It is not easy to start saving while overseas. Every time we go to a new country, we need to adjust to a new cost of living and the currency, and sometimes a change in salary. Often we lose track of our income and expenses, and struggle to commit to a savings goal.
Nevertheless, our lifestyle also gives us a lot of opportunities to save. It’s a matter of whether we can hold on to those opportunities.
Over the years I have worked with many globetrotting clients who show me their unique way of saving when they don’t even think about their decisions that way. I call these “forced saving schemes.” These are more than just willing yourself to put aside savings each month. With some upfront planning, you are able to turn some spending into saving opportunities.
Let me show you the 7 ways to start saving while overseas.
In my experience, they can be grouped into two types of forced saving schemes- “save more tomorrow” and “pay out of pocket now.”
Save More Tomorrow
Richard Thaler and Shlomo Benartzi famously promoted and tested the “Save More Tomorrow” program. They found that people are more likely to commit to saving 3% of their future income in a retirement account, after receiving a pay raise of over 3%, than 3% of their current income. (So the participants are saving a large portion of their pay raise, but not 100%.) The research also found that the program participants followed through with their commitment, and increased their savings drastically, especially for those that did not save at all originally.
At first thought, start saving tomorrow seems like an irresponsible concept. After all, it sounds more like procrastination than actually taking action. However, it takes into account the human tendency to overvalue the present while discounting the future, and to prefer averting losses over acquiring gains. These two traits make it very difficult for us to give up our current consumption and opt for saving. That is why the “Save More Tomorrow” program was so successful in raising people’s savings rate.
Another added benefit of saving a large portion of your future income is that it helps you stick to your current cost of living with only mild increases over time. If you think about it, the amount of money we need to live a comfortable life (adjusting for inflation) doesn’t necessarily go up when we earn more money. Most of the time we spend this extra income on “upgrades” – a better car, a nicer hotel, or a boat. While there is nothing wrong with improving your quality of life as your income increases, you can easily forego saving because now you can enjoy all the luxury that you couldn’t previously afford.
The trap of saving a percentage of income, no matter what you earn, is that you would raise your ideal expenditure at a much faster pace, which means you need to save even more to maintain that lifestyle for when your income level drops, such as when you retire.
Below are a few things I’ve seen many globetrotters do when they apply the concept of Save More Tomorrow, unconsciously:
#1: Save 50% of cost of living differences
You may be moving from a country with a higher cost of living to one with a lower one, without significant change to your income. Instead of starting to make more unnecessary purchases, by continuing to live the way you used to, you will start seeing more cash in the bank. If you start tracking exactly how much more you are saving, you might even be able to use some of the surplus to indulge in some services that you couldn’t afford, such as household help or weekly massages.
#2: Save 50% of your subsidies
Your employers may pay you extra in addition to your normal salary to compensate for your move overseas. This may include a relocation package, housing subsidy, cost of living adjustment, etc. You can commit in advance to save 50% of all this “extra pay” if it comes in cash form. When I moved overseas for work for the first time, I received generous relocation assistance that left me with 50% of the allotment after paying for travel to my new work location. I saved it all and that represents more than half of what I ended up saving while in that country.
#3: Save 50% of your second income
Many trailing spouses, without a guaranteed job, do not find work until arriving at the new location. If your household managed to subsist on one income previously, consider saving 50% of your secondary income source when it becomes available. Even if the spouse is only making US federal minimum wage, you can save an additional $7,500 a year by committing to do this.
Pay out of pocket NOW
For those who are more disciplined, paying out of pocket now so they can save more in the future is a norm. It comes in different shapes and forms, but generally it involves fitting extra cost into your budget before you receive a payout in the future. Below are a few things people commonly do.
#4: Withhold more than tax liability
For many who are new to the US, having a large tax refund is a strange idea. In countries where the tax system is much simpler, it is common to have taxes deducted from your paycheck without the need to file a tax return. Even if you do file, the deductions available are so few that most people would have no further tax refund or liability after the paycheck deduction.
In the US, because we are able to select our taxpayer status and allowances, and because the tax system affords us so many deductions from gross income, what was withheld from our paycheck is most likely not what our tax liability actually is. This mismatch creates both a trap and an opportunity. You may have under withheld your tax liability, spent the extra take home pay, then realized that you need to pay more in taxes. Or you could over withhold and get a refund next year, but incur the financial penalty of letting the government keep that money from a few months to a year without paying you interest.
This dilemma creates the age-old debate for the best withholding strategy- is it better to pay more and get a refund or pay less so I can use the money now? During a time with a higher interest rate, I would agree that there is a merit in trying not to over withhold, so you can begin to earn some return on your cash. However, in a low interest rate environment like now, I would encourage you to consider using withholding as a saving mechanism, especially if you always have trouble keeping track of your expenses to allow for savings.
