Relocating plays havoc with your money; the cost of moving, the unpredictable expenses, the loss of local financial history and the soaring banking costs all make creating a relocation budget the greatest work of fiction since Harry Potter.
Despite the uncertainty, financial preparation and clarity is vital to a successful global transition, because if you think cultural orientation is challenging enough, try learning the Mandarin for “Why has my card been declined?”.
So for those of you considering (or already) living overseas, here’s part one of the commonsense rules to follow for creating a relocation financial plan.
1. Budget no more than 25- 30% of your net household income for housing
– including rent or mortgage, property tax and insurance and security services. While this may seem low, it gives you greater financial flexibility, so when other unexpected costs crop up, you are well prepared.
It’s especially relevant for homebuyers – while corporate assignment contracts often include a buyout policy, in the current financial climate you may get offered far less than you expect, or even be ineligible for the program. Check the fine print carefully before you buy if you may need assistance when selling or if you move on short notice – but for maximum security the less income you have tied up in property when you lead a nomadic life, the better. Read The Golden Rules of Expat Housing – Buying a Home.
2. Make friends with your tax advisor.
Expatriate taxes are complicated and while you need a qualified tax professional to oversee them, but don’t just relinquish responsibility.
Their priority will be to complete your taxes in a timely and accurate manner, but they have a wealth of information and experience relating to your tax breaks and liabilities for future plans and destinations and can help you avoid making costly mistakes. Higher education and retirement costs continue to rise, and with expat life comes the uncertainty of where these costs will be incurred and what support (if any) is available locally.
Most locations have tax free savings or investment policies for retirements, college funds etc., but you need to get independent expert advice to help you make the right choices. My personal favorite? Grant Thornton, for their knowledgeable, down to earth, easy to understand approach.
3. Plan for the Relocation “Money Roller Coaster”..
Changing location means fluctuating expenses – often much larger than you expect. Healthcare, school and college fees, retirement, cost of living and tax liabilities all vary hugely between locations and having a financial cushion can be the difference between all going well, all going into debt or all going without.
Don’t confuse this with your emergency savings account (for more on that, see part 2); this fund is purely to manage expat related expenses that you can’t accurately predict. Anything from last minute flights home, the extra security deposit because of your pets or extra tutoring for your children – all are common expenses that most of us will have to cough up at one point or another, so forewarned is forearmed.
Once the dust has settled in your new home, add up how much you spent relocating – it doesn’t need to be accurate to the last penny, just a rough estimate. Divide this figure by the length of the assignment in months, and set up an automated bank transfer to a separate ‘transfer expenses’ account.
If the amount seems terrifying, don’t panic. Even $100 per month over the course of a 2 year assignment will net over $2400, enough to handle most short term expenses. The key to remember is that something is better than nothing, and the earlier you start, the bigger your cushion will be.
For a guide to cost of living expenses, use Xpatulator.com as a starting point but remember to take into account your individual family needs. While local clothing or groceries may be cheap, your preferred brand of breakfast cereal, school wear or laundry detergent may be far more expensive than the index suggests.
4. Don’t Get Used To Expat Packages.
The days of the longterm expat living in one location for 10 years or more are over – nowadays, the trend is for shorter term assignments or moving the long term employee onto local, local plus or ‘expat lite’ programs. These packages may look seductive on paper, but they are designed to reflect the actual cost of living rather than as a perk.
While your income seems larger in the short term, you are exposing yourself to longer term financial challenges (potential loss of spousal income, international college fees, privatized healthcare and changing pension benefits to name a few), so explore the long term impact of your assignment and budget accordingly before you assume your increased income is disposable.
Coming Next: Protecting Your Credit, Life Insurance, The Expat Emergency Fund, Long Term Plan.