If you are committed to spending time abroad, opening a bank account in another country may be something to consider. Should you get a bank account abroad?
Are banks outside the US safe?
As you would expect, the answer depends on where the bank will be located. Some countries have lower banking safety scores than others. What is shocking to many is that US banks are not always all that safe. According to Nomad Capitalist, US banks rank only 40th in safety measures following the Great Recession. If that isn’t a shocking stat, I don’t know what is. Personally knowing very little about this area, I decided to take a closer look.
My personal beliefs going into this assignment
I have always followed trends in global exchange rates. I beleive this has roots back to my days as a law student in London. As my friend and I sat around in our small flat–I always joked you could make your bed, cook dinner and go to the bathroom from the same location in the flat–we would lament the current exchange rate. The British Pound at the time was a whopping 2:1. Think about that: a cup of coffee that cost three pounds cost me six dollars! Even worse, more expensive things like a dinner out could really set your budget back. As it stands now, the pound is worth $1.34 dollars rather than the $2 I had experienced. If you think the dollar will lose a ton of value in the next few years relative to the British Pound, you could hedge this risk by trying to open a bank account in that country (England presumably), send over some US Dollars to that bank account, and when you need the British Pounds, withdraw them in that country later on. If the exchange rate at that future point in time is much worse than today, you have avoided, or “hedged” that risk. That gets a bit too much in the weeds.
It’s possible, however, that for a family gap year this is the best justification. As we’ll talk about later in the article, it’s unlikely our family will do any investing during our trip. I don’t anticipate we’ll need to have a foreign bank account for signing leases with local rental managers. We anticipate using Airbnb and other options for short-term stays. I believe that any family thinking of doing some substantial traveling should be thinking in these terms, however. How many opportunities for financial and family well-being exist off the shores of the US? It’s impossible to know without at least doing some cursory research.
So how does it really work?
The term of art I see used today is “offshore banking.” That implies some place like the Cayman Islands where scrupulous investors can sort of “hide away” some money. That term, however, can encompass any global bank location like Central Europe, Turkey, or Tanzania. There appear to be three main reasons to bank overseas: 1) if you run a business in another country; 2) if you have investments in another country; 3) if you plan to spend a lot of time in another location during the year. Option three applies to most people reading this post I would guess. But who knows, if you really like living somewhere, opening a business or buying a piece of real estate might make a lot of sense. But perhaps the best way to “crawl before you walk” is to open that bank account abroad. The requirements are a lot like they are in the US. You have to have proof of identification. You may need to show some sort of evidence of how the money you will use was obtained. As to what personal information you’ll need will vary. You will likely need to provide proof of citizenship or domicile (where you live in the US). You need to actually decide where to get the bank account. For our family, a good choice might be somewhere we plan to be in the next year for a long time. The truth of the matter is, you can do due diligence on foreign banks using the internet in most cases. Banking markets like Singapore have a solid track record and might be a good choice.
If you are using the foreign bank account to offset currency risk, maybe it doesn’t make sense to go through the trouble if your family gap year is only going to be 12 months. Or, perhaps you could wait until actually setting foot on foreign soil to set up the account. Sure, that might be possible, but may not be the most practical. The way these foreign accounts are funded is commonly through a wire transfer. It would seem difficult to have your US bank make a wire transfer when you cannot actually set foot in your bank. And who wants to deal with all those steps when you should be exploring and having fun? It seems like the best option, if you are going to dip your toe into foreign markets, would be to open the account and fund it with a wire transfer from the US.
Do foreign banks pay interest on deposited money? Yes, but probably not much more than US banks. I tested out this theory by looking at some banks in Singapore since we mentioned that country earlier in this article. The interest rates seem pretty ho-hum at anywhere from 1.5% to 3%. But those are better rates than most standard banks in the US, so it’s something. These account options were from familiar names like Citibank, as well as ones I hadn’t heard of like Maybank. I will also be looking into the standard Central European banks and some non-traditional places like Montenegro. This article will be updated as new information is learned.
Is opening a foreign account the right move for me?
Frankly, this will of course be a personal choice. Our family is sort of on the fence. It doesn’t seem like there are overwhelming reasons for us to do this approach, but I’m definitely curious. I cannot imagine purchasing anything like real estate while we’re traveling on a family gap year. If and when we do decide to purchase any global real estate, we could always just set everything up at that point (as such a transaction would likely involve a foreign banking requirement). Moving some money over to a European bank now, however, might be a good move if you think the Dollar/Euro spread will widen in the next 9-12 months. That’s for you to decide. I cannot give financial advice. But I’ll continue to look into this and possibly will open a small account to “diversify” my banking and take the first step.
Update on opening a foreign bank account
I recently opened an account using Wise.com. If you aren’t familiar, this is a way to purchase foreign currency at a stated exchange rate, and have it kept on a bank card. It seems to be like a bank account. I did not have to travel to a foreign country to open the account, nor did I have to deal with a bank, per se. The dollar recently spiked against the Euro and the British Pound. The Euro was down to a bit more than $1.04 dollars per Euro, which is as low as I’ve ever seen (the pound broke to $1.24 dollars per Pound). We purchased a few thousand in each currency to be used while in France and England. This way, we’ll be hedged if the dollar starts to tank, and we’ll have a cash card to use while in Europe. Sure enough, the dollar lost ground over the last few days so we bought at the right point in time.