What should you do with Excess Cash While Living Overseas
Key points
Establish an appropriate emergency fund to provide liquidity for unexpected expenses, employment changes and other unforeseen circumstances while living overseas.
Consider your currency exposure and plans to return to Australia, particularly if you have accumulated significant savings in a foreign currency that you may ultimately use in Australia.
Give surplus cash a clear purpose, whether that means reducing debt, contributing to superannuation or investing for long-term growth, based on your timeframe and financial objectives.
What should you do with Excess Cash While Living Overseas
Living and working overseas can provide Australian Expats with an opportunity to increase their savings capacity. In some countries, higher salaries, lower taxes, employer benefits or lower living costs can allow you to accumulate significant amounts of cash over time.
However, building up a large cash balance also raises an important question: what should you do with excess cash while living overseas?
Keeping money in a bank account can provide security and flexibility, but holding too much cash for too long can also create other risks. Inflation can gradually reduce its purchasing power, while movements in foreign exchange rates can affect the value of your savings when measured in Australian dollars.
For Australian Expats, the right approach will depend on your circumstances, including where you live, your future plans, your expected return to Australia, your tax residency, your time horizon and what you ultimately want your money to achieve.
Start with an emergency fund
Before deciding what to do with excess cash, it is important to establish an appropriate emergency fund or cash buffer.
An emergency fund is designed to provide readily accessible money for unexpected expenses or changes in circumstances. This could include an unexpected period without employment, medical expenses, relocation costs, emergency travel back to Australia or other unforeseen expenses.
As a general starting point, many people will consider holding around three to six months of living expenses in readily accessible cash.
The appropriate amount can vary significantly between individuals. Someone with a secure employment contract, substantial employer benefits and relatively low fixed expenses may be comfortable with a smaller buffer. Someone with variable income, significant financial commitments or less certainty around their employment may prefer to hold more.
Your emergency fund also needs to reflect the country in which you live. If you are living overseas, accessing additional funds from Australia may not always be immediate or straightforward, particularly during an emergency.
This means your cash buffer should generally be held in a form that is easily accessible and in a currency that is practical for your day-to-day needs.
Once an appropriate emergency fund has been established, the next question becomes what to do with any cash sitting above this amount.
Consider your plans to return to Australia
One of the most important considerations for an Australian Expat is whether you expect to return to Australia.
If you are planning to return home, holding a significant amount of surplus cash in a foreign currency may introduce unnecessary currency risk.
For example, imagine an Australian living overseas who has accumulated a substantial amount of savings in their local currency. If they ultimately intend to use those funds in Australia to purchase a property, repay a mortgage or invest, the value of those savings in Australian dollar terms will be affected by movements in the exchange rate.
Currency movements are difficult to predict. Attempting to identify the "perfect" time to convert money back to Australian dollars can therefore become a difficult exercise.
Instead, it may be appropriate to gradually convert funds into Australian dollars as the need for the foreign currency reduces.
An Expat who is planning to return to Australia may choose to retain enough foreign currency to cover their ongoing living expenses and near-term commitments, while gradually converting surplus funds into Australian dollars.
This can help reduce the amount of wealth exposed to foreign currency movements as the eventual return to Australia gets closer.
The timing and structure of currency conversions will depend on your circumstances, and there may also be tax considerations depending on the country where you are living and your Australian tax residency status.
What should you do with excess cash while living overseas?
Once you have established an appropriate emergency fund and considered your currency requirements, you can start thinking about the longer-term purpose of your surplus cash.
This is where the question of what should you do with excess cash while living overseas becomes more important.
Cash itself is not necessarily a poor financial decision. It provides liquidity, certainty and flexibility. The issue is that money sitting in cash for a long period may not keep pace with inflation.
If the cost of goods and services increases over time while your cash balance remains relatively unchanged, the purchasing power of that money can gradually decline.
For this reason, surplus cash can benefit from having an active purpose.
There are several options that may be worth considering.
1. Paying down debt
If you have existing debt, directing surplus cash towards reducing it may be one option.
For an Australian Expat with an Australian mortgage, this could involve making additional repayments or using an offset account, where available and appropriate.
