Taxes for USA expats can be complex. The USA is one of less than a handful of countries that tax citizens on worldwide earnings no matter where they live.
If you are employed by a foreign company and stationed overseas for the full year (in qualifying countries) you will pay tax on your earnings where they are earned and have the first $100,800 (in 2015) of earnings excluded from USA income tax. However earning above that level will be taxed where you earn them and by the USA. Learn about the Foreign Earned Income Exclusion on the IRS web site.
The IWantOut and USExpatTaxes SubReddit are forums to search for more information and learn from others. Taxes for Expats is one service many USA expats use and have been happy with.
Like banking, taxes (at for USA citizens) are one of the more difficult issues of an overseas (including nomadic) lifestyle.
Many people are already planning on working for a longer time because they don’t have enough money for retirement. Those reading the blog and focused on taking a different approach from the common one (either FI/RE or digital nomad or something else) already understand the traditional mindset of working hard and buying what you want (even if you go into debt) is more and more difficult. Some specifics of this post use terms that make sense in the USA (like IRA) but the ideas are universal.
The economy is no longer as robust after the financial crisis in 2007. While the recession is over, the cost of living has gone up. What’s more, there aren’t as many options to earn a high income unless you work in the technology sector. There is so much competition for even high skill jobs that it’s easy for employers to pay less than they used to in the past.
Those focused on FI/RE do consider retirement (obviously) but digital nomads for all the other ways I think this lifestyle is appealing often don’t consider the long term at all. And this is a serious problem.
For traditional employees and digital nomad and other freelance type employees one of the biggest challenges with planning for retirement is not the economy. While the economy certainly is a significant factor, it’s not the only one. You also have to take a look at your money management skills. There may be many ways that you are paying too much and saving too little. If this is the case, then it’s vital that you learn new ways of making your money go farther.
With that in mind, here are 6 ways to save your dreams of retiring at age 65 or even earlier.
Are You Adding to Your Retirement Savings With Each Paycheck?
Direct some of your paycheck to a 401(k) or IRA and you will soon be above average in preparing for your retirement.
One of my favorite tips to nearly painlessly greatly improve your retirement life is to put some of every raise you get toward retirement savings. For example, if you get a new job (or a raise) that gives you an extra $5,000 a year in income set aside $2,000 into a retirement account (every year). As you get further raises do the same thing.
Where are you spending your money?
You may have more control of your money than you think. Take a look at your recurring expenses. Can you spend less on cable? Cable companies make millions because of the fascination people have for entertainment. Is it possible that you could spend the same amount of time sitting in front of the TV doing something else — like starting a new hobby that will be more personally enriching? What about electricity? Perhaps, you can use a local electrical supplier if you live in an area that has energy deregulation. This site explains how you can buy cheaper electricity in a deregulated market like Texas.
Do you need to upgrade your car, phone, TV, laptop so often?
In the past, buying a car every three years made fiscal sense because you would save on repair costs. However, cars are now made much better and will run well for many years. By buying a car less often and looking after it better, you could save tens of thousands of dollars because every time you drive a new car off the lot, it depreciates in value. Computers used to become painful to use (as the new software took advantage of and thus required the big gains made in hardware to work well – this is much less true today). This money could go toward your retirement.
Do you have money leaks?
It doesn’t take much to spend money on small inconsequential things. An evening with friends, a latte when you’re tired, an extra few boxes of your favorite snacks when grocery shopping… all these things can add up quickly. You can also save thousands every year by skipping the convenience of eating out and learning how to cook nutritious meals at home. While it isn’t necessary to become a tightwad overnight, wincing when things are a few dollars above your comfort level, increasing your awareness of how you’re spending your money will help you realize that many of the things you buy aren’t giving you that much satisfaction in the first place.
Do you use your credit card almost reflexively?
Paying with your credit card is convenient, but you do have to remember that even if you keep up with your monthly balance, you are still paying more for the things you bought because you’re being charged interest, perhaps even high interest. Since it’s so easy to whip out a credit card then to carry cash or try to figure out if you have enough money to use your debit card to make a purchase, it’s only too easy to buy more things than you intended. I pay for nearly everything that I don’t buy online in cash.
