Nomadic Times contributor shares useful tips to help U.S. digital nomads plan their finances to secure their future and make traveling more enjoyable.

By Rebecca Brown

Being a digital nomad allows you to enjoy many freedoms. You’re not tied to a desk, so you can roam freely around the world freely to make a living. But, you’re still burdened with financial obligations. In fact, you have to weigh in some important financial considerations that you normally wouldn’t care about.

If you want to make the most of the digital nomad lifestyle, you need to plan your finances carefully, and here’s some tips to help you along that journey.

Budgeting as a Digital Normal

When your income is irregular, or when your travel costs vary greatly from month to month, budgeting can be difficult. Yet, setting a budget is one of the first steps to successful financial planning.

Budgeting Basics – Income

What you make and what you spend are the two basic elements of your budget. You should start with what you’re earning. If your income is inconsistent, look at what you’ve earned over the last year. To set a baseline for your budget, use your lowest month’s income. By doing so, you won’t run the risk of overspending when planning your expenses. You can add to your savings or adjust your spending accordingly in the months when you are making more money.

If you are an U.S citizen who is working abroad, the tax implications can get messy. Uncle Sam will tax the income you earn abroad. But you may be able to exclude part of your income if you are a taxpayer who is working and living abroad. You’ll have to pay estimated quarterly taxes and income tax if you are self-employed. The good news is, you can deduct expenses for housing even if you live abroad.

Budgeting Basics – Expenses

After you set your baseline, look at your essential monthly expenses. This includes your work expenses, insurance, housing, travel, and food costs. If you have debts such as student loans or credit cards, make sure to include them as well.

Budgeting Basics – Savings

The next item on your list of priorities should be savings. Be sure to set up an emergency fund. As a rule of thumb, it should cover 6 months’ worth of living expenses. If you get sick or hurt while you’re traveling, your emergency fund will help you pay for larger expenses. When your income isn’t as steady as you’d like it to be, it will help cover your cost of living.

Budgeting Basics – Non-Essentails

The last step is to review your non-essential expenses, and this is where there’s the most flexibility from a budgeting perspective. These non-essential expenses include dining out, entertainment, clothing, etc. You can add them only after you’ve set aside money for basic expenses, debt repayment, and savings. If you have money left over each month after you pay for all of these things, great! If not, it’s best to review your spending more thoroughly to see how you can reduce your monthly expenses.

Cover Your Financial Bases at Home

People approach being a digital nomad differently, some abandon their home town and hit the road long-term with no clear plans of where (or even when) they’re settle down. And others are digital nomads for part of the year and return home for a few months each year.

If you rent or own a property at the base you call home, you need to incorporate those expenses into your budget. You need to make sure you’ll be able to budget for your rent or mortgage, along with expenses such as renter’s insurance, property taxes, or utilities. If your budget isn’t big enough to cover these expenses, consider listing your home on Airbnb or subletting your rental while you are away.

You’ll need to decide whether you can manage this remotely or if you have to pay a property manager to handle it on your behalf. Hiring people to do this will eat into your income, by dramatically reduce the stress of trying to handle manage a property when you’re in a remote location.

Plan Your Retirement

As a digital nomad, you should save for retirement as well as for emergencies. An employer’s 401(k) is off the table if you are a business owner, independent contractor, or freelancer, so you need to explore other options.

If you want to start saving for retirement the easy way while enjoying some tax benefits, consider a Roth or traditional IRA.
When you retire, a Roth IRA will allow you to make tax-free withdrawals. A traditional IRA gives you the advantage of tax-deductible contributions.

Other options include a solo 401(k) plan, or a SIMPLE or SEP IRA. The solo 401(k) plan has the highest annual contribution limit of the three. It can be a great choice for sole proprietors who aren’t employers. Compared to traditional IRAs, SIMPLE and SEP IRAs come with higher annual contribution limits. But they follow the same tax rules.

To determine how much money you can set aside for your retirement each month, go back to your budget. Each month, save that amount in a tax-advantaged plan. The simplest way to grow your retirement plan is to automate contributions. Make sure your investments fit your risk tolerance as well as your goals and review them annually. To maximize the earning potential of your account, review the fees that you have to pay for every investment.

Retirement planning is probably the most overwhelming because it has long-term impact, but don’t let that put you off from starting to save for your retirement as soon as you can. There are plenty of financial planning agents who will handle your finances for you, and only charge a small annual fee based. This is an additional expense, but you should balance the time and effort it will take you to research all of retirement options available to you vs. the time you’ll save by having somebody do in on your behalf.

Your Travel Plans need a Financial Plan

If you’re not a number’s person then all of this talk of financial planning and having to estimate future income and expenses could overwhelm you. But just look at what’s at stake—if you don’t put some type of plan together, you could end up having to come back home sooner than you planned because you ran out of money. Here’s a six-point action plan to get your financial planning wheels turning:

Action Plan List for Planning your Budget

1. Set a projected income baseline using your previous year’s income
2. Set a projected expenses baseline by listing all your monthly expenses
3. Estimate how much you’ll be able to contribute to an emergency fund
4. Set a budget for luxuries and non-essentials
5. Create a baseline for your home base expenses and income
6. Develop a retirement strategy and choose the best savings plan to support your lifestyle

No matter what kind of lifestyle you prefer, financial planning is the key to a carefree future. Once you get to grips with money-management, handing your digital nomad finances will become second nature. When all of your finances are in order, your travels become more enjoyable.

About the Author:

I’m Rebecca, a translator and avid traveler, a book worm and horror flick enthusiast.

My job has given me the amazing opportunity to travel to dozens of countries around the world, and writing on Rough Draft gives me a chance to try to showcase some of them.

Follow me on Twitter.