Updated: Sep 6
"Don't let your mouth write no check that your tail can't cash." - Bo Diddley, blues legend
The importance of financial planning for expats whose finances are complicated by debt can’t be overstated. Types of debt many expats often incur include student loans, credit card debt, and bank loans. Managing and paying off debt is essential though, as not doing so can jeopardize your ability to achieve your long-term financial ambitions. In this article, we’ll outline some strategies to help you manage your debts.
Specifically, in this article, you’ll learn about:
• Strategies for repaying student loans
• Budgeting and planning your outgoings
• Prioritizing repayments and restructuring debts
• Whether to pay down debt or invest
Strategies for repaying student loans
Most people borrow money to pay for college. When it comes to repaying your student loans, the first step is to collate all the information about your loans, including how much you owe to which lenders, along with the repayment terms.
Then, find out about the different repayment options. There are numerous student loan repayment options available, and you should explore which best suits you with your financial advisor.
You should also consider consolidating or refinancing your loans, as this could mean paying a lower interest rate and repaying the principal sooner.
If there’s a grace period before you have to start making repayments anyway, you could consider making advance payments on your loans during the grace period, as repaying some of the principal early means less interest will accrue, reducing the amount you’ll have to repay overall.
It will, of course, help to make overpayments if you can. These could be regular small overpayments or substantial payments when you receive a tax refund or if you inherit money, for example, which will pay down the principal more rapidly and shorten the loan’s overall duration if you can.
Late payments can impact your credit score, so avoid paying late fees and credit score issues by setting up your loan payments to be automatically withdrawn from your account each month.
Finally, there may be a forgiveness program available. Expats can, in theory, access Biden’s Student Loan Forgiveness Plan if or when it’s eventually approved. As another example, the Public Service Loan Forgiveness (PSLF) program is intended to provide student debt relief to those working in the public sector.
Budgeting and planning your outgoings
The last thing you want is for debts to overwhelm you.
An experienced expat financial advisor will help you map out your financial flow and identify potential issues.
To give your advisor the whole picture, you’ll need to provide all pertinent documents relating to your financial circumstances, such as:
• Recent tax returns
• Bank statements
• Credit card bills
• Loan installment statements
• Pay stubs
• Loan contracts
• Anything else that can affect your financial condition
The aim is to allow your advisor to help you budget your outgoings effectively as part of a longer-term plan to manage and repay your debts.
This usually entails cutting back on any unnecessary spending so that extra money can be found to pay off your debts.
Prioritizing repayments and restructuring debts
It makes sense to prioritize repaying debts with the highest interest rates, which are most often credit card debts, and most advisors will create a repayment plan based on this strategy. This way, interest added to debts is reduced quickest, although you mustn’t miss minimum repayments on other loans to achieve this.
Debt restructuring meanwhile is a strategy used by individuals (and also businesses) to avoid defaulting on debts, as defaulting has a negative impact on your credit score and your ability to borrow in the future. Debt restructuring is often used when a debtor is in financial trouble, perhaps because unrelated circumstances have made it difficult to fulfill their repayment commitments in their current form or terms.
It entails looking for a lower market interest rate and extending the time in which the loan amount is to be repaid. As an example, if you have equity in your home, it might make sense to take out a second mortgage at a lower interest rate than your other debts to enable you to pay them off.
It may be wise to take out life insurance, too, to cover your heirs from having to take on your debts in case you die before you’ve repaid them.
Whether to pay down debt or invest
If you find yourself with extra cash, you should consider the opportunity cost of either paying off debts or investing.
There can be good reasons for doing both, but if you are faced with the choice, there is a simple formula you should aim to follow.
The formula is to invest if doing so will allow you to earn a higher return than the interest rate your loans are currently accruing.
However, unfortunately, while the formula is simple, working out whether it will apply often isn’t simple, as investments often perform better or worse than expected.
The first consideration is always that if you have high-interest debts such as credit card debts, you should repay these before investing, as it’s unlikely that any investment will yield a greater return than the costs you incur each month with these debts.
Another reason it’s worth ensuring that your debts are well managed before using excess income to invest is to maintain your credit score, which is crucial if you want to borrow money in the future for something like a mortgage. Otherwise, you’ll have to pay higher interest rates. Your credit score can also have an impact on other facets of your life, such as insurance costs, whether a landlord will let you rent an apartment, and even whether or not an employer will hire you.
For this reason alone, paying off your debt before investing can be the right decision.
Conversely, if your debts are well-managed or consolidated with a low-interest rate, it can make more sense to start investing your excess income with the aim of realizing a greater gain on your investments than the interest rates you are paying on your debts. In this way, if in the future you sell your investments to pay down your debts, you’d realize a net gain rather than a loss.
Ultimately, it will depend on your circumstances, and your financial advisor will guide you through whether to repay debt or invest as part of your wider financial planning.
While debts can sometimes seem overwhelming, with good advice, a good plan, and some discipline sticking to the plan, they can more often than not be managed in a way that doesn't inhibit your long-term financial goals.
If you have any questions, don't hesitate to contact us.
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