Wednesday, June 8, 2016

Mo Money Mo Problems

tl;dr: personal finance is HARD, especially in the Foreign Service.

One of the 13 Dimensions on which one is evaluated during the Foreign Service Exam is Quantitative Analysis: to identify, compile, analyze, and draw correct conclusions from pertinent data; to recognize patterns or trends in numerical data; to perform simple mathematical operations.  It really is an essential skill, not only for tasks related to the actual job but for figuring out how to manage your own finances while overseas.

Personal finance is complicated for everyone. I was lucky enough to be raised in a household where money management was discussed from an early age, and I had an amazing high school economics teacher (thank you Ms. Franklin!) who covered this stuff, so I consider myself to be on the higher end of the general-public financial literacy scale. I'm pretty solid on compound interest and budgeting and lifecycle funds and all that jazz. But. FS life adds its own special wrinkles to financial planning.

The first challenge is just figuring out how much money you make. It should be simple right? It's on your paycheck! Yeah, but hardship differentials, danger pay, and cost-of-living adjustments mean that your income changes every time you go to a new post. Since it takes a while for these things to kick in you may be several months into your new post before your paycheck properly reflects your new income, and trying to work it out ahead of time is a headache. And it can change without warning once you get to post too: Embassy Addis lost its cost-of-living allowance a few months ago, which meant I suddenly saw a cut to my take-home pay of several hundred dollars a month. Ouch. I had plans for that.

Next is working out how much money you spend. Prices on basics such as food, gas, internet, and other goods and services procured locally vary widely from country to country. Visiting my sister in Dubai I discovered that a tank of gas there is cheaper than a glass of wine, which speaks to both the low price of gas and the high price of alcohol relative to the United States. Prices and availability of essentials can also change suddenly and dramatically. (See: Venezuela.) And don't forget to factor saving up for home leave into your budget; having time in the States between tours is wonderful but it can be very expensive, especially if you're buying a car or consumables for your next post, and/or don't have friends or family you can crash with for free for a couple of weeks.

The way you pay for things also makes a difference. For example, Ethiopia is a mainly cash economy, so to have money on hand I cash big checks one or twice a month, which may not actually be deducted from my account until a couple of weeks later. My internet bills often don't turn up until months later. This is a lot harder to keep track of than having everything posted immediately from your debit card. Emergencies can also be very cash-intensive: when I had some health issues a few months ago I had to pay for for everything up front, and I'm still waiting for my insurance to reimburse me.

And then, once you have a handle on your current money situation, there's planning for the future. Oh. My. God. I'm thinking about going back to DC after Addis and buying a condo, so I spent HOURS doing research and putting together a spreadsheet trying to figure out how much money I'll be making, how much I can afford to spend given my expected income and down payment, and whether it's financially more advantageous to buy in DC, VA, or MD given the different income and property tax regimes. There were multivariable equations involved. Later I found out I screwed it up, mostly because there are lots of nitty gritty things I don't know about mortgage payments and the tax implications thereof.

One thing I've learned from this little exercise is that it may be time to outsource to a professional. I would hope my quantitative analysis skills are solid enough to recognize when someone else has comparative advantage.

3 comments:

  1. Thank you for writing about this! It's something I'm thinking a lot about and something you don't hear a lot about from current FSOs.

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    1. Glad it's useful. It's complicated but ultimately manageable in practce; the main thing is to plan ahead for predictable big expenses like home leave and to make sure you have buffers in place for the unexpected. I keep a pretty hefty emergency fund, which I pulled from for the health stuff. And I lean pretty heavily on my credit cards for home leave expenses and pay them off once I get to post. Consumption smoothing is what credit cards are for!

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  2. I know exactly what you mean! Those calculators that are supposed to tell you 'how much house can I afford' just can't comprehend the whole FS income-expenses-savings cycle, or why one would need to save a lot in the first year of the tour, before finding out whether to expect a combined differential of 70% or COLA of 20, expenses that include rent in DC or purchasing an aprtment's worth of furniture, commuting by bus or on foot or buying a car (and figuring out how much you might be able to sell it for later), 6 months of per diem in DC or a year or none... The only thing you can really count on is your base pay.

    Anyway, I'd be interested to hear what your financial planner makes of the situation as I thought about hiring one a few months back.

    Thanks for posting!

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