Living Overseas and the Reality of Currency Arbitrage — Part I
Ever considered moving to a lower cost country so you can stretch your income further?
As an American who left the country in 2011, here’s everything you need to think about (as it regards your finances at least) before making the move.
As a tiny bit of backstory, I’ll never forget reading Tim Ferris’ 4-Hour Workweek.
Similar to many digital-nomads-turned-expats, that book opened my eyes to the possibility of living overseas in a way I’d never considered before.
In particular, one of the concepts I was most fascinated by was ‘Currency Arbitrage.’
In plain English, this means getting paid in a high value currency (like the Dollar or Euro) and living in a country where the exchange rate dramatically increases your purchasing power.
Which for most people, means moving to Central or South America, most of Asia, or the cheaper parts of Europe.
As someone who’s done this in all three regions, here’s the good, the bad and the ugly.
The Good Stuff
So let’s be real here: Currency arbitrage is a beautiful thing.
You can have a great quality of life for a fraction of what you’d pay for the same lifestyle in the West.
I personally live in a beachfront, penthouse condo — in one of the safest, hippest, and most upscale parts of all Brazil — and pay about $1,000 per month in rent.
(Many of my friends pay as little as $300 to $400 for regular studios and 1 bedrooms.)
To illustrate my point, I live a fairly upscale lifestyle for about $1,800 per month here in Brazil (excluding travel).
I bought a low milage, almost new car, have a 2 bedroom penthouse condo on the beach, and eat out pretty much whenever I want.
For me to spend more than $1,800/mo, I’d have to get a luxury / sports car, buy way more clothes, and eat out at 4/5 star restaurants more often.
In short, I’d have to TRY to spend more money.
Further, Brazil is one of the most expensive countries in Latin America.
In Costa Rica and Ecuador — which were much less developed than where I live now— I spent even less.
Same goes for most digital nomad / expat hotspots (Budapest, Vietnam, Lisbon, etc.):
If you get paid in a high value currency, and are willing to deal with the negatives I’ve outlined below, you really can have a great quality of life for $1K to $3K per month.
Foreign Earned Income Exclusion (aka FEIE)
On top of that, if you’re an American and you spend less than 34 days on US soil in any given 365 day period, you do not have to pay federal taxes on your first $112,000 of earned income for that year.*
As you can imagine, this can add up to some serious savings.
Especially if you’re able to prove you are no longer a resident of the state you used to live in, at which point you can avoid state taxes as well.*
*There are some serious caveats related to what is and is not considered earned income, how the 34-day rule applies, how your state determines whether you’re a resident or not, etc. Please consult with a qualified tax planner as I am not a financial professional and this is NOT financial / tax advice.
The Negatives
Before we continue, I want to remind you this article is focused entirely on currency arbitrage.
I mention that as there’s plenty I could say about the social aspect of living overseas. But, that’s a whole ‘nother topic.
So, there are a couple downsides to this currency arbitrage thing I failed to grasp until I stayed in one country for multiple years.
Exchange Rates & Inflation
The biggest of which is how fluctuating exchange rates can affect large purchases.
See, there’s a difference between spending a couple months overseas and actually moving there.
Because when you live somewhere, you tend to take on long-term financial commitments.
You buy cars. You sign rental agreements. Or maybe you even buy a house.
Now, when you move somewhere and your home currency keeps going up against the local currency, life is good.
But if your home currency starts falling, things can turn ugly.
To illustrate my point, here in Brazil the exchange rate between the dollar and real was 5.7 : 1 a few months ago.
Last week, however, it fell to 5.16 — a 10% drop.
Meaning literally everything I spend money on here has become 10% more expensive over the last 45 days.
Second, inflation in Brazil hovers around 10% per year. Post-COVID, however, the cost of most everything has shot up even more than that.
Third, I live in an in-demand area. Because of that, both the rental and housing markets favor owners. Why?
Because there’s more demand for houses and apartments than there is supply. Meaning, both rents and home prices have been rising like crazy.
Which is arguably the #1 problem with playing the currency arbitrage game.
When you combine a dropping dollar with rising inflation, the cost of your largest expense (your apartment / home) can increase by 30–40% in a short period of time.
As an example, between the 12% drop in the dollar, and the fact my landlord was going to raise my rent by 20% (after two years of no raises), I was looking at a 30% increase in my housing expenses between February to March.
On the flip side, it’s unheard of for someone’s rent to jump that dramatically back in the US.
Yes, with the affordable housing crisis, rents have gone up substantially over the past year.
However, that’s based on a once-in-a-generation black swan event (COVID and the supply chain crisis layered on top of decades of home builders not building enough housing).
Here in Brazil, however, 10–15% annual rent hikes are the norm.
Between the dollar dropping, inflation, and a skyrocketing housing market, I’ve had to take a serious look at how expensive of a rental I commit to.
Now, if you’re living well below your means and can afford such a jump — or don’t mind moving all the time — that’s fine.
However, if you plan to stay in one place for a while, you have to think twice about this stuff.
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