Are you an investor, saver or planner?
Ex-pats in Suzhou have special financial planning needs. Many of us are here for a relatively short time, and we may even know our approximate exit date. If its just a couple of years, then there is a tendency to push off the financial planning decisions until you are back home. That may turn out to be an expensive bit of procrastination. If you are earning a western salary but the company is picking up housing and some living expenses, then your excess cash flow may be bigger now than ever before. One of the biggest reasons for NOT saving a little extra is that many people have no idea how to get started.
Suzhou exspats face the same basic financial problems that they did when they were back home – but now they lack the support network and ready-access to professional advice that they used to take for granted. One basic question that people often don’t think to ask is: What is the difference between Investing, Saving and Financial Planning?
The key differences between the investing, saving and financial planning can be seen in the areas of:
- Time
Risk-Return
Tax
Time:
Investing is simply the act of putting money to work for you. You can invest for a few days or for many decades. While many of us associate the phrase ‘investment’ with well-considered, rigorously analyzed, long term planning, it simply isn’t so. You can invest in the safest government-backed treasury bonds or in uranium mines on Pluto.
Saving in banking accounts is extremely ‘liquid’, or flexible. Most banks offer passbook savings (do we say ATM savings now?) that give you maximize freedom to withdraw money whenever you wish – but pay minimal interest. You aren’t really making any money in a day-to-day savings account, but are actually paying the bank for the security and convenience of leaving your money there. Banks also offer Certificates of Deposit (CDs) or fixed term accounts (90, 180 or 360 days are common) that pay a bit more – but severely limit your access to funds.
Financial planning is based on long-term commitments. Most professional financial planners start work with time horizons of 10+ years, since they tend to focus on retirement and education funding.
Risk-Return:
Investing is a broad term that covers every possible risk-return scenario – including those that don’t make much sense for the average household. Investing in rock-solid treasury bonds is very safe – but pays what is referred to as the “risk –free rate” that should just keep you ahead of the inflation rate in the long term (if you’re fortunate). Many of your friends have probably told you about the fortunes they’ve made in heroic stock market maneuvers. What they don’t tell you is that the risks they take will eventually wipe them out if they keep following the speculative road.
Savings plans are very safe, but the return is very low. They are designed for safety and convenience – not profit. In an economic environment where inflation is gradually decreasing, you will make a small net profit in a savings bank. If inflation is rising, you will probably suffer a small net loss.
Financial Planning should focus on instruments and techniques that offer moderate risk with relatively high returns. A reasonable financial plan will start with assumptions of long term returns of 5% to 9% — but in reality any plan showing from 8 – 12% returns can probably fit the category of “moderate risk, high return”. A professional financial planner beats the odds in two ways: 1) By working with a long planning horizon of ten years or more, the investment has time to ride out rough times and bearish economic moves, and 2) Professional management and a diversified portfolio will maximize returns while limiting risk in any market environment.
Taxation:
Traditional investments tend to be tax-blind. In other words, return rates are calculated independent of tax considerations, and it is up to the investor to deal with the tax people later. Be aware that profitable investments can incur several different types of tax consequences – including income tax, capital gains tax and estate tax.
Savings accounts yield interest that is also subject to tax – but the amounts involved are usually so low as to make it a minor consideration.
Financial planning can include estate planning – which is all about avoiding unnecessary tax. While financial planners are not necessarily tax experts, they should be well versed in the area of tax havens and tax-advantaged financial products that are designed to minimize tax obligations.
A final consideration for Suzhou expats is finding qualified professional advisors. Many foreigners in China have found that local branches of international banks don’t deliver the kinds of services they are accustomed to, and professional investment advice is extremely difficult to come by. There are plenty of people calling themselves ‘financial advisors’, but finding a qualified one can be a bit of a challenge.
Posted: March 12th, 2008 under Uncategorized.
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