Author Topic: Case Study: US Expat in China: Pay Low-Interest Loan or Invest?  (Read 4017 times)

lovesasa

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Take-Home Pay: ~US$26,697.544 per year after taxes

February and July: ~US$1,841.27/month*
Other Months: ~US$2,301.59 per month (14500RMB at 6.3RMB/US$)

Take-home pay is earned income after Chinese income tax, US tax exempt under FEIE (Foreign Earned Income Exemption). US Citizen working in China for a Chinese company. Employer provides Chinese health insurance and a housing stipend included here in 'earned income' for ease of calculations.

*Months of February and July are not working months, so I earn partial salary during these month.  This February I used this salary (minus fixed expenses of US bills and rent) as my travel budget. These holidays are the only chances I have to travel outside of the city I live in and travel is a huge reason I work where I do and at the job I do. Currently, I'd rather scrimp during the rest of the year and be able to take advantage of this time to travel more than I would be able to at another job or in another location. I plan on doing more or less the same in July, although with hopefully much lower expenses (I will be staying in China/Mongolia, travelling in less touristy areas, and staying in lower-end accomodations).

Total Current Expenses: $1220.77/month ($930.77 after I cancel insurance)

Total US Expenses: $505.77/month ($215.77/month after I cancel insurance)
Health Insurance: $190/monthly (to be cancelled this month)
Life Insurance: $100/monthly (to be cancelled this month)
Student Loan Minimum Payments: $98.77/month
Online Charges: $67/month
  VPN: $8/month
  Netflix: $8/month
  Scribd: $8/month
  Audible: $15/month
  Kindle Subscriptions: $7/month
  Online Chinese Courses: $21/month
Other: ~$50/month (Misc. shopping, gifts, mostly book purchases)* recently this has been much lower, but averaged over the past year I still budget about $50

Credit Card Annual Fee: $75 (only on my oldest card, not cancelling the card due to credit score considerations)

Total China Expenses: ~$715/month (~4500RMB)
Rent: ~$175/month (~1100RMB at 6.3RMB/US$)
Spending: ~$540/month (~3400RMB at 6.3RMB/US$)*
  *This includes all other expenses. I basically give myself a 100rmb/day budget plus 400rmb "wiggle room" for bigger expenses that may come up during the month. This is my maximum spending budget, but I usually spend a bit less. January I spent 2900RMB (~$460)

**Both of these are rounded up a bit. I hold the lease to our apartment and sublet rooms. This covers rent, but I pay utilities, housekeeping, drinking water, and management fees, so this "rent" is variable and a conservatively high estimate.

Assets: $14,622.66
US Checking & Savings: $8,148.53
China Checking Accounts: ~$4,924.13 (31,022RMB at 6.3RMB/US$)
Roth IRA: ~$1,550 since August 2014 ($1,200 lump sum +$50/month automatic contribution)

Liabilities:
Student Loans: $8,476.30 Total
 - $3,199.68 @ 5.8%  (to pay off... this month!?!)
 - $4,643.03 @ 4.25%
 - $  633.59 @ 3.15%

Credit Card Balance: $74 (paid in full monthly)

US Credit Score: Approximately 769 (Equifax, Transunion)

Savings:
At this point I'm saving about $1080 a month. This should be increasing to $1370 a month once I jump through all the hoops of cancelling insurance policies in the US while residing abroad (thanks to some face punches as a wake up call in a previous post).

Anticipated Annual Savings:
$1,370x 8 = $10,960
$1,080x 2 = $2,160 (January and March before my insurance gets cancelled)
$0 x 2 (February and July - not working, travelling)
Total Anticipated Savings 2015: $13,120

Savings Rate: ~49% (Ok, but could be improved).

Another factor is that I am up for contract renewal, new salary starting in July/August. My manager has already mentioned a 1000rmb/month (~$158.73) raise after tax. If I get my negotiation chops brushed up (erm, I have no spine), I may be able to get higher. I don't plan on increasing my spending so this would just be more 'stache money.

Main Questions:

1. Should I pay off the rest of my student loans in one lump or start investing? I have aggressively paid down my loans over the last year and a half, tackling the high interest loans (many were 7.8%!). I was planning on putting any savings leftover after my Roth Contributions towards the loans, but now that I'm not sure I can contribute to a Roth the tax deadlines don't seem as pressing. I still think I will pay off the 5.8% loan this month but I'm unsure if it's wise to drop all of my cash into the other two loans (4.25% and 3.15%), or if I should start investing to 'diversify' a bit. I've already paid off around $20-25K in loans. My main goal is FI rather than RE and I'm only 25, so I have some wiggle room.

