what you don't need. Also, make sure you understand your coverage—not all insurance policies are the same. Generally, it's best to buy each type of coverage separately and not lumped in with some other financial product. If you can't evaluate your insurance needs yourself, seek out an unbiased advisor to help. Ideally, that is someone who is not compensated based on the insurance product sold to you.
- Simplify your financial affairs. Keep your financial life as simple as possible. It's easier to manage and you're more likely to keep up with it. Close unneeded bank accounts, limit the number of credit cards, use an online broker, have your statements delivered online. Keep good records. See "Ten Tips to Simplify Your Financial Affairs While Living Overseas" for help.
- Get a will. Most people don't have wills, and for those who do, it's unlikely to be up to date. This is especially important for expats who may be involved in dual-nationality marriages and have assets spread across several countries. While you're at it, review beneficiary designations on all insurance, pension, and retirement accounts. Ensure your spouse has access to the financial accounts and knows where the records are kept. Consider whether a financial or health care power of attorney is required. See"Why Expats Need Estate Plans, and How to Get Started."
- Get competent advice when you need it. Don't be pennywise and pound foolish. The level of complexity and financial sophistication of financial products has increased immensely in the past few decades. So has the slickness of the marketing. In today's world of specialization, it is impossible to keep up with it all. You don't have to do it all yourself. It can often be cheaper and more effective in the long run to get competent, unbiased advice when you need it rather than attempting to go it alone. Just ask any wife whose husband tried to save a bit of money by refusing to call the plumber.
This new year, resolve to bid farewell to bad financial habits, instill some good ones, and get started on creating your own financial security.
We hope you had a great holiday season and wish you all the best in the new year!