Why Financial Planning?

Planning is bringing the future into the present so that you can do something about it NOW.

I feel that many of us during our initial years in the US have some of these ingrained financial instincts like directing all savings to fixed & recurring deposits, buying a home, using insurance policies as investments, and being risk-averse to market investments.

Based on my experience, I just wanted to share some quantifiable inputs.  I know that Priorities, necessities, and understandings differ, and below is just a personal perspective.

This post is written by Sundeep Adusumilli (he is US NRI) – he writes regularly on his blog Exploring Instincts

Personal Finance in USA

Check – How to fix common financial mistakes of NRIs

Some Mistakes, Which I Made

Transferring Dollars to India to fund fixed deposits for better returns.

Returns offered by banks are proportional to inflation. If the return offered in India is 7%, inflation would be around 5%. Similarly, if the return offered in the US is 3%, inflation would be around 1%. The real return is 2% in either case. The rupee depreciates as inflation rises and offsets the imaginary returns in India. If India makes progress from an emerging economy to a developed economy, inflation will slow and the returns would also be downsized proportionately by banks. If the transferred dollars are to be repatriated (converting rupees back to dollars), remittance costs would further dent the capital.

Review the case used below. Assume the dollar conversion rate is 51. Remitting companies’ outward transaction rates would be around 50. Transferring $1,000 equates to ₹50,000. Banks’ dollar selling rate would be around 52, which would be applied for incoming remittances. Repatriating ₹50,000 (50,000 divided by 52) would amount to $960. With neither inflation nor depreciation in the picture, the loss would be around 4%.

The only situation where the above would not be applicable is when inflation in India is lower than that of the US and the rupee appreciates. This is not impossible but unlikely in the near future.

Read – Why You Should Save early For Retirement?

Buying an apartment.

I bought an apartment (which was under construction) in 2009. Based on relevant foreign exchange rates over the period of 6 years, I transferred around $112,000 (₹65 L). While the basic cost was ₹42 L rest ₹23 L amounted to interest on the availed loan, amenities (car park & clubhouse), taxes (value-added tax & service tax), utilities set up (water & electricity), registration costs, and interiors. Apart from the car park and clubhouse to an extent, none of these would add to the selling price.

As of 2020 March, apartment price appreciated from ₹3,000 to ₹6,000 per sq ft which translates to ₹84 L. The rental income earned till date is around ₹11 L. Assuming a sale materializes and the whole of ₹95 L (including real estate gain and rental income) could be repatriated, the current valuation stands at $122,000. Post taxes, this is just a 1% annualized return with a rental yield (income generated on investment) of 2.5%. When adjusted for inflation, this is zero gain despite the best-case scenario where the apartment sq ft price doubled and there was no gap in rental income.

Marginal investment returns and low rental yields do not make monetary sense to invest in housing as an investment. It is very tedious as well, to move real estate sale proceeds back to the US. To give some perspective, the US Stock market rose by 15% during the same period. Historical US market return is around 8% taking into account all major recessions.

If you could get a commercial space with high rental yield, do the math if the returns would at least beat the inflation and then decide.

Read: Good time to invest in the property in India?

Buying Life Insurance Policies as investments.

Endowment and Unit-linked Insurance plans which are very popular in India are expensive products with stringent liquidity options. Popular LIC Endowment plan returns are comparable to fixed deposits. Unit linked plans (from Bajaj Allianz etc.,) invest in mutual funds and returns realized are much lower when compared to direct Mutual Fund investments. This is due to policy costs associated with life coverage. The assured coverage amount is very nominal relative to policy premiums, which defeats the purpose of life insurance.

endowment policy NRI

Investing in Indian Mutual Funds.

In the US with regards to Indian Mutual Funds, un-realized gains are subject to income tax while un-realized losses are not eligible for a tax deduction. This coupled with rupee inflation could significantly diminish the investment growth.

Check – NRI Mutual Fund Taxation in India

What to do with US savings?

It is only natural due to emotional bonding and current immigration uncertainties to get fixated on the idea of moving back and base every decision on that. If you are planning to invest in the US, below is a rough plan.

Invest 10% in Retirement accounts.

