Comparing the costs of living abroad (hint: it’s about more than just taxes)

One of the most difficult things about trying to understand expat finances as an American is the vast differences between how we pay for things in the U.S. and how the rest of the world works. As a general rule, the U.S. is a country of fragmented costs. You pay your federal and town or county taxes, which is pretty normal. But you also have a state, which functions much like a second country and has its own taxes and requirements. Sales taxes are often separate from the cost of goods. And either you or your employer — or more likely both — cover health care premiums and maybe dental insurance. You then pay for the things that are not covered by your health insurance. There are co-pays, deductibles and just plain “it’s on you” costs if your insurance isn’t up to the job.

You pay for primary school supplies, secondary school field trips, colleges, graduate schools and professional training. You pay for help with your income tax filing, interest on your student loans, and that weird bank charge you could never figure out but that they won’t fix. The list goes on.

Most countries don’t do all of this, probably because most people would never put up with it. But U.S. residents get used it and can often forget how much it adds up. This makes it tempting to focus on taxes. And not all taxes — income taxes. It’s the aspect of public life that gets the most attention in U.S. politics, and it makes for a relatively easy place to start a comparison. If I am paying 20% in taxes in the U.S., how much will I pay there?

When we are counseling someone on the financial repercussions of a move abroad, we find they are often surprised to find out how inadequate this question is in the final analysis. As necessary as it is to look at income tax costs, there are often (if not usually!) other costs far more important to your long-term financial well-being.

So how do you really examine the finances of your proposed life abroad?

Begin by clearly identifying your expenses and income in the U.S. Take the time to itemize the general expenses you have now and any that will significantly change. That means looking at what you spend on weekly groceries, how much is taken out of your paycheck or your social security for healthcare, what your transportation costs are and what sort of money is going toward rent, mortgage, property insurance and taxes. Add in “soft” costs, the expenses that aren’t absolutely necessary but which make you happy. That could be hiking excursions, dance lessons, regular trips to the movies or dining out — whatever you do when you aren’t worrying about tax returns.

There are plenty of free websites and forms online to help you understand your monthly budge and to remind you of some of those less obvious expenses.

 Now try to create a side-by-side comparison of these costs with your new life abroad. Using these expenses as a guide, do the research for costs in your proposed country. If dining out is big for you, check on those prices in the new country. If your regular medication would be free in the new country, put a zero in that column. If on the other hand, you need to up the budget to enjoy ski trips from Portugal, add that in, too.

 Check your results. Only at this point do we adjust for taxes. Because it is only at this point that an advisor can calculate how much your taxes in the U.S. and in your new country are likely to be. You might be surprised at the results! A high-tax country might be a great deal for someone with the right income and costs, especially if housing and food is cheaper. Likewise, a relatively low-tax country could be a terrible deal if you have to pay a lot more for the things that sustain you. 

And one last crucial point

In all of the spreadsheets and budgets, don’t forget what is important. Prioritize a place and culture that will make you happy. Don’t cheap out on your own life if you don’t have to.