Rules to Live (And Save) By

I’ve highlighted 10 easy financial planning principles to guide expats to their financial goals.

Don’t downgrade your lifestyle when you retire. Aim to earn at least as much as you do now, adjusted for inflation
We often find that folks are willing to compromise with future earnings and accept that they will earn less on a monthly basis when they retire. We believe this to be a fallacy and have calculated, at least in the majority of cases, that expats can retire usually before their average target retirement age (usually 65) earning at least what they do today on a monthly basis or more, adjusted for inflation.

Save at the beginning, not end of the month
Most people save at the end of the month, after expenses, instead of at the beginning. This means that expenditure is prioritized over saving, and the amount you have left over every month to save lacks consistency. Instead, save at the beginning of every month and budget to spend what you have left over. This means that you target and maintain a fixed savings rate every month and expenditures come second. Some tools to make your monthly savings more convenient are: setting-up  automatic debit or standing orders into your savings accounts to automate your monthly transactions and make your life easier. Also, for most effective way to control and manage expenditure try the next principle

Create a daily, not monthly, budget
Micromanaging and compartmentalizing your expenditures can seem daunting, but an easy fix is to budget over the short term (daily) instead of the longer term (monthly). Work out how much you have to spend after saving and your utilities & fixed expenses for the month, divide that by the number of days in the month and you have your daily budget. This will incentivize you to spend under your daily limit in order to increase your daily limit for times you’d like to spend more money, like on weekends or special occasions.

Have sufficient health insurance coverage – it could literally save you hundreds of thousands of dollars

This is of particular relevance to expats who come from countries with universal healthcare systems, like the UK & Europe. When living in, for example, Vietnam, you’ll have to use a private healthcare facility as the standard of the state facilities can be inadequate. Using a private facility means you will have to pay for your own treatment. Spending a small percent of your income on health insurance will mitigate these types of risks, as long as you get insured while you are healthy.

Don’t rely too much on your defined-benefit pension plan
If you don’t know what a defined benefit pension plan is already, it’s basically a guaranteed amount that your company will pay you at retirement based on the number of years you’ve worked at your company, and the salary you’ve earned during that period. This means that the company takes the risk of financing your retirement, which also means the company has the incentive to reduce the amount it pays you at retirement to decrease operating costs and increase profitability.

Stocks will provide you with the most return over the long-term
Research conducted by Raymond James Investment Management shows that from 1926 – 2017 the compound annual return from small cap stocks = 12.1% & large cap stocks = 9.9%. This is the highest annual compound growth rate among all asset classes. As populations grow, companies will grow, become more profitable and lead to higher stock prices and an increase in your net worth.

Learn to manage your own money
The majority of folk seek counsel from financial advisers to manage their investment and retirement portfolios. The reality is that most financial advisers are product salespeople with no experience managing or investing their own money effectively, and charge you high fees or earn high hidden commissions for their council. Read buy stocks in your own retirement portfolio.

Understand the value of compound interest
Compounding is the process of exponentially increasing the value of your assets as opposed to linearly. A linear example: you save USD10,000 today, earn 10% interest over that time, and retire after 3 years. After 3 years you will have USD11,000. An exponential example: you save USD10,000 today, earn 10% interest per year over that time and retire in 3 years. After 3 years you will have USD13,310, a USD2,310 difference. A real life example: a 30 year old invests USD20,000 in the stock market for 30 years, earns a 9.2% compound annual return and invests an additional USD1,000 every month. After 30 years he/she will have: USD2,221,523—just about enough to retire for 30 years.

Real estate is not as great as you think
Many savers favor real estate to park the majority of their savings, but don’t take the following factors into account: 1) Complexity – pretty much every neighborhood is a totally different market, and selecting the right asset for long-term growth incredibly complex. 2) Illiquidity – it takes a long time to sell a piece of land to realize a profit. During that time your asset could decline significantly in value. It takes a few seconds to sell a stock. 3) Mortgages – many get sold on the ability to use their homes as collateral to obtain financing. Remember that if you get a mortgage on your home, your home technically belongs to the bank. 4) Asset bubbles – because people love the fact that you can touch, see and feel real estate, people tend to crowd the real estate market, creating asset bubbles, like the one currently underway in China and Australia, and the US in the 2000s. Don’t pour the majority of your net worth into real estate.

Most importantly – maintain zero debt, if you can
Debt destroys wealth and makes bankers wealthy. It creates unsustainable spending patterns and could lead you to pay double for your home or other assets that you lend against. Avoid having an institution own you and save on the interest costs.

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