It can be a bit difficult for me to transfer money to the US, so I do prefer keep the balance in my US savings account at about 6 months of my US expenses. I just sent some money home with my mom, which is why my US cash holdings are fairly high right now. Once I have all the paperwork done for cancelling my insurance plans, I should be able to decrease the amount I hold in my savings account significantly.

2. I was planning on maxing out my Roth IRA contributions for 2014 this month, but after doing some reading I'm not sure that I'm eligible to contribute to the Roth anymore. Basically I would have to not claim the Foreign Earned Income Exemption, thus disqualifying myself from claiming it for the next five years. I would probably have to pay full income tax again on my income here in China, since none of my employers here have been able to provide me with proof of income tax paid. (See fun tax stuff here: https://americansabroad.org/issues/taxation/foreign-earned-income-and-roth-ira-contributions-revised/) I haven't run all the numbers but this doesn't really seem worth the tax break on the Roth. I have already contacted both the broker I opened the Roth with and my accountant in the US, but neither have much experience with this. I'm not eligible for a 401K, and as I'm currently not paying any US Income Tax a regular IRA wouldn't be helpful even if I were eligible. Do I have any other options?

3. If a regular taxable investment account is my only option, this is what I'm considering. I don't have a lump sum of $9K to drop, but over the next 3 quarters I should be able to come up with enough to fund the following:

2015 Q2: $3K into VTSMX Total (US) Stock Market Index
2015 Q3: $3K into VGTSX Total International Stock Market Index
2015 Q4: $3K into VBTLX Total Bond Market Index Fund
2016 Q1: $3K into VISVX Small-Cap Value Index Fund (US)

These lump sum deposits would just be to meet the minimum investment requirements and somewhat diversify. By the end of 2015 I would be approximately in 66% Stocks (1/2 US, 1/2 International), 33% Bonds. By Q1 2016 I would be up to 75% Stocks (2/3 US, 1/3 International) and 25% Bonds, which is about the allocation and diversification I'd like to maintain from that point with monthly buys of equal amounts into each.

If I choose to pay off the last of my loans first, I'll just bump these investments back a quarter or two. I'm not too worried about over-investment in stocks for a few months, partially because I'm young enough to recover if I magically lose it all (oh wow, then I'd be... in the same boat as the average 25 year old) and partially because I do have partial ownership of a family trust that owns some high value property in the US. I don't know how much the trust or my share is worth and I don't want to be dependent on it, so I don't count it in most of my calculations. However, it does allow me to take a bit more risk than I might otherwise.

I'm only just getting to the point of being able to research all this investment stuff without my head swimming or my heart racing. I witnessed my dad lose his company and his shirt (and a lot of other peoples' shirts) in his foray into daytrading in the late 90s, and it left me with the conviction that stocks were only for egomaniacs and gambling addicts. Jumping into index funds is a huge step for me, but it seems like the logical next one...

Any advice is welcomed. I'm bracing for the facepunching.

Spondulix

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Re: Case Study: US Expat in China: Pay Low-Interest Loan or Invest?
« Reply #1 on: March 10, 2015, 12:40:43 AM »
It sounds like you're doing pretty well (other than maybe all the monthly services). There's so many free podcasts why not try that instead of Audible? Does your local library have Ebooks? $8/month would buy a lot of used books...

Personally, I'd knock out those student loans just to get them out of the way. You're so close, and then would be totally debt free.

BWholehearted

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Re: Case Study: US Expat in China: Pay Low-Interest Loan or Invest?
« Reply #2 on: March 10, 2015, 12:29:00 PM »
Pay of the loans!  It's my personal opinion but you've got time to invest, and the loans just keep accruing interest.  And when the shit hits the fan at some point, not having any liabilities is going to be a huge blessing.  And like you say it's just a difference of a few months.  Do it, be done with it!

Rein1987

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Re: Case Study: US Expat in China: Pay Low-Interest Loan or Invest?
« Reply #3 on: March 10, 2015, 01:54:53 PM »
Pay of the loans!  It's my personal opinion but you've got time to invest, and the loans just keep accruing interest.  And when the shit hits the fan at some point, not having any liabilities is going to be a huge blessing.  And like you say it's just a difference of a few months.  Do it, be done with it!

I'd not suggest payoff the loan. In China, the interest rate is so high. You can easily get 6% interest rate just putting your money into a money market account.

If there is no 50k limit per year, I'd love to do carry trade to save in a Chinese money market account rather than any saving account in the US.