Reducing debt can provide a more certain financial benefit than leaving excess funds sitting in a low-interest account, particularly where the interest rate on the debt is higher than the return being earned on cash.
However, the decision should also consider liquidity. Using all available cash to repay debt may leave you with limited funds available for emergencies or future opportunities.
This is why establishing an appropriate cash buffer first is important.
2. Contributing to superannuation
For some Australian Expats, surplus cash may also provide an opportunity to contribute to Australian superannuation.
Superannuation is designed as a long-term retirement savings vehicle, and additional contributions can potentially help build retirement wealth over time.
However, superannuation also comes with contribution rules, tax considerations and restrictions around accessing the money. As a result, contributing excess cash to superannuation should be considered as part of a broader strategy rather than simply moving money into super because it is available.
The important question is whether the contribution aligns with your retirement objectives, cash flow requirements and broader financial circumstances.
3. Investing for long-term growth
If your excess cash is not required in the short or medium term, investing may provide an opportunity to grow your wealth over the longer term.
The appropriate investment will depend on your objectives, investment timeframe and tolerance for investment risk.
Depending on the circumstances, this could include assets such as Australian or international shares, property, gold or other growth-oriented assets.
These investments have different characteristics and risks. Shares can experience significant fluctuations in value, property can be relatively illiquid and concentrated, and gold does not produce an income stream in the same way as many other investments.
The key consideration is not simply choosing an asset because it has performed well in the past. It is determining what role the investment is intended to play within your overall wealth strategy.
For example, money that you expect to use to purchase a home in Australia within the next 12 months will generally need to be treated differently from money that you do not expect to need for 15 or 20 years.
Your time horizon matters
A common mistake when deciding what to do with excess cash is to focus solely on the potential return.
Instead, consider when you are likely to need the money.
If you are returning to Australia in six months and expect to use your savings for a property purchase, maintaining liquidity may be more important than pursuing long-term investment growth.
On the other hand, if you are an Australian Expat in your 30s who does not expect to need the money for many years, holding a substantial portion of your wealth in cash may not align with your longer-term objectives.
This is why there is no universal answer to what should you do with excess cash while living overseas.
The appropriate strategy will depend on the purpose of the money.
Give your cash a purpose
For Australian Expats, managing excess cash is about more than deciding where to hold money. It is about understanding what that money is ultimately intended to achieve. A useful framework can be:
First, establish your emergency fund.
Maintain an appropriate cash buffer, typically around three to six months of living expenses, depending on your circumstances and comfort level.
Second, consider your currency exposure.
If you expect to return to Australia, consider how much foreign currency you actually need for your ongoing living expenses and whether surplus funds should gradually be converted into Australian dollars.
Third, give surplus cash an active purpose.
Depending on your circumstances, this could mean reducing debt, contributing to superannuation or investing for long-term growth.
The important point is that cash should form part of an overall financial strategy rather than simply accumulating without a clear purpose.
For Australians living overseas, this can become particularly important as your plans change. The strategy that makes sense while you are establishing yourself overseas may be very different from the strategy that becomes appropriate as you prepare to return to Australia.
Conclusion
Understanding what should you do with excess cash while living overseas requires more than simply comparing interest rates between bank accounts.
Your emergency fund, currency exposure, Australian assets, debt, superannuation, investment timeframe and plans to return to Australia can all influence how surplus cash should be managed.
For some Australian Expats, retaining additional cash may be appropriate. For others, surplus funds may be better directed towards debt reduction, superannuation or long-term investments.
The right strategy will ultimately depend on your individual circumstances and what you want your wealth to achieve.
Runway Wealth Management is the trusted Financial Adviser to the Australian Expat community. Our tailored advice is backed by expertise, education and experience, which allows us to be at the forefront of Australian Expat Financial Planning.
If you would like to speak to one of our Expat Financial Advisers about this blog or if you have other queries, we would be more than happy to speak with you. Feel free to send us an enquiry through the 'Contact Us' tab provided in the link below:
General Advice Disclaimer: The information contained herein is of a general nature only and does not constitute personal advice. You should not act on any recommendation without considering your personal needs, circumstances, and objectives. We recommend you obtain professional financial advice specific to your circumstances.
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