British Expat – Time to start thinking about money

I’ve tended to encounter two types of British expat, those who moved abroad for a job and those who moved abroad to, well… move abroad.

The first set, usually get more money and benefits than they would had they stayed in Britain. The second set often get less than they got when they lived in Britain. However, in both cases, the chances are they have more disposable income than they did at home.

That’s my experience anyway.

You see, it turns out the great thing about the UK being so expensive is that when you move abroad, you often find that everything is cheaper. I know plenty of people that earn what would be considered peanuts in Britain, but still have a great lifestyle abroad. Of course there are always exceptions, but in my experience the average British Expat usually has a more affluent lifestyle than they did before.

So what does the average expat Brit do with all that money? Well, it won’t come as a surprise that they usually spend it. When you have a lot of disposable income it is easy to slip into the trap of thinking you are richer than you actually are. In fact, in my experience a lot of expats are much less careful with their money when living abroad than they would be when living in the UK.

For a lot of people I speak to, living abroad gives them a feeling somewhere between living back in Britain and being on holiday, and you know what people are like when they are on holiday. It’s almost like they leave their worries back in Britain, particularly financial.

The thing is, as a British expat you often need to be even more diligent about your finances than people living in Britain. There are a lot of benefits of living in Britain that you might take for granted until you need them and find you don’t have them. It’s easy to complain about the national health service until you run into health problems abroad and realise not only is the medical care often not up to British standards, but worst still, you actually have to pay for it! The same goes for kids education and of course pensions.

If you are lucky enough to work for a company that provides a good pension then that’s great, but for the rest of us, we really need to start thinking about how we are going to fund retirement.

The State Pension – A great return on investment

I’m always surprised by the number of people I encounter that aren’t contributing to their state pension. It’s not going to provide you with a life of luxury but its practically free money. If you’re not making national insurance contributions it is worth arranging as soon as possible. Usually a British expat will pay Class 2 contributions, although other classes are sometimes required depending on the specific situation.

At the time of writing class 2 contributions are £2.95 per week. You need to provide 30 years of contributions, you can retire when you are 65 if you are a man and 60 if you are a woman and you would get £125.95 per week if you started receiving it today. Of course, these numbers are always increasing so by the time you retire, the age you can receive it will almost certainly be higher, and your contributions will have almost certainly increased. On the bright side the amount you receive should also have increased.

The average life expectancy in Britain for Females is 83 and Males 79, so right now the average male could expect to receive 14 years of state pension, equating to about £91,691.60. Women of course would get more. That’s a pretty good return on your £4,602 investment, and don’t forget that these contributions also entitle you to bereavement benefits, contribution-based employment and support allowance.

Once that’s sorted, then you can start thinking about what to do with the rest of your money and for most it makes sense to start investing. It goes without saying that the earlier you start and the more you save the better, but at the same time it is never too late to start.

Property vs Stocks

A lot of Brits are a lot more comfortable about investing in property than investing in shares and if you have enough money to do it that’s great. These days as a British expat you can easily search for a house online from wherever you are and get a letting agent to look after the property once you’ve bought it. For a lot of people, this is an excellent way to build wealth through the capital gain in property price and the rental yield, but for others its simply out of the question. Maybe they can’t afford it, maybe they can’t get a mortgage as a British expat or maybe they simply don’t feel comfortable placing all their eggs in one basket. If you fall in to this category it probably makes sense to start investing in the stock market.

Don’t be put off if you’ve never done it before and don’t feel like you need to pay somebody to do it for you. Unfortunately, one downside of being a British expat is many of the high street banks in the UK simply won’t deal with you when you live abroad. Most of them stop short of closing your current account, but many of the services they would make available to you in the UK such as an investing account or a mortgage facility simply aren’t available for expats and here lies the first problem.

Some companies out there don’t have their customers’ best interests at heart. They see expats as somebody who has no choice but to pay higher fees for inferior products. Some of the products aimed at expats are terrible. They can tie your money up for long periods of time, offer bad returns and most importantly charge extortionate fees. The importance of this cannot be underestimated since fees are usually key to the performance of your investments.

Here’s a quote from Warren Buffet, considered by many to be the best investor of our time:

“If you invested in a very low-cost index fund — where you don’t put the money in at one time, but average in over 10 years you’ll do better than 90% of people who start investing at the same time.”

His rational is simple. The average market participant will only earn a return equal to the market average minus fees. Therefore, the lower the fees, the higher the return. A few special people out there can achieve a better return, but they are few and far between. We are unlikely to be one of them, and we are just as unlikely to be able to find one. Loads of research out there shows even investment professionals are unlikely to beat the market and those who have had superior returns in the past are less likely to have superior returns in the future, because unfortunately is was more down to luck than anything else.

Keep it cheap!

Often people get mislead into thinking the fees they are paying aren’t expensive at all, but here’s what Charles Schwab, the founder and Chairman of Charles Schwab Corporation (one of the first and biggest discount brokerages) has to say during an interview with Tony Robbins in Money Master the Game, “For every 1% over the lifetime of investing, it’s 20% of your money you’re giving up. Give up 2%, that’s 40%. Give up 3%, that’s 60%.” Working back from that 0.25% = 5% of your money and that sounds more like what we should be aiming for and it really is possible. These days we can buy index funds and exchange traded funds for as little as 0.04%.

There are a host of online brokerages that you can join to gain access to low cost index funds. Gone are days when you needed to spend your weekends reading business reports and the Financial Times trying to find individual company shares to buy. Now you can just invest in a couple of funds with really low fees, add money regularly, sit back, and watch your money grow.

What are you waiting for? Time to get investing!