Do you postpone money management?
Since you are busy most of the time, it’s easy to shrug off the basics of money management—keeping a budget, living within the budget, and saving a little every month. You use excuses like promising yourself that you’ll start your retirement savings when you earn a little more or pay off your credit cards. Unfortunately, life doesn’t stop long enough to give you enough time to plan everything perfectly. Even if you have started to budget, are you sticking with it? And if you have stashed away some cash, are you now looking for ways to keep that money active?
Changing Habits is Challenging
While these six ideas are easy enough to grasp and won’t require any financial wizardry to put into action, the challenge is breaking bad habits and replacing them with good ones. It’s uncomfortable, of course, but if you do, it will be rewarding in the long run. The earlier you get started, the better your retirement options will be.
I started adopting the mindset that set me on the path for FI/RE (Financial Independence/Retire Early) when I was very young. I collected baseball cards when I was a kid and added comic collections when I was a bit older kid.
Early on I was paying attention to the investment potential. I enjoyed not just the collecting but also the idea of making money by buying something and then selling it later for more money (which is the fundamental idea of investing). It came naturally to me.
I never much liked spending money on something that lost its value. For some things, like ice cream, I could happily spend my money even though I would soon have nothing to show for it. But more often I would rather buy something I could enjoy and also believe I would be able to sell later at a higher price.
When I started actually trying to sell baseball cards for money I learned about he difference between reported “value” and the ability to get cash for what you owned. Not only can’t you sell items to a store at the “value” reported in pricing guides you often couldn’t sell them at all (they didn’t want the items at all).
In high school I started renting space to sell at shows. There you were selling to the public (or other dealers). I learned vivid examples of the challenges of turning assets into cash. And I also learned about the weaknesses in the economic ideals such as the market being efficient. I saw how often the very same product (the same baseball card) for sale in the same hall would have very different prices (over 100% more was not uncommon) and the sales were often not close to the best buys. The friction in this situation was much smaller than the typical purchase (all the items were in the same room, just a little bit of walking created the friction).
1. Don’t mistake your vocation
2. Select the right location
3. Avoid debt
Money is in some respects like fire; it is a very excellent servant but a terrible master. When you have it mastering you; when interest is constantly piling up against you, it will keep you down in the worst kind of slavery. But let money work for you, and you have the most devoted servant in the world. It is no “eye-servant.” There is nothing animate or inanimate that will work so faithfully as money when placed at interest, well secured. It works night and day, and in wet or dry weather.
5. Whatever you do, do it with all your might
6. Depend upon your own personal exertions
7. Use the best tools
8. Don’t get above your business
9. Learn something useful
10. Let hope predominate but be not too visionary
11. Do not scatter your powers
12. Be systematic
13. Read the newspapers
14. Beware of “outside operations”
15. Don’t indorse without security
16. Advertise your business
17. Be polite and kind to your customers
18. Be charitable
19. Don’t blab
20. Preserve your integrity
From the introduction,
Those who really desire to attain an independence, have only to set their minds upon it, and adopt the proper means, as they do in regard to any other object which they wish to accomplish, and the thing is easily done. But however easy it may be found to make money, I have no doubt many of my hearers will agree it is the most difficult thing in the world to keep it. The road to wealth is, as Dr. Franklin truly says, “as plain as the road to the mill.” It consists simply in expending less than we earn; that seems to be a very simple problem.
The thoughts are worth reading today. You can update things a bit, from read the newspapers, to read the websites, but mainly it is sensible advice today.
Health insurance is something that many young healthy people don’t think about. And many digital nomads are young healthy people, though not all of them are. And if you are from most rich countries you may not think about health insurance as your country makes it pretty easy to just be treated if you have health care needs, without a need to have bought health insurance.
