Living Abroad: Developing a Household Budget

The answer to this often asked question of “How much does it cost to live overseas?” is that it depends on a number of different factors. These major factors are: your country of choice, where you live in that country, what your lifestyle requirements are, and currency exchange rates. In this article, we review the major factors affecting one’s cost of living when you retire abroad.

Cost of Living Overseas: Choice of Country

Your choice of country for your retirement destination is probably the greatest factor affecting one’s cost of living. In general, the more developed a country is economically, the higher the cost of living will be. A useful statistic to look at is the per capita gross domestic product of a country to get a feel for how developed any given country is.

Highly developed countries such as the United States, Canada, Europe, and Japan generally have higher costs of living than countries such as Mexico, the Philippines, and India. For example, the per capita GDP for America is over $45,000 a year while it is about $4,000 a year in the Philippines.

When living in the United States, my current retirement income places me below America’s per capita GDP, but will place me in the higher bracket when living in the Philippines. My purchasing power in retirement is slightly below average when living in America is much higher than the average in the Philippines.

Cost of Living Overseas: Choice of Location in Country

The second major factor affecting the cost of living is where you decide to live in your retirement destination. As a general rule of thumb, costs of living are highest in the capital city, somewhat cheaper in other smaller cities, and much cheaper when living in small towns or the countryside.

Because of globalization, the largest cities will tend to have more foreigners and wealthy locals and you will be competing with them for goods and services so prices tend to be high. In the countryside, you will be competing with a less wealthy local population and prices will tend to be lower.

In the capital city of Manila, the condo that I am currently renting might cost almost twice what I am paying in Cebu City. It is possible to find a condo in Manila that is in the same price range, but it will be much smaller and is likely to have fewer amenities than the one that I currently live. And, if I were to move outside of Cebu City, I would be able to find a much larger place at a lower cost.

Cost of Living Overseas: Your Lifestyle Requirements

The third major factor affecting your cost of living overseas is your lifestyle requirements. The more you need to emulate your lifestyle in the United States, the higher your costs of living will be. In general, the more you are able to adapt to a local lifestyle, the lower your costs of living will be.

To keep my costs of living lower, I’ve made certain conscious trade-offs. Instead of owning my own car, I will either take a taxi or jeepney to get around. This greatly reduces my need to purchase, maintain, and insure a vehicle. Instead of frequenting American food franchises frequently, I’ve begun to develop a taste for eating at local eateries where costs are much lower and to cook most of my meals. I like air conditioning but learn to manage costs by not having a very large condo and by cooling only those rooms where I am spending my time.

Even though I am living in the Philippines, my cost of living could be as high as in the United States without some lifestyle adjustments.

Cost of Living Overseas: Currency Exchange Rates

One of the factors that affects your cost of living when you retire abroad is the currency exchange rate. This fluctuates over time and could make your cost of living much higher when the US dollar grows weak against the foreign currency.

For example, a year ago, the Philippines peso grew very strong against the US dollar and my purchasing power decreased by almost 20% in that year. Fortunately, the US dollar recovered this year and my purchasing power has gone up significantly.

Cost of Living Overseas: A Hypothetical Budget

Here are the steps that I took when developing my overseas budget:

• Net Income: the total retirement income I am receiving from my pension after taxes
• Available Income: the amount of my net income that I have available after paying off any debt or putting money into savings. When you are living abroad, you are somewhat more vulnerable to unexpected events and should have some funds that are readily available in an emergency. Living on a retirement income, its also a good idea to retire any debt that you might have.
• Household Budget: the amount of money available for daily living. It is my net retirement income minus any debt service minus savings.

So let’s say that my net retirement income was $2,000 a month. Let’s also say that payments on various debts was about $600 a month. And for illustration purposes, let’s also say that my savings plan is for $400 a month.

In this scenario, my household budget is $2000 – $600 – $400 = $1,000 a month. This budget insures that any debt will get paid off and that I will accumulate savings over time.

Cost of Living Overseas: Allocating Your Household Budget

Once you’ve determined your household budget, then you can begin to allocate those funds to various costs depending on your lifestyle requirements. Using the hypothetical household budget of $1000 a month, the major costs that you should prepare for are as follows:

Rent:  perhaps the biggest expense for anyone living abroad is rent. Rent in the Philippines can range from under $100 per month to well over a thousand dollars per month depending on your housing requirement.  I set the amount of rent to no more than 40% of my household budget (you should pick your own numbers that are comfortable for you).

On this hypothetical budget, this translates to $400 a month or about 20,000 pesos. This would then frame my decisions when looking for a rental unit. For that amount it’s possible to find a 1 bedroom condo of at least 50 square meters in the city.

Utilities: I also set my utilities costs at no more than 20% ($200) of my budget. Again, this value works for me, but you may select some other value. This value includes condominium dues as well as electricity, water, telephone, internet, gas, and cable television. These costs are actually on the high side because it includes condominium fees.

Groceries, Transportation, and Miscellaneous: the remaining $400 in my hypothetical budget is designed to cover food, transportation (taxis), entertainment and other miscellaneous expenses.

Initially, I’ve discovered that for my eating tastes, that my food budget runs about 2,000 pesos ($40 USD) a week. The more I adapt to local food products, the more I am able to lower these costs. On the low end, I could easily live on half that amount without sacrificing dietary quality.

Transportation is relatively cheap. A taxi ride to the mall/supermarket is under a dollar. If I take a jeepney (mass transportation), it’s about 14 cents.

After rent, entertainment can easily become a major cost. Dining out frequently and enjoying the nightlife can easily break your budget. Although, expenses are lower than in the states, I initially found myself spending too much on entertainment and have brought those costs under control.

Other miscellaneous costs include laundry service which runs me about $2-3 a week depending on the volume of laundry. This is actually on the high side because I use the condo’s pricier service for its convenience.

Cost of Living Overseas: Summary

The budget presented is hypothetical. However it tries to build in a plan to make your overseas retirement worry free over time – by gradually eliminating any debt and by building up savings. Without disclosing my actual household budget, the household budget described above is something that I could readily live on while maintaining a very good lifestyle.

As your savings grows, it can cover a wide range of contingencies, but perhaps its greatest value is that it can help cover unanticipated fluctuations in currency exchange rates or inflation. It’s a good idea to allocate funds to savings as padding that you can dip into should the dollar grow weak or an emergency should arise.

It is possible to live in the Philippines for under a $1,000 a month or for over $3,000 a month. It all really depends on the choices that you make. However, one should factor in any existing debt and incorporate a savings plan as well and establish a lifestyle that comfortably fits within your household budget.

(Photo by: Sanja Gjenero)

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