The last few years has witnessed the rise of the digital nomad, remote working while exploring diverse cultures and landscapes around the world. However, the nomad life comes with unique financial planning considerations for Americans. In this article, we look at some essential strategies for American digital nomads, addressing key areas to ensure financial stability and security while living a nomadic lifestyle.
Establishing a budget with headroom
Digital nomads can experience income variability if they are working as a freelancer rather than for a single company, and also fluctuating expenses due to the varying costs of living in different destinations. As such, creating a flexible budget is important for American digital nomads, with headroom for unforeseen expenses. Start by looking at your income from the past 1 to 2 years. If your earnings fluctuate, base your budget on the lowest month’s income. By prioritizing flexibility, you can adapt to changing circumstances without jeopardizing your financial stability.
Tax planning and compliance
As a US citizen, you are subject to US tax on your worldwide income, even if you are living, traveling or working broad. You may also become liable to pay foreign taxes if you meet tax residency criteria in another country. This situation requires careful tax planning to ensure compliance and minimize your tax liabilities.
Many American digital nomads can reduce their US tax bill by claiming the Foreign Earned Income Exclusion when they file their US tax return, which allows you to exclude up to $120,000 (for 2023) of your earned income from US tax. Seeking guidance from a US expat tax professional will help you to understand your options and minimize your tax liability. Note also that some foreign investments or owning a foreign registered business can trigger burdensome US reporting requirements, and sometimes also a new US tax liability.
Currency transfers
American digital nomads managing finances across borders require efficient, cost-effective currency transfer solutions. Your options include online money transfer services such as Wise and foreign exchange brokers such as Spartan FX, to facilitate seamless fund transfers between US and foreign bank accounts. It’s sensible to compare exchange rates, fees, and transfer speeds.
Access to US investment accounts
Maintaining access to US brokerage services when residing abroad is vital for managing investment portfolios, and retirement accounts while staying compliant with US tax laws. However, many US brokerage firms won’t keep accounts open for clients who aren’t resident in the US.
Short term digital nomads who maintain a permanent US residence can often maintain their US brokerage accounts, however if you’re planning to be abroad for longer, it makes sense to work with an expat specialist investment adviser or financial planner who will know where and how to invest as a remote worker overseas while optimizing your tax liability.
You can however maintain and keep contributing to US pension plans while living and working overseas.
Building an emergency fund
Many American digital nomads choose to establish an emergency fund as a financial safety net to cover unexpected expenses, medical emergencies, or periods of income volatility. You should ideally aim to establish an easily accessible fund equivalent to at least three to six months’ worth of living expenses.
Insurance coverage
American digital nomads should consider obtaining comprehensive health insurance to protect against unforeseen medical expenses.
Many digital nomads opt for global healthcare policies that cover medical expenses worldwide, regardless of where they live or roam. Despite potentially higher costs, a global policy offers comprehensive protection regardless of the country where treatment is received.
In conclusion, financial planning as an American digital nomad requires a proactive and adaptable approach to address the unique challenges of remote work and international living. Consulting with financial advisors and tax professionals who specialize in expats can provide invaluable guidance and expertize to help you manage your cross-border finances, stay compliant with local and US rules, and grow your wealth as you work remotely from abroad.
If you have any questions about financial planning or investing as an American living in the EU, get in touch.
This article is for informational purposes only; it is not intended to offer advice or guidance on legal, tax, or investment matters. Such advice can be given only with full understanding of a person’s specific situation.