As a U.S. expat living abroad, it’s important to take proactive steps to optimize your money management. Living overseas means you’ll likely face challenges you didn’t need to worry about while living stateside. Here, we explore several money management challenges faced by Americans living abroad, offering strategies to help you navigate them.
Key Takeaways
- Americans living abroad face several money management challenges, including currency risks, transfer expenses and banking complexities.
- Fortunately, there are steps you can take to navigate these money management challenges.
- An experienced international wealth manager can help you establish a foreign banking strategy that meets your needs and helps minimize your tax exposure.
Currency Risks and Fluctuations
What is Currency Risk?
Currency risk refers to the risk that changes in the value of your current country of residence’s currency could meaningfully impact your ability to achieve your future financial goals. If you’re not taking steps to manage your currency risk, you could experience the following challenges:
Impacts of Currency Risks on Expats
- Decreased spending power – If you earn an income in one currency and spend in another currency, you face the risk that unfavorable exchange rates could significantly decrease your net income and spending power.
- A drop in the value of your savings and investments – If you’re saving and investing in a currency that’s not the one you use to fund your lifestyle, changes in exchange rates could greatly impact the value of your investments, potentially leading to significant investment gains or losses when converted.
- A high cost of living – If your country of residence’s currency is strong compared to the currency of your savings, you may experience a higher cost of living as you pay for daily necessities, such as groceries, your mortgage or rent, transportation, healthcare, etc.
Strategies to Mitigate Currency Risk
Fortunately, there are several steps you can take to help mitigate the impact of currency risk, including:
- Maintain a diversified portfolio – For many American citizens living abroad, it makes sense to maintain a diversified portfolio at a U.S.-based brokerage firm rather than opening multiple investment accounts in different countries. Within your U.S.-based portfolio, it’s important to invest in a range of foreign investments that provide exposure to different currencies. To help mitigate currency risk, consider tilting your exposure toward your geographic region.
Not only does maintaining an international exposure within your U.S.-based investment account simplify your tax reporting requirements and help keep costs low but it also helps you avoid the risk of inadvertently investing in a passive foreign investment company (PFIC), which can lead to significant U.S. tax penalties. - Incorporate currency matching –Another strategy that can help mitigate currency risk is to match the currency of your “life assets” to that of your “life liabilities.” Life assets are the assets you accumulate through saving and investing with the understanding that you’ll one day use these assets to fund your lifestyle. Life liabilities are the big expenses you expect to incur during your lifetime, such as buying a house, paying for a child’s education and, eventually, retiring.
Some U.S. expats find themselves holding life assets and life liabilities in different currencies. This is highly problematic, as currency risk has the potential to significantly erode life assets, making it more difficult to pay for life liabilities. This is why it’s important to hold assets and liabilities in the same currency.
For example, if you currently live and work in Europe but plan to retire in the United States, you’ll want to make sure your investment assets are more heavily weighted in U.S. dollars while also maintaining a diversified multi-currency portfolio. Your international wealth manager can help you find the right balance.
Wire Transfers
Costs and Delays with Traditional Banks
Traditional banks typically charge high fees for international wire transfers, which can significantly erode the end value of your transfer, especially if you regularly transfer money across borders. In addition, even though wires are electronic, they can sometimes take several days to fully process, thanks to time zone differences and processing timeframes.
Modern Money Transfer Services
Fortunately, many American expats have access to modern money transfer services, which can be faster and less expensive than traditional bank wires. These services also have the added benefit of providing upfront transparency into exchange rates and fees, which allows you to make smart decisions regarding the timing of your transfers.
Working with an International Wealth Manager
Your international wealth manager can help you choose a trusted transfer service that best meets your needs.
Banking Challenges
FATCA and Foreign Account Reporting
The Foreign Account Tax Compliance Act (FATCA) was enacted in 2010 in an effort to cut down on tax evasion by U.S. taxpayers who hold foreign financial accounts. FATCA has strict reporting requirements that make it difficult to open bank accounts at smaller banks abroad. Instead, you’ll likely need to open a bank account with one of the larger banks in your current country of residence, as the bank will need the resources and expertise to remain FATCA compliant.
Some U.S. expats decide to open a bank account with an international bank with branches in their new country of residence prior to moving overseas. However, it’s important to be aware that opening non-U.S. accounts may trigger additional IRS reporting requirements, including the need to file FinCEN Form 114.
Also known as the Report of Foreign Bank and Financial Accounts (FBAR), FinCEN Form 114 is used to report foreign financial accounts to the Financial Crimes Enforcement Network (FinCEN). Because it’s not a tax form, it’s filed separately from your U.S. federal tax return. The form is required for U.S. citizens who hold a financial interest in, or signature authority over, foreign financial accounts worth more than $10,000 at any time during the calendar year.
Choosing the Right Bank Account Abroad
Before opening a bank account in your new country of residence, it’s wise to consult with an experienced international wealth manager who can help you establish a foreign banking strategy that’s in line with your financial needs and in compliance with U.S. and foreign tax and reporting requirements.
