Ep 03: 10 Wealth-Building Mistakes That Can Derail Your American Dream
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In this episode of the International Money Café Podcast your cohosts Jane Mepham CFP® and Manasa Nadig, EA walk through the top 10 wealth-building mistakes they see when people are new in the U.S..
When new to the U.S. (Citizen, Green Card Holder, or foreign national on a nonimmigrant visa), there are certain steps you want to take to set yourself up for financial success.
They talk about the importance of getting started, spending plans (budgets), and saving for the future. By the end of this episode, not only will you have a list of the mistakes, but you’ll also understand what they are, as well as how to solve them.
The views and opinions are those of the speakers, and should not be considered financial, tax, or legal advice. Consult your advisor for any legal, cross-border tax, and financial advice.
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Speaker 1 (00:06):
Welcome to the International Money Cafe podcast, the show where we filter out the noise on cross-border taxes, finances, and life in the us. I'm your host, Jen Metham, CFP.
Speaker 2 (00:18):
I'm your host, ADE. Yay. Join us on this journey as we explore these unique challenges facing us, inbound outbound families and businesses onto the
10 Wealth Building Mistakes to Avoid as a New Immigrant
Speaker 1 (00:29):
Show. In today's episode, we are going to be talking about achieving your American dream, and we'll go about doing this by discussing the top 10 wealth building or financial mistakes to avoid as a new immigrant or as a foreign national coming to the us. Mana and I have seen a lot, but based on our experiences, we are only going to address the most common ones we've seen. So really the top 10 manasa, would you like to take a shot at the first one that you see?
Mistake 1: Not Starting a Financial Plan
Speaker 2 (01:02):
Thank you, Jane. Yes, I will. The first mistake is what we see a lot is that people do not start. They don't start with their financial planning, their tax planning, and this is something that really comes in the way of building that foundation. There's a Chinese proverb that says, the best time to plant a tree was 20 years ago. The next best is today. If you want to succeed, you have to start now. This would be something like getting your financial life in order, starting to invest, starting that new business, starting that new course, contacting a professional to get these ducks in a row, start on your tax planning, stop procrastinating and start as human beings, we can justify just about anything, including things that sabotage asks us. I would say that's the top mistake. Decide, and if you think that this is not for you, move on. But this is important as a newcomer to the United States, you need to learn more about what financial planning and tax planning entails and start that journey. What do you think, Jane?
Mistake 2: Not Having a Budget
Speaker 1 (02:26):
I love that. I'm going to jump right into number two. The number two mistake that I see is not having a budget, which I like to call a spending plan. One of my clients once said to me, the thought of creating a budget makes me want to throw up. And after a lot of conversations, we figured out what she actually was afraid of is what the budget would reveal. I understand it can be scary, but it can be any worse than getting onto a plane and moving to a new country. New country. A budget is one of the best ways to figure out your exact situation, giving you an idea of where to start from. And once you have a budget, you are able to plan for an emergency fund, which are really funds that can be used to support you and your family, help you find another job depending on what's happening or buy a ticket back home if you lose your job or a visa and you have to go home. Hopefully it doesn't come to this, but it's good to know you are protected in that way. And one of the things I talk about is a good amount to aim for is three to six months. Sometimes I go all the way up to 12 months depending on your situation, but always include the cost of a plane, take it back to your home country for family for some of those emergencies that come up where you just have to get up and go. I'll let you go to number three, Melissa.
Mistake 3: Not Taking Advantage of Tax Savings
Speaker 2 (03:53):
Yes. The third most important wealth building mistake that foreign born nationals who come to the US make is not taking advantage of tax savings and tax saving vehicles. The most important one that I see is the retirement account. The federal income tax can be as high as 37% if you are in the highest income tax bracket and if you live in a state which also has income taxes, that can take a good chunk out of your hard earned money. Now, luckily we have vehicles which provides ways of mitigating some of this and it allows you to postpone or differ some of the taxes to a later time when you are likely to be in a lower tax bracket. Some of these vehicles, which we talk about a lot to our clients are workplace retirement accounts, and if your employer offers these and if you are eligible to take part in them, then you definitely must take advantage of a 401k of 401k Roth or other workplace retirement accounts.