Let’s say that by withholding as close to your tax liability as possible, you may receive $100 extra from your paycheck. This amount is small enough that many would not notice, and may be happily splurged away for a fancy dinner one night. However, if you let the government keep the $100 a month for twelve months and give you $1,200 back in January next year, it’s a big enough income that you will not ignore it. It is more likely we will put more thought into how to put this money to use, and saving it for a specific goal should be on the top of the list!
If you agree that using tax withholding to help you save is a good idea, how do you start doing it? The first step is to find out what your current withholding rate is. It is usually shown on your paycheck, and is based on the W-4 form you filled out when you first started the employment. Many people who have been with the same employer for many years never change their withholding when their situation changes, such as getting married or having children. So you should first go through the W-4 worksheet and find out what the suggested withholding is for your current situation.
With the help of a tax professional, you can also estimate how much your real tax liability will be, and compare it against your current withholding. This will help you determine if you are currently under withholding and will be liable for a large tax bill next year. You will need to file a new W-4 with your employer to correct this difference. Or you may find out that you will likely get a refund because of large itemized deductions such as for mortgage interest and state taxes paid.
Assuming you want to save $1,000 at the end of the year through tax withholding, you only need to give up $38 per bi-weekly paycheck from your take home pay, a sum most people don’t even notice. (Use IRS withholding calculator to find out the best way to withhold.)
#5: Save your reimbursement check
If you work for a US employer overseas, it is more likely you will be a participant in a US based insurance plan, such as health insurance, that covers your overseas expenses. Usually this requires you to pay out of pocket first, and then submit the receipts to receive the reimbursement from the insurance company.
Sometimes months will pass before you receive the money. It could be an annoyance, but also an opportunity! If you are able to cover these expenses up front from your monthly paycheck instead of from savings, you should consider repurposing these reimbursement checks into savings for a particular goal when they come. Just because they are reimbursement for a specific expense doesn’t mean they have to go back to the same expenditure category.
The same principal applies to all types of reimbursement for out of pocket expenses, such as paying for employer reimbursed work expenses, auto insurance payments before your file a claim, or even paying your nanny before you receive the full annual check from the Dependent Care Flexible Savings Account.
#6: Pay for advice out of cash flow
This may not apply only when you are overseas, but it’s a great benefit many people overlooked. A ton of steel and a ton of cotton weigh the same, but the latter just “feels” much lighter.
In the past, people paid for financial or investment advice from their investment account for the advisor’s convenience. You pay from an account that is delinked from your day to day spending, so it gives you the feeling that you get all the great services without paying very much for it. Or even if you do know how much you pay, it doesn’t “hurt” because you don’t see a deduction from your checking account every month.
The upside for the traditional advisors is that you are less likely to question the fees because you don’t feel the pinch. But the downside for you is that your investment grows much slower because of the extra expenses coming out of the account. Most people have a hard time evaluating this slower growth since your investment goes up and down all the time.
Many advisors (including me), in an effort to make fees more transparent, began to charge directly from your checking account or credit card. Therefore you are paying the cost of getting advice out of pocket now. This allows your long-term investment account to grow just a little bit more each year. In 30 years, with the compounding effect, the difference can be huge.
The same principal applies to spending money from an investment account. If you are able to spend from your income instead of from savings, your savings will grow a lot faster. (Duh!)
#7: Get a mortgage
I don’t generally recommend people getting into debt, or even buying a home when you don’t live in it for that matter. However, for people who lack the discipline to save, paying debt can be a more effective way to save.
Buying a home has long been viewed as the way to accumulate wealth. Other than the tax benefit, why is investing in one single piece of real estate better than investing in the stock or bond market? Study has shown that in a 30-year period, on average the real estate in the US returns only 1% annually above inflation, which is lower than stock and bond markets. (Of course, there are regional differences. Some places have better house price growth than others.)
I think the real reason lies in the fact that it’s easier to make sure you make a mortgage payment every month than to force yourself to save the same amount. I have experienced this personally while not having housing expenses. While we save a lot of take home pay each month, we don’t save nearly as much as what a mortgage payment amounts to in a large metropolitan area.
That is not all bad, however, since a mortgage payment consists of mostly interest in the beginning for many years. If you bought a property that is not appreciating, you are simply paying “rent” to the bank, and not accumulating much wealth, especially if your interest payment is below what will give you extra tax benefits.
So if you have the income to afford a mortgage but otherwise would spend all the surplus in the budget, forcing yourself to pay yourself every month can be a good idea. If not a mortgage, perhaps set up an automatic transfer schedule of the same amount to invest in other assets that will give you even better returns. (Use this tool to compare whether to invest in property or the market.)
This same principal may apply to a cash value life insurance. Many people choose to reduce savings when they have unforeseen expenses, but they will continue to pay the premium to a life insurance policy. If you lack the discipline to save consistently month after month, using “monthly bills” to save can be a good idea for you.
I hope these 7 ways will help you start to save while overseas. Let me know if you have other tricks that will benefit others!