How to Plan Your Finances as a Digital Nomad

How to Budget as a Digital Nomad

Budgeting is something everyone needs, but it can be even more important for digital nomads, especially if travel costs make up a large part of your expenses or if your income is irregular. There are two key components to your budget: what you earn and what you spend.

Start with your income. If you work as a freelancer or run a business as a digital nomad, your income may not be consistent from month to month. Look at what you’ve earned over the past 12 months and use the lowest monthly income to set your budget.

This can help you plan your expenses so you don’t risk overspending. In the months when your income is higher, you can adjust your spending accordingly and increase your savings.

Next, look at your essential monthly expenses. These include costs for housing, food, travel, insurance, and any expenses you need for work, such as internet access or a cell phone. If you have credit card bills, student loans, or other debts you are repaying, include those as well.

Savings should also be a priority in your budget. If your income fluctuates, an emergency fund can help cover your expenses when needed. It can also help with larger expenses if you become injured or ill while traveling.

Finally, review your non-essential spending. This includes things like clothing, entertainment, and dining out. These expenses should only be added after you have budgeted for your essential expenses, savings, and debt repayment.

Ideally, your budget should cover all these items and leave you with some leftover each month. But if that’s not the case, you will need to review your expenses to see where you can cut back.

Be Sure to Plan for Retirement

It’s important to have an emergency fund if you are a digital nomad, but you also need to think about saving for retirement. If you are self-employed, a freelancer, or a business owner, an employer-sponsored 401(k) plan isn’t an option, so you will need to consider how to save on your own.

A traditional IRA or Roth IRA is an easy way to get onto the retirement savings track while enjoying some tax benefits. A traditional IRA allows for tax-deductible contributions, while a Roth IRA provides the advantage of tax-free withdrawals in retirement.

You may also consider a SEP plan, SIMPLE IRA, or individual 401(k) plan. SEP and SIMPLE IRA plans follow the same tax rules as traditional retirement accounts but offer higher annual contribution limits. The individual 401(k) plan is designed for sole proprietors who don’t have any employees other than a spouse, and among the three, it has the highest annual contribution limit.

Go back to your budget and determine how much you can save for retirement each month, then commit to saving that amount into a designated plan regularly. Automatic contributions are the easiest way to grow your retirement wealth. Remember to review your investment options at least once a year to ensure they still align with your goals and risk tolerance. You should also review the fees you pay for individual investments to ensure you are maximizing the earning potential of your account.

Covering Your Financial Needs Back Home

While some digital nomads spend their time traveling, you might only plan to be away part-time. If you own a home or are renting one, you’ll need to consider how those costs fit into your budget.

For example, if you will be gone for six months of the year, will you rent out your apartment or list your home on Airbnb during your absence? If not, then you need to ensure your budget allows you to pay your mortgage or rent, along with things like utility bills, property taxes, or renter’s insurance, alongside your other expenses while you are away.

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Also, regarding the tax implications of working while traveling. If you spend part of the year outside the United States, you should know that income earned abroad is still subject to taxation.

The foreign earned income exclusion allows eligible taxpayers living and working in foreign countries to exclude a portion of their income, up to certain limits. However, if you are self-employed, this exclusion only reduces your income tax and not your self-employment tax. The upside is that you can deduct housing expenses while living in a foreign country.

Consider Your Banking Needs

If you live in a foreign country for part of the year or travel to different countries regularly, you need to have access to your money. As a digital nomad, the easiest way to pay for things might be to use a credit card that doesn’t charge foreign transaction fees, then pay off the balance in full each month.

But if you think you will need cash or prefer to use a debit card for some purchases, you might want to rethink where your bank account is located. If you currently have accounts at a small community bank, for example, you might want to consider opening a checking and savings account at a bank that has a global network of branches and ATMs.

Another thing to consider is currency conversion fees. If you are converting U.S. dollars to the local currency at the bank, remember to factor in what you will pay for the conversion and the exchange rate for your money.

Source: https://www.thebalancemoney.com/how-to-plan-your-finances-as-a-digital-nomad-4172654