I came to the US in 2011, when my
company sent me for an onsite assignment. I had the typical mindset of a desi
guy on a work visa. To me, home was (still is) India and my stay in the US is
temporary. As with any temporary events, we don’t do long term planning. I was
happy with the salary I was getting, especially when I mentally multiplied it
with the Indian currency exchange rate. For over two years, I paid the highest
individual income tax rate and had zero protection against inflation for my US
income. It took me a long time to realize the income and savings that I was
missing out due to a lack of financial planning. Unlike in India, here you
don’t have family or elders to guide you on these matters. I have now spent
five years in the US and have gained some knowledge in financial planning that
I would like to pass on to my fellow Indian workers in the US.
Depending on
your length of stay and long term plan, consider the following ways to save or
invest money:
1) 401(K)
– I did not join a 401(k) plan for over 2 years and missed out a lot. This is
the most important and easiest money
that you can make from day 1 in the US. 401(k) is a retirement savings
plan that is offered by almost all companies in the US. This is similar to the
Employee Provident Fund in India. A percentage of your monthly income can be
allocated to your 401(k) account. Most employers make matching contribution to
their employee’s 401(k) up to a certain limit. In my case, my company adds 50%
more to my contribution, when I allocate up to 6% of my income. For example, if
my monthly salary is $5,000, my individual contribution is 6% of $5000, which
is $300. On top of this, my company will add 50% of $300, which is $150. So, my
monthly 401(k) total contribution is $300 + $150 = $450. This money can be
invested in a variety of Equity or Debt based mutual funds. Key benefits of a
401(k):
a.
The employer contribution (in the above example,
it is $150 per month) is “free” additional income which you would otherwise miss
out if you didn’t open a 401(k)
b.
Allocating a certain percentage of your monthly
income to 401(k) before it reaches your hands, results in compulsory savings.
This will really help you in a rainy day (read “old age”).
c.
By allocating your savings to mutual funds, you
give it a chance to grow and counter inflation over the years. Otherwise, money
sitting in the bank earns no interest in the US, in the current environment.
d.
The money you contribute to your 401(k) is tax
free. You are taxed only when the money is withdrawn.
e.
Withdrawal Penalty worries: A lot of Indians
worry about what will happen to their 401(k) money if they need to return to
India. Don’t worry. It is very rare to lose money with a 401(k). An early withdrawal (before you reach the age
of 59.5) attracts a penalty of 10% of the value of your 401(k) in addition to
your normal tax rate. If you are already gaining by an employer match (which is
at 50% in the illustrative example I explained above), you will still come out
with a gain. Also, if you need to return to India, there is no need to
terminate your 401(k) unless you really need the money. You can easily keep the
money invested in the 401k and let it grow over the years in the US. This part
of your life savings can be in dollar denomination and be a great way to
diversify your savings. The US has very little restrictions on fund flows. You
should be able to withdraw and transfer the money to India (or any other
country) at any time you need it.
2) IRA/Roth
IRA – Some employers don’t offer 401(k) plans, especially small consulting
firms. If you are in such a situation, you can open an IRA or a Roth IRA
account. These are individual retirement plans with similar benefits as a
401(k). Several leading financial services companies, including Vanguard,
Fidelity, etc offer this. Just google “IRA” or “Roth IRA” and explore the
various plans offered.
3) Employee
Stock Purchase Plans/Options – A lot of companies offer plans for employees to
purchase their shares at a discount. Please be aware and subscribe to these
plans. Once again, this is easy money that you shouldn’t miss out. However, as
with any equity asset, you should put the effort to understand and monitor the
asset. Know what you’re doing or consult a financial advisor.
4) College
Savings Plan – Folks with a long term plan to settle in the US, should plan to
save for their kids’ college education as early as possible. College Savings or
529 plans are offered by most financial services companies. This is a great way
to save tax while saving up for your kids’ education.
5) Health
Savings Account (HSA) – Most families have to spend out of the pocket for some
medical expenses over the course of a year. By opening a HSA and contributing
money to it at the beginning of the year, you can gain a tax advantage. The money
you contribute to the HSA is non taxable. You are allowed to use the HSA money
only for medical expenses. In case you fail to fully spend the HSA money in a
given year, you can roll over the balance to the next year.
Once you have exhausted the
limits of the above savings options, you should generally be in a healthy
financial position. If you have a surplus after this, you may choose to invest
in a variety of asset classes in the US or in India. I will write more on these
various asset classes in future articles. One piece of advice to young (below
40 yrs) folks is: don’t be over cautious with your savings. If you want your
savings to keep up with inflation, you have to take on some risk. That means
moving away from fixed income to growth assets like equities. If you don’t, you
will be at the mercy of the greatest risk to long term savings –
Inflation.