HSA and 401k for Foreign Born Nationals in the US
Speaker 2 (05:13):
And also don't forget the HSA, which is a health savings accounts or other flexible spending accounts. The most important one that I would really like to talk about and expand on right now is the 401k plan, the 401k plan. You may already be aware of the traditional 401k plan. What it does is it reduces the amount of your income that is subject to tax and the money goes in pre-tax and it grows tax deferred until you have to take it out at retirement. If your employer matches what you put into this 401k, then that is literally free money and if you do not contribute to that account, you are losing on that employer match as well. The 401k Roth is a little different. The money goes in after taxes, but it does grow tax free and down the road when you take that money out, it comes out tax free to a certain extent. So this is great for those people who are employed who have an employer 401k or a Roth 401k, and there are other vehicles outside of work which you could also look into, which is the individual retirement account 5 29 plan, which is an education savings plan, et cetera. Of course, there are nuances, there are always nuances based on which country you come from and if you're planning to go back to that country in the near future or far future, and that is something that you can plan for, again, planning is important. The next one, Jane,
Mistake 4: Not Protecting Your Family
Speaker 1 (06:59):
So number four mistake that I see is not protecting your family, and it's a tough one because this really deals with debt. It's an emotional subject to contemplating one that I know a lot of people don't want to think about, but if you have children, you can't afford to ignore it. And the way I always think about it is you want them to have it better than you did if you're not around to take care of them financially. So I want people to think about life insurance as a way to replace yourself if something happened to you. Again, you made this long trip, you are here now. Let's make sure your family is protected in case something happened to you. And another thing I do want to throw out is as part of cultural practices, there are some immigrant communities that we've seen that again, God forbid, you end up passing away, they'll choose to take you home and actually bury you in your home country.
Speaker 1 (08:04):
This of course entails shipping the body, which can be very, very expensive. And when you're in that situation, the last thing you want is to have to deal with a financial emergency. There are some insurance options that I've seen around, but life insurance is probably one way to cover the cost really without stressing the family left behind. And as a general guidance, I'll say keep it simple and just get 10 times of your income of time life insurance and it really will make a huge difference. You don't have to think about all the other options, just go for time, life and your life will be better for it, at least those left behind. So manasa, you want to do number five?
Mistake 5: Disability Insurance
Speaker 2 (08:47):
Yes, I would say mistake number five is kind of going off where Jean left off on number four, which is disability insurance. Disability insurance, or rather the lack of that could almost be looked upon as a failure to protect your income. And there are some sobering facts on this issue. If they say that one in four 20 year olds will become disabled before the age of 67 and more than 5.6% will experience a short-term disability. So what is disability insurance? Disability insurance, both short-term or long-term, will protect you if you are unemployed due to sickness, injury or severe disability. Most companies do offer this as a group benefit, so that would be a great place for you to start. How about the next one, Jane?
Mistake 6: Protecting Your Property
Speaker 1 (09:47):
Okay, I think we are on a theme here, so I'll just continue with the whole protection idea. This is now protecting your property. There are other types of insurance if you own any kind of property or vehicle when you acquired that asset, for example, your house, you really had to work hard and yet one single mistake can wipe out everything and ruin your life. So we want to make sure you have protection for all your assets. Again, this is homeowner's insurance, renter's insurance, if you are renting or insurance, if you drive your own car. And we want to make sure we get an umbrella policy. It's one that I don't hear talked a lot about, but this will protect you if let's say somebody comes after you, they fell outside your house or something and you've already exhausted your homeowner's insurance. So as the word says umbrella, it covers everything and will shield you from a lot of overall damage. So let's protect our property. You want to jump to number seven?