But when you are traveling outside your country health insurance is important. I am not very familiar with the details of how health coverage works for all the different countries so you will have to figure it out for your own country. It wouldn’t amaze me if European countries set up some kind of reciprocal care agreements but I have no idea if they do (they should if they don’t).
In the USA we know what a nightmare health insurance is. The ludicrously expensive USA health care plans generally don’t provide any coverage when you are outside the USA (even inside the USA, but not in your own state there are severe limitations). There are many wonderful things about the USA but the health care system is a nightmare and has been for decades.
If you are going to fly off and become a digital nomad one of the critical items to consider (though many don’t give it the attention it needs) is health insurance. It is true that in many countries you can pay out of your own pocket for health care that would bankrupt you if you used the USA health care system and tried to pay out of your own pocket (tens of thousands of people go bankrupt in the USA due to health costs).
If you use good personal financial planning practices you should have at least 6 months of expenses in an emergency fund (and I would strongly suggest at least a year for any digital nomads). That emergency fund should be able to pay for routine medical visits in many countries (Malaysia, Thailand, India, Indonesia, Vietnam, Singapore… – I would imagine this is true in most countries, but certainly not the USA.) without a need for health insurance.
My plans were similar to the now popular (within a small but committed group of people) Financial Independence Retire Early (FIRE) movement. I was more focused on lifestyle and increasing my financial independence (as apposed to striving for complete financial independence in order to retire very early).
My thoughts were more along the line of being able to avoid a full time job and possibly do some consulting, run my own business (with a lifestyle goal rather than a make millions goal) and have investments that supplement that income. I also wanted to be able to have that possible from wherever I chose to live. Often you are quite limited on where you can live (especially cheaply) if you require a high paying job.
I also understood by living more frugally I gave myself lifestyle options. Living frugally allows you to save money. But it also lets you experience what living on less is like and you know if that is what you want. It is for me. I would much rather have freedom from having to earn a bunch of money to allow me to spend lots of money.
Combining FIRE and location independent work provides some valuable benefits. If you have some investments saved up that can be tapped as you travel that can meet some of your living costs, this aids on of the bigger challenges – how to earn money while you travel. And if you travel frugally you can reduce your costs (below what you speed where you used to live).
The digital nomad lifestyle is made possible by the modern world. In some ways it harkens back to nomads but not really very much. Another idea that is gaining favor (not as popular as the digital nomad trend) is multi-generational housing.
Our ancestors all lived in close knit multi-generational communities. Normally with 3 or 4 generations of the same family under the same roof (or within shouting distance in a hut nearby).
I can understand many reasons why many of us moved to our more independent way of living (especially in the USA) as we got rich enough to afford to do so.
There are really interesting (small) efforts to do this in non-related multi-generation households. I think there are very good reasons for it. And for people like me that would rather not live in the same house with these others it can even work in a small group of homes. Often with shared kitchen… Sometimes older people can share some financial burden (young family gets cheaper housing). And younger people can help with yard work, repairs… Cooking can be shared. Childcare from elderly can help free up the kids parents and can give some personal contact to elderly (that can otherwise be socially isolated). Kids can get more contact with people in the small community and may has less time just sitting in front of Netflix (especially small kids).
I learned about the resurgent movement for co-housing while I was living as a nomad. To me it really seems like another form of trying new ways of living that are not the common living arrangement for most people today. It seems to me it has the potential to be as life changing and enriching as many find the nomad lifestyle to be.
Of course there are all the issues you have with people being together. But there are some pretty good things about it too.
Owning rental property can be a wonderful way to help support your nomad, location independent lifestyle. Rental property can provide a source of regular income to supplement your earnings. Of course, getting a rental property into that state is usually something that takes time, or a huge downpayment.
I have found dealing with property management folks to be extremely annoying. First they charge ludicrous amounts (in my opinion), especially for places that have high rents (they normally charge a % of rent + huge amount to rent the place out). These costs greatly reduce the investment appeal of renting out your property. On top of paying them a huge amount they are not very customer focused (to me paying them, or to those seeking to find a place to live).