Radagast

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Re: Case Study: US Expat in China: Pay Low-Interest Loan or Invest?
« Reply #4 on: March 10, 2015, 04:51:33 PM »
Not too much to say here. Pay of the loans (despite any potential interest), then start your investment plan. There is no excuse to save less than $1,000 per month permanently as a long-term expat in China. You will need it if you ever return home. Everything left is for living and travel.

What job are you in to earn that much in the western parts? I lived in Inner Mongolia for a year, and would love to stay in Gansu or Ningxia for a while. However, I was just lazing about doing the part time teaching thing for half that salary. I ultimately felt I needed to earn more money and came back to the U.S.

lovesasa

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Re: Case Study: US Expat in China: Pay Low-Interest Loan or Invest?
« Reply #5 on: March 11, 2015, 10:18:48 PM »
It sounds like you're doing pretty well (other than maybe all the monthly services). There's so many free podcasts why not try that instead of Audible? Does your local library have Ebooks? $8/month would buy a lot of used books...

Yeah, I think my monthly services are a bit high. Unfortunately where I live in China there are not many English language books available. The ones that I can find cost at least $30, even used, and I often can't find the stuff I want (I read a lot of academic books in preparation for the FSOT... and because I'm a huge nerd).  I also use Scribd to find a lot of worksheets and other teaching materials for the courses I teach, so I can sort of justify it as a work expense.

I did at one point have a Denver Public Library card, so I may see if I can (a) find it and (b) use it go get ebooks.

Thanks for your input!

lovesasa

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Re: Case Study: US Expat in China: Pay Low-Interest Loan or Invest?
« Reply #6 on: March 11, 2015, 10:20:19 PM »
Pay of the loans!  It's my personal opinion but you've got time to invest, and the loans just keep accruing interest.  And when the shit hits the fan at some point, not having any liabilities is going to be a huge blessing.  And like you say it's just a difference of a few months.  Do it, be done with it!

I'd not suggest payoff the loan. In China, the interest rate is so high. You can easily get 6% interest rate just putting your money into a money market account.

If there is no 50k limit per year, I'd love to do carry trade to save in a Chinese money market account rather than any saving account in the US.

Thanks for the input! A coworker of mine buys some kind of short term investment vehicle here and makes a pretty good return, but her Chinese is much better than mine and her husband is a local. I've been kind of nervous about it but I might go ahead and ask her more. I have noticed ridiculously high CD rates here...

lovesasa

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Re: Case Study: US Expat in China: Pay Low-Interest Loan or Invest?
« Reply #7 on: March 11, 2015, 10:34:29 PM »
Not too much to say here. Pay of the loans (despite any potential interest), then start your investment plan. There is no excuse to save less than $1,000 per month permanently as a long-term expat in China. You will need it if you ever return home. Everything left is for living and travel.

Thanks for the input. Seems like most people are leaning towards paying off the loans, despite the low interest.

I completely agree with the bolded part! I know some of my coworkers don't save very much and I can't wrap my brain around how!! I'm one of the lowest paid teachers at my school (I'm not a certified US teacher and I don't have a lot of experience), and I feel like I live a pretty plush life here, though this city has a very high inflation rate.

What job are you in to earn that much in the western parts?

I teach AP Microeconomics and IGCSE Business Studies at an international program. It's supposed to be the top school in Yunnan province, though who knows... I do work a lot more than most expats (a standard 40 hour workweek) and I do find myself bringing grading home, though that probably has more to do with my time management than anything.

A lot of my friends make easily more than half of my salary doing part time teaching, but I like the stability of my job and the fact that it's somewhat related to my studies. I think it will help me more in the future than just teaching English would, and it gives me a chance to stay fresh on what I learned in college while I study Chinese on the side.

I could probably make more money if I moved to a Tier 1 or Tier 2 city, but I like that things are a bit more relaxed here. The weather is great (blue skies all this week!) and I can head west to the mountains if I'm feeling homesick. I graduated college while the US was still in the midst of the "Great Recession" so after taxes my first job offer in China matched my first job offer in the US... and sounded like way more of an adventure, so I jumped on it.

I lived in Inner Mongolia for a year, and would love to stay in Gansu or Ningxia for a while. However, I was just lazing about doing the part time teaching thing for half that salary. I ultimately felt I needed to earn more money and came back to the U.S.

I am thinking of moving back into the "real world" eventually, I just haven't quite decided how I want to make that transition, or what field I want to go into. If I can get my act together enough to pass the HSK 5 I might have more of a shot at a higher paying job, though. I don't want to stay in China forever. How did you find the job hunt when you returned stateside? Did they view your time in China favorably, or was it more of an "oh, that must have been a fun break" kind of thing?