Mistake 7: Not Complying with Existing Tax Laws
Speaker 2 (10:57):
Yes. Mistake number seven is my favorite. And you see why the mistake number seven we see is that people don't comply with existing tax laws. So anybody lucky enough to actively straddle two lands, us plus another country might, well you can say put it this way, will also have the added burden of having to deal with tax laws that come from having assets in another country. We see this quite a bit. There are US citizens who come to the United States have either worked in the country where they're from for a long time and they have built up considerable financial assets in that country. But when you come to the US and you become a tax resident, you have to declare your worldwide and your worldwide assets. Of course, if you are a US tax citizen, I'm sorry, you are a US citizen or you are a green card holder or a permanent resident, you are taxed or you have to declare your worldwide income no matter where you live.
Speaker 2 (12:10):
And this means that any assets outside the US that generate any or some kind of income, you need to include that as part of your US income as well. And if you are a tax resident, like I just said, you have to declare your foreign assets and there are many other ways of mitigating the double taxation if you were subject to that. But the most important thing is to make sure that you have complied with the existing tax law in the US where you are declaring all of your foreign assets and any income from these foreign assets and all of the income that you have in the US as well. Back to you Jane.
Speaker 1 (12:55):
Ashley, before I get to mistake number eight, because the tax staff we talk a lot about, can you think of a situation where you've seen somebody go wrong or any stories that you've seen?
Missed Reporting
Speaker 2 (13:09):
Yes, yes. We are always working with people who have missed reporting. These foreign financial assets that I just talked to you about, there are amnesty programs offered by the government for you to bring all of these assets into compliance and these amnesty programs like the streamlined disclosure, et cetera, there might be some penalty that you have to pay for not disclosing all of those. But the penalty in itself is not as much as it would be if the IRS found these accounts before you declared them and slapped fines and penalties on that. Definitely we are always working with people who have for some reason or the other not file their or declare their foreign financial assets. And thank you for pointing that out. That was an important one.
Mistake 8: Not Taking Care of Legal Affairs
Speaker 1 (14:07):
Thank you. So let me jump to number eight. This mistake is not taking care of your legal affairs. We are basically talking about estate planning. And you probably recently had of a lot of cases celebrities where they didn't have their affairs in order, they didn't have wills and now the family is fighting and it's all in the court. And it's really the one thing you don't want to do or you don't want to subject your family to if God forbid you pass away. It really means having a plan for what will happen to your assets again when you die or become incapacitated. We're basically talking about a will. The one thing I like to point out is you don't have to be a millionaire to have a will think of an estate plan or a will as a way to say if I'm incapacitated, if I can't sign documents for myself, who can do this for me and who can help me make medical decisions as well.
Speaker 1 (15:09):
So think of it that way. If you're already thinking I don't really own a lot of money. Another thing to be cognizant about as you're thinking about this is making sure you have named and I say named beneficiaries in place for your accounts and other assets. This way, again, when you pass away, we know who this is going to go to. And by the way, this can be extended to foreign beneficiaries, but this is where we say please work with a qualified attorney to get the correct language in place. And if you have young kids, it's even more critical to have these clearly laid out. International guardianships are a possibility and it's something that I see come up over and over again, especially for those who were newly arrived in the us. They don't have family around. They have kids that want to protect them, they want to make sure they have guardians in place and the only family that they have is still back home whatever back home is.
Speaker 1 (16:11):
So yeah, you can name these folks as guardians, but again, this is a case where I say, please make sure you work with a qualified attorney to make sure the language is correct and that the courts will accept this again if something happens to you. And then when it comes to wills, you need to understand that in the US wills jurisdiction, it's state by state specific. So if I wrote a will in Texas, it's probably not valid in Nevada, for example, you want to make sure again, anytime you move, you are working with a qualified person to help you do this. And if you have overseas assets, consider international wills or wills drawn up in that country because again, the wills jurisdiction is based on where you are. So think of this as putting yourself in control of your life's affairs when you are gone. And if you're still not sure about it, think of it as an act of love for your family wherever they are. Back to you, Monica.
