Extra Cash Savings
What Expats Should Do With Extra Cash Savings
It is not uncommon, especially for higher income earners, to accumulate more cash than expected after paying all expenses and covering all “normal” savings goals, like retirement, vacations, and college. What should you do with extra money saved? If you are an expat, an American living abroad or foreign citizen living in the US, you may have more to think about when deciding what to do with accumulated cash. The first question you should consider is your timeframe for using the extra savings.
1. When will the cash be spent?
To decide what type of vehicle to park your extra savings in, you should first decide when you may need to access the money. If you believe it is likely you will use it within the next few years, keeping the savings in a liquid account may be wise. Liquid accounts include high-yield savings accounts, money market mutual funds, checking accounts, and sometimes certificates of deposit (CDs) and bonds if you are able to lock your money up for a period of time. For those looking for the most yield and easiest access, you may want to consider high-yield savings accounts or money market mutual funds.
If you believe you won’t need the money for several years, investing the money in a diversified investment portfolio may be the best option. Investing as an American living abroad can be complicated and difficult to understand. Many of the brokerages from the US that you are familiar with may not serve you if you are a resident of a foreign country, and investing abroad can create different tax liabilities depending on where you invest. For many Americans living abroad, a US-based brokerage firm that serves expats, and gives you access to US-based investment products, could be a great option. If you have questions about options available to you, reach out and schedule a time to chat.
Investing as a foreigner in the US may be a little more straightforward if your home country does not tax you like the US does. The US taxes income based on citizenship, regardless of where you live and work. There are tax treaties and agreements to mitigate and potentially eliminate double taxation, but it makes some things like investing more complex with taxation pitfalls. If you are a foreigner living in the US, you likely have access to the full range of investment options offered in the US. IRAs and employer-sponsored retirement plans like 401(k)s are great tax-advantaged ways to save for the future, but restrict access to your funds. Taxable brokerage accounts have no contribution limits and allow you to access your funds at any time, but don’t have any special tax advantages (other than qualified gains being taxed at the long-term capital gains rate).
2. What currency should you keep your money in?
If you are keeping extra savings in a cash-equivalent account, like a high-yield savings account or money market mutual fund, you may be wondering if it is best to store your cash in US-based accounts or accounts in your home country or country of residence. Interest rates vary across different countries, so investing your money in accounts in a country that generally has higher interest rates may allow you to earn more on your savings. However, denominating your savings in a currency other than what you plan to spend it in opens you up to currency risk. If you are an American living in Europe, and all of your daily spending is in euros and you choose to store cash in the US (in dollars), your savings could effectively go down in value if the dollar weakens compared to the euro.
Many countries have raised rates over the last several years and are now close to or on-par with the United States, and some countries have higher rates than the US (but it is worth noting that extremely high interest rates often correspond with an unstable currency). If you plan to spend your extra cash savings within the next few years, it may be worth keeping it in your local currency to avoid exchange risk, even if you could expect a slightly higher yield outside of your country of residence. If you are planning on traveling between countries or moving to a different country, though, it may not be a bad idea to store some cash in the country you plan on moving to.
3. Do different accounts have different tax implications?
When deciding where to park your extra savings, you should always consider the tax implications of the account you are investing in. Since US citizens can be taxed no matter where they live, it may make sense to avoid foreign investment products and stick with US-based brokerages and investments. Citizens of other countries may not have to worry as much about their home country taxing income in another country as the US is one of only a handful of countries that tax income based on citizenship regardless of where you live and work.
Americans that earn interest on cash savings abroad may owe taxes on those earnings to the United States, but it is worth noting they are generally not subject to passive foreign investment company (PFIC) reporting. Protections on money held at a bank vary from country-to-country, so make sure you research the protections afforded to you in the country in which your cash savings resides.
Deciding what to do with excess cash savings sounds like a great problem to have, but it can be a headache for expats that aren’t sure where to invest their savings or how it will be taxed by their home country or their country of residence. At Aberdour Investments, we help expats make smart financial decisions like this regularly and are happy to talk more about how you may benefit from working with us.