Also I'm planning on visiting Inner Mongolia this summer (~July). Any tips or must-sees?

Radagast

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Re: Case Study: US Expat in China: Pay Low-Interest Loan or Invest?
« Reply #8 on: March 15, 2015, 04:12:07 PM »
The weather is great (blue skies all this week!) and I can head west to the mountains if I'm feeling homesick. I graduated college while the US was still in the midst of the "Great Recession" so after taxes my first job offer in China matched my first job offer in the US... and sounded like way more of an adventure, so I jumped on it.

How did you find the job hunt when you returned stateside? Did they view your time in China favorably, or was it more of an "oh, that must have been a fun break" kind of thing?

Also I'm planning on visiting Inner Mongolia this summer (~July). Any tips or must-sees?
Mountains and blue sky. Absolutely.

I returned from China probably about the time you graduated (late 2010) during the peak of the recession. At that time most employers had 200 resumes for every open position and wouldn't look at an application, much less respond to or consider mine. I was saved by being from a small gold mining town because the price of gold had doubled in two years. There were 200 applications for that position too, but I was the only local so they interviewed and hired me the next day for my desired salary. I guess that illustrates that having a connection or an "in" is the important thing.

Inner Mongolia is Chinese. You need to visit Mongolia to see Mongolian culture. However, all buildings in the province are required by law to have their signs in traditional Mongolian script as well, so that is cool. There are a few aspects of Mongolian culture around. Hohhot and Baotou aren't the most exciting cities, though there is nothing wrong with them. I liked the more remote western parts better, for example Bayanhot and Alashan Youqi. The northeast might also be nice.

I took a crazy path home, traveling through China, Mongolia, China, then into Russia at Vladivostok, across the TransSiberian Railway over the course of a month, through Europe, ferry to Ireland then England, container ship (expensive mode of transport) to the US, Amtrak home. Great adventure.

shanghaiMMM

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Re: Case Study: US Expat in China: Pay Low-Interest Loan or Invest?
« Reply #9 on: March 15, 2015, 11:27:10 PM »
Pay of the loans!  It's my personal opinion but you've got time to invest, and the loans just keep accruing interest.  And when the shit hits the fan at some point, not having any liabilities is going to be a huge blessing.  And like you say it's just a difference of a few months.  Do it, be done with it!

I'd not suggest payoff the loan. In China, the interest rate is so high. You can easily get 6% interest rate just putting your money into a money market account.

If there is no 50k limit per year, I'd love to do carry trade to save in a Chinese money market account rather than any saving account in the US.

Erm... can I have more information if possible? Sounds very appealing given the trouble it takes to get money out of the country here!

Rein1987

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Re: Case Study: US Expat in China: Pay Low-Interest Loan or Invest?
« Reply #10 on: March 16, 2015, 11:04:15 AM »
Pay of the loans!  It's my personal opinion but you've got time to invest, and the loans just keep accruing interest.  And when the shit hits the fan at some point, not having any liabilities is going to be a huge blessing.  And like you say it's just a difference of a few months.  Do it, be done with it!

I'd not suggest payoff the loan. In China, the interest rate is so high. You can easily get 6% interest rate just putting your money into a money market account.

If there is no 50k limit per year, I'd love to do carry trade to save in a Chinese money market account rather than any saving account in the US.

Erm... can I have more information if possible? Sounds very appealing given the trouble it takes to get money out of the country here!

Do you mean the 6% interest rate or the 50k limit?

I'm not an expert of the Chinese money market, but a lot of large companies like Alibaba, Baidu offers money market account. It's liquid and you can get maybe 6%-8% interest rate. CDs in the bank is a safer place. I believe 5 yr CD is more than 5%.

China has currency exchange limitation that a person (No matter Chinese citizen or not) can exchange up to 50k US dollars of RMB per year through official channel.

I was thinking of borrow money from US (my mortgage is 2.375% for example) and save it to China to earn the interest difference, but then I realized the 50k limitation...so I gave it up. The risk to consider here is the currency exchange rate..

BTW, it's possible that you save US dollars directly into Chinese bank, but the interest of US dollars offered by Chinese bank is much lower than RMB but still a little bit higher than US banks.

shanghaiMMM

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Re: Case Study: US Expat in China: Pay Low-Interest Loan or Invest?
« Reply #11 on: March 18, 2015, 04:41:09 AM »
Interesting, thanks! I might have to ask around with the local staff to find out more.