Mistake 9: Not Using Professional Services
Speaker 2 (17:14):
Yes, thank you Jane. The next big mistake that I see that happens quite often is people do not use professional services. And these three areas that affect foreign born nationals are new to the US Most are finances, taxes, and immigration. So foreign born nationals. When we come here and we can say we have been guilty of the same thing, we do rely on our fellow countrymen for all kinds of advice. We are asking them about where to live if we have come here with kids, where should they go to school, which is a better place, how to buy a car and so on and so forth, which is great. I mean that kind of advice to get it from people who have already been here and lived here for a while is awesome. But when it comes to your finances, your taxes and immigration issues, please, please work with a professional.
Speaker 2 (18:15):
And earlier was talking about taxes and one of the things that happens with foreign financial assets is that the threshold for reporting that is quite low, if you really think about it, it's $10,000, $10,000 in a foreign financial asset can add up quite fast depending on which country you're from and what the exchange rate is with the dollar. This is what happens usually is over these years I have seen a lot of creativity in these areas as to why people think that they did not disclose their foreign assets. In fact, so much so that there was a court case and if you deal listener are interested, you can go look it up. It was the Horowitz versus United States where the taxpayers were fined for not disclosing their foreign financial assets and their excuse was that they were told that nobody was doing it. It's as simple as that.
Speaker 2 (19:19):
Please, when it comes to these three areas, do not go by what your friends are telling you. Go to a professional who is an expert in that area and work with them, especially on matters that straddle two countries. I will go out to say so much as if you are seeking a doctor when you are sick, you should take the same care in these other areas of your life. And there's a lot of confusion out there on who to work with and so on, but it's worth searching for and working with the right professional to avoid making mistakes which can turn out to be extremely expensive in the future and difficult to undo as well. Back to you, Jane,
Mistake 10: Not Taking Advantage of What the U.S. Has to Offer
Speaker 1 (20:06):
I'm listening to what you're saying and thinking about that specific case, you really don't want to get into that situation. Okay, so I'm going to do the final one. Mistake number 10. Mistake number 10 is really not taking advantage of what the US has to offer. There's a reason America is referred to as the land of opportunity. And what I say to everybody, and I think you're all aware of this, it's probably one of the few countries today where an individual can change their family's trajectory in one generation. I mean, you literally can start from scratch, from zero and end up making it big. And we have lots of examples of people who've done this as it is, research shows that 25% of all entrepreneurs in the US are immigrants. And in fact, one of the number that I recently saw said a quarter of all billion dollar private companies in the US was started by people that came to the US on F1 visas, which means these people came as foreign nationals, they started from scratch and now look where they are.
Speaker 1 (21:22):
What I realized is immigrants and foreign nationals tend to see opportunities where others see barriers based on life experiences. So what we are saying is take advantage of the fact that you have these life experiences and even though you may be starting from scratch, don't let your situations stop you from making it big, from going after all the opportunities available to build wealth if need be considered starting a side hustle or consider looking at different ways of creating wealth. Keep working hard and you are most likely going to be successful. It may not work the first time, but that's okay. Just keep going. What I like to say is it takes a special strength to move from your community to a new land. So let's make the most of this opportunity back to you, man.
Speaker 2 (22:15):
That was great, Jane. Yes, very moving. I would like to say, I hope this list gives you my dear listeners some ideas for getting started on your journey or a checklist even if there are areas you need to work on. We, Jane and I have walked the same journey and we know it can be scary and confusing and all sorts of self-doubts not knowing where to go next. I would even suggest bookmarking this episode as a way to keep track of your progress and let us know how you're doing. We would love to hear back from you. And on that note, thank you so much for tuning into this episode of the International Money Cafe podcast. Give us a like, subscribe, and share our podcast with friends and family who may benefit from this information. Until next time, bye
Speaker 3 (23:09):
Bye. Thank you for listening to the International Money Cafe podcast. The content is for informational and educational purposes only and should not be used as a substitute for professional advice. Seek the advice of your qualified service provider with any questions you may have regarding your cross border finances and tax needs.