5 Financial Steps to Take Before Moving Abroad
Planning a move to another country is an exciting, but daunting undertaking which requires significant planning and preparation. There are many things to consider; where you'll live, where your children will go to school, arranging compensation agreements, and so on. So it's not surprising that new expats often fail to arrange their financial lives properly before making their move. This can be a costly mistake. Read on for the 5 essential steps you must take to prepare your finances before you make the big move:
Establish Two Bank Accounts
You'll need to have two bank accounts, one in your home country, and one in your new host country. Your home country bank account will be used to access cash in your home currency. Often, expats leave behind financial obligations in their home currency (think mortgage, loan, and tax payments, recurring bills, etc). You may also need an account to which you may receive payments in your home currency (like rental income, social security payments, and the like). Establish this account before your departure, as it will become more difficult, and perhaps impossible, to establish with a foreign address.
Once you arrive in your new locale, it will be important to have a banking relationship there as well, for managing your every day cash needs. We recommend that you fund this account with a substantial sum - 3 to 6 months of living expenses. This will ensure you have plenty of funds available for unforeseen expenses. You'll want to avoid being forced to move money across borders and exchange currencies at inopportune times, as this can become quite costly.
For both of these accounts, we recommend using large, reputable banks. Big banks usually have experience in currency conversions, offer better exchange rates, and have the ability to transact international wire transfers quickly. Plus, larger banks' websites tend to be more robust, which will be important when you are half a world away with a large time difference between you and your banker.
Establish Two Credit Cards
We also recommend expatriates have credit cards established in both their home and host countries (for the purpose of this discussion, the term ‘credit card' is meant to include any sort of payment card that is widely accepted). Your host country credit card will come in handy for every day purchases. Since it defaults to the host country's currency, you can avoid foreign transaction fees and exposure to exchange rate fluctuations.
Your home country credit card will, of course, be denominated in your home currency and will save you from potentially costly fees and currency fluctuations. Establish a credit card in your home country before you go, as banks are often unwilling to issue cards to individual with foreign addresses. It's generally easier to change the address of an existing card to a foreign address.
Find a Financial Advisor with Cross-Border Expertise
The complexities in managing currency risk, an investment portfolio, and dual-nation tax reporting are many. It is important for expats to have a trusted advisor that understands the financial nuances of living an international lifestyle. A financial advisor that specializes in helping expatriates will help you choose where to hold your assets (see step 5), refer you to other professionals that understand your situation (see step 4), and manage your investment portfolio. While some expats choose to manage their own finances, the pitfalls are many, for example, purchasing the wrong type of investment or investing in the wrong place can be costly down the road. Be wary of commissioned financial sales representatives, as they often are motivated more by commission than by your best interests, and they are rarely financial experts. Rather, search for a ‘fee-only' financial advisor that charges a fee for his services rather than a commission.
Consult with a Tax Advisor or Legal Professional
Dual-Country financial arrangements are complex and should not be taken lightly, as even the most innocent transaction can be costly if not well planned. Some concerns to take up with your cross-border tax advisor are:
- Taxation and Tax Planning – Find out if you will owe taxes to both your home and host countries, or just your host country. Learn about your host country's tax system so that you don't get caught off guard.
- Location of Investment Accounts – As addressed in item 3, your cross-border tax or financial advisors will be able to answer this question.
- Estate Planning – Expats must consider the estate tax laws of multiple countries and arrange their estate plans accordingly. Failing to plan for these issues can leave heirs with enormous complexity and hefty tax burdens.
- Real Estate Concerns – Owning real property around the world creates a new set of tax obligations; learn the benefits, drawbacks, and tax considerations of property ownership as an expatriate before purchasing or selling any real estate.
Determine the Country in Which to Hold Your Investments
There are many factors that go into determining the best country in which to locate your investments. We recommend you consult a financial advisor or tax professional with cross-border expertise to help you answer these questions. Some items to consider are:
- Taxation – Consider the tax reporting requirements of your home and host country's tax authorities and the compliance of the tax reports provided by your investment company with each authority.
- Financial Goals – Consider the location of your financial goals, such as, education expenses, vacation home, and retirement. For example, if your main financial goal is retirement, you'll want your investments to be denominated in the currency of your expected retirement destination. Many expats don't know their ultimate retirement destination. In this case, it is important to minimize your exposure to risk by maintaining currency diversification.
- Safety and Investment Selection – Choose a country with a stable financial infrastructure and an investment firm that offers account protection and insurance on your assets. Also, choose a country and investment company with a wide selection of investment vehicles to choose from.
Once you determine where to hold your assets, you will need to choose an investment company to work with. We recommend choosing a large, discount brokerage firm that's accessible online or by phone.
If you choose to keep your investments in your home country you should establish the account prior to moving abroad. Again, it may be difficult, if not impossible, to find an investment company willing to open an account for an individual with a foreign address. It's much easier to establish the account while living in that country, then inform them of your address change. You will also want to look into the policies your chosen investment firm has concerning your home/host country, as some firms and governments have varying restrictions on financial dealings with foreign countries.
Source: Maxim Global Wealth Advisors, By Jeannie Pedersen - 2009