Digital nomads must take control of their finances. They have desire to have location independence and financial freedom, so a substantial part of that is underpinned by financial planning. In this blog, I'll explore the key financial planning considerations we have at DW for digital nomads, including budgeting, saving, and investing, as well as tips for minimizing your tax liability and protecting your assets.
In order to succeed financially as a digital nomad, you must set up a budget, which outlines your income, expenses, and savings goals. It's essential to have a clear understanding of your financial situation, including your fixed and variable expenses, so you can make informed decisions about where to allocate your money.
Consider using an app or spreadsheet to keep track of your expenses and track your progress when budgeting.
SET UP AN EMERGENCY FUND
Setting up an emergency fund allows you to prevent unexpected expenses, such as medical bills. Your emergency fund can be built by setting a savings goal and making regular contributions, either through a high-yield savings account or a short-term investment strategy.
Being so far away from home, with little to no immediately available physical family support, can prove to be troublesome when facing situtations of emergency.
INVESTMENTS
A long-term investment plan is also essential for digital nomads who wish to grow their wealth and become financially independent. By working with a financial advisor, you can develop a diversified investment portfolio that aligns with your risk tolerance and financial goals.
Consider opening an individual retirement account (IRA) or participating in any employer-sponsored retirement plans. If your employer has a provident fund set up that is permitted to contribute amounts into personal IRAs or pension accounts, this would be most ideal.
Nonetheless, a transferable pension contribution with its associated high costs will still suffice.
TAX PLANNING
Having a good understanding of the tax laws of the country you are working in is very important when you are a digital nomad. It is best to consult a tax professional or accountant to assist you in navigating these laws.
For example in Germany, I work as a "Freiberufler" Corporate English Trainer, within the 0% Kleinunternehmer Income Tax Bracket. This means for as long as I don't earn more than €9,408 per annum, I don't pay any German taxes.
Germany, like many attractive EU Digital Nomad destinations such as France, Italy, Portugal and even Estonia, employ a progressive tax rate system, which seems to always catch many uninformed Nomads by surprise.
GERMAN 2020 Income Tax Rates
TAXABLE INCOME BAND EUR | NATIONAL INCOME TAX RATES FOR INDIVIDUALS |
0 to 9,408 | 0% |
9,409 to 57,050 | 14 - 42% |
57,051 to 270,500 | 42% |
270,501 + | 45% |
INCOME & ASSET PROTECTION
It is important to protect your assets while you are traveling. This includes purchasing insurance to protect against the loss or theft of your personal property and liability coverage.
Additionally, consider setting up a trust or LLC to shield your assets from creditors and lawsuits, if your income averages higher than €20,000.00. You don't necessarily have to bear the additional expense employ anyone, as separating your personal identity from that of your professional activities via a trust, LLC, or (Pty) Ltd, has the benefit of limited liability.
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