Invest in 401(K) as early as possible. If the employer is not offering 401(K), invest in IRA (via a Robo Advisor like Betterment). Allocate to Roth and Traditional in equal proportion. In Roth, gains are not taxed and contributions are accessible after 5 years. To illustrate, assume you invested $100 in Roth and $100 in Traditional. For Traditional, you pay $30 in taxes upfront while tax is exempted for Traditional. If $100 investment in both accounts grows to $1000 at the time of retirement – $1000 in Roth would be fully tax exempted, while in Traditional your take-home would be $700. (assuming tax rate remains in similar range) .

This $30 vs $300 difference is not a straight conclusion but is contingent on various variables like your tax bracket at the time of retirement (which is likely to be lower) and the opportunity cost of the $30 accessible upfront for Traditional contributions. Roth is no brainer for young and high-income earners. Since nothing is certain with taxes and future income, diversification helps.

Must Check – NRIs investing in India 

Save 5% in online-only Bank.

Online-only banks like Barclays US or Credit Unions provide returns in line with current inflation. This is for capital preservation with zero risks. This could be used as investment capital if needed during market downtimes.

Invest 5% in Brokerage Account.

This is to provide flexibility with respect to investment options and liquidation as retirement accounts 401(K) have limited investment options and are locked in until retirement age. (A Robo Advisor like Betterment which invests in low-cost exchange-traded funds could facilitate this)

Invest 5 % in the 529 Plan, if you have kids.

Certain states like New York provide a 10% exemption on contributions and the gains are always tax-free (similar to Roth) when used for education. The penalty is 10% if not used for education. Tax is exempted from both contributions (not all states) and withdrawals. Over 15 to 20 years, this tax advantage could yield significant gain.

Read – Financial Must-haves for NRIs

Some other ways to save :

  1. Over some time ensure you have 6 to 9 months of your net income saved in a Certificate Deposit.
  2. Life happens – This helps you to ensure against any unexpected expenses and prevent liquidating long-term investments.
  3. Enroll in Employer Benefits.

All of these reduce the taxable income as well.

Health Savings Account: If You are Eligible or if enrolled in a high-deductible health plan then Contributions, Gains, and Withdrawals are tax exempted. Investments roll over automatically each year. This Covers eligible medical expenses. This also Doubles up as an investment to cover medical expenses post-retirement.

Flexible Spending Account: Covers healthcare-related deductibles, copays, medication, and other out-of-pocket costs. There is no eligibility restriction to enroll in a high deductible plan (as in Health Savings Account) but contributions cannot be rolled over into next year beyond $500.

Must Read – How to withdraw 401k from India

Dependent Care Flexible Spending Account: Covers dependent care expenses like Child Day Care costs.

Commuter Benefits: Covers commute costs like parking, train & bus tickets.

Apply for a Term Life insurance and Create an Online Will.

Death and Taxes are inevitable and uncertain. You could at least plan for taxes. Life Coverage could be 10 times the annual net pay. The time period could be a number of remaining working years left. For Will, I liked Willing.com. It takes less than 10 minutes and is under $150.

Do not buy a car which is more than 25% of your annual net income

Do not buy a car on lease.

“You should buy a home” is a piece of naive advice.

The below article advocates neutrally, advising to review the numbers methodically before making a decision. To ensure optimal cash flow for essentials it is recommended to not exceed 33% of take-home pay for monthly payments.

“Currently working as a Software Consultant in New York. Married since 2009 and father since 2017. Loves dogs, cricket and fitness.” Sundeep Adusumilli 

Hope you learned something new from this post. Please share your experiences as an NRI – which can help other readers.

Published on June 27, 2020

Hemant Beniwal

Hemant Beniwal is a CERTIFIED FINANCIAL PLANNER and his Company Ark Primary Advisors Pvt Ltd is registered as an Investment Adviser with SEBI. Hemant is also a member of the Financial Planning Association, U.S.A and registered as a life planner with Kinder Institute of Life Planning, U.S.A. He started his Financial Planning Practice in 2009 & is among the first generation of financial planners in India. He also authored Bestseller book "Financial Life Planning". 

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