15 years ago I started renting out my first house and obviously created a web page for it. Nearly none of the expensive professionals did that back then. Only years later they finally were dragged into catching up. And still today, they post not nearly enough useful information.
Still it can be that even with these costs and frustration it makes sense as an investment (especially in the last few years when investment climate is so challenging).
Often the decision to rent out your home (versus selling it when you leave) is impacted by your long range plans. If you want to move back into your house in a year or two or five that limits your options. You may have to accept a bad investment to keep that option open. Especially if you are just going to go give the nomad idea a try for a year, selling may not be wise (unless you don’t want to return to your house even if the nomad idea doesn’t appeal to you once you try it).
Another consideration, even if you don’t care about moving back into the same house, but plan on moving back to the same city, is that if you sell and real estate values climb you could find yourself priced out of the market.
When I started by overseas adventure I lived in Johor Bahru, Malaysia. Among the reasons I chose to move to Malaysia was to save money (from the costs of living in the USA) and to travel in SE Asia.
In some ways it worked well. Living was as cheap as I expected, which actually surprised me. I figured I would find costs were not as low as I was able to estimate from online sources. I didn’t travel as much as I planned though.
The lack of travel could be overcome by just being more diligent about making it a priority. But I tried and it just didn’t happen. Partially I think I subconsciously delayed things due to cost. I starting looking into a nomadic lifestyle and decided to give that a try.
I don’t think I am particularly well suited to a nomadic life. I like the stability of a home. I do like to travel, but I also do find I put it off or just don’t get around to it as much as I would like (while I had a real job it was even worse, which is part of the reason for moving to SE Asia in the first place). But while I am not particularly well suited to the lifestyle I also figured I can possibly try it (while for many it just won’t work at all).
View from the porch of my cabin in Luang Prabang, Laos. I had a 20 Gb data cell plan that was excellent for under $25.
One of the big advantages of a nomadic lifestyle if you want to travel is you eliminate your primary housing expense. So when you are traveling your housing expenses are just the place you are staying while you travel not that plus your main housing.
One of the big attractions to a nomadic life in low cost areas, for those from high cost areas, is the financial savings. People can go very cheap for housing or middle of the road or enjoy luxury housing they couldn’t afford in a high cost area. I go more for the middle of the road choice, which to the budget people seems extravagant luxury and the those getting very nice places for much less than they could at “home” see as unnecessary hardship.
I had a somewhat nice condo in Johor Bahru on the 16th floor with a view of Singapore and a pool and basketball court. I could walk to places downtown or take short taxi rides for a couple US$. That cost about US$850.
I realize that being reluctant to spend money isn’t the normal problem people have. This is especially true where I grew up: the USA. But I do have trouble spending money, my default desire it to save money.
The main reason I have the ability to have a digital nomad, long travel lifestyle now is not some incredible business bringing in lots of cash. It isn’t have made a huge fortune that I can now live on. It is mainly because I don’t need to spend a huge amount now. And I have saved up money by not spending a huge amount before. Investing that money well also helped.
But I do also have trouble due to my desire to not spend money even when I might like the result (when the cost just seems too high for what is offered). I have taken to a “reverse budget” where I have set money that I expect to spend. And I add to that balance each month and if it grows I have an increasing pile of money I am suppose to spend.
So when I think about getting a guide for a trip in China and I am put off by how much it costs, I can look at my balance and say if I have to spend that money there really isn’t anything I want to spend it on more than hiring a guide. So then I can spend money in the way that benefits me and I can escape the trap of saving more than really makes the most sense when you look at the overall picture.
Sunset from boat tour in Kuching, Borneo, Malaysia. I may well not have taken this evening boat tour if I didn’t have money I “had” to spend.
Some people will put some amount into a checking account each month to limit their spending to say $2,000. I do something similar but for the opposite purpose to segregate money to spend. I move the decision from whether I am better off saving or spending that money to this is the money that has already been allocated for spending, so now go spend it on whatever is the best use for it.