Top 7 Money Mistakes to avoid when on H1B visa!
I arrived in USA on an H1B visa in Jan 2014 and have been here for about eight years now. I started thinking seriously about building wealth and investing sometime in 2016. I have since then built up a substantial investment portfolio and have researched and read an enormous amount of material on personal finance.
My journey of building meaningful wealth so far has been incredibly liberating and satisfying. It made me feel a lot more independent and in better control of my life and finances! It has also involved navigating the complex finance and investing landscape of US. Below are the most common and costly mistakes I see people around me make while starting fresh after moving to United States on a H1B visa.
- Not paying attention to building credit right away!
It is extremely important to build a good credit history in US. Credit history is used to determine your home mortgage rates, car loan rates, eligibility for leasing home/apartment, insurance premiums (except in some states where it is banned by law) and determine eligibility for credit cards. Your broadband and telecom providers may also use credit history to determine eligibility for certain products. Even some employers may check credit history before making job offers! There are excellent online resources on how to get started with building credit asap in US. You can also read my short article on the same here.
2. Working with only a checking account and not opening a high-yield savings account.
As soon as we arrive in US, we are told to open a bank account at one of the major banks like Chase or BoA. The regular account that we open here is known as a “checking” Account, and some people also open a “Savings” account. Checking accounts do not give any interest at all on the money deposited but allow one to make as many transactions as one likes. Savings accounts do give interest on the deposited money but the rates can vary vastly amongst banks. Depositors are generally restricted to 6 withdrawals each month from Savings accounts.
It is fine to have a regular Salary “checking” account at one of the larger brick and mortar banks, but these tend of offer very poor Saving Account rates and are not optimal for keeping large amounts. For example, as of 12/28/2021 Chase offers a 0.01 % interest on its Savings accounts vs Marcus (by Goldman Sachs) offering 0.50%! This is a huge difference! Since your deposits are safe up to 250,000 USD in all FDIC insured banks (this is essentially a US government guarantee), one should opt for these high yielding online banks that will offer a decent rate of return on your deposits! Do check if the bank is FDIC insured by visiting FDIC website before opening an account.
For someone who has an average balance of say 30,000 USD for a year in a chase Savings account, he/she would get $3.00 interest (at 0.01% rate!) vs $ 150.00 at Marcus! You can have your Salary deposited and expenses paid from a regular checking account, but do not let it sit there doing nothing. Move all excess amount to a high yielding account every month, you can always move it back if need be!
3. Picking sub-optimal health insurance plan
Healthcare in United States is notoriously expensive and complicated. Fortunately, most good employers provide healthcare plans that cover most of these costs. But there are some choices to be made since employees need to select one of the plans that an employer may have on offer. There are many types of employer health insurance plans on offer, i.e. PPO Plans, HMO Plans and Health Savings plans (also known as High Deductible Health plans — HDHP) etc. Employers usually conduct an open enrollment session to guide employees in making the right choice based on their individual/family circumstances. That is a good starting point but one needs to understand these plans and compare/contrast to be able to make an optimal choice. I have put together a quick overview here that may be useful.
4. Neglecting to save and Invest via 401K/IRA accounts
The alphabet soup of Investment accounts can be confusing for someone starting out fresh in US. With so many types of Investment accounts (401K, IRA, Roth-IRA, 529 Account, Taxable Brokerage Account etc) and the choices around what to buy inside these accounts, this can appear a little over-whelming. And instead of figuring these out some people simply neglect to make the best of these amazing tax-efficient investment vehicles that US has to offer. I have attempted to simplify these as much as possible here so that you do not postpone saving/investing for future!
5. Not understanding the true cost of owning/driving a car
In most places in US (except for downtown areas of some large metros) driving a car may turn out to be a necessity. But in the excitement to get behind the wheel as quickly as possible I see a lot of us make very basic financial mistakes. First thing is to get a driving license as soon as possible in US as it allows one to build up driving history that will help reduce insurance premiums later (even if you do not intend to drive right away).
Unless you absolutely need a car right away for commuting to work and do not have savings (or some credit history to finance a purchase) leasing is usually the “worst” option financially. So please do not lease unless you absolutely need to. Also, most dealer financing schemes are rip-offs and if you need to borrow to buy a car, getting a “direct” loan from a credible financial institution is much better (there are many players that offer such loans). This money is then used to pay dealer upfront and you pay back installments to the lender.
The best way to own and drive a car is usually to buy a used economy vehicle (3–6 years used and driven less than 100K miles). Most new cars tend to depreciate almost 40–50% in 3–5 years! So, picking up a reliable used car (pre-certified from a dealer) is usually the best way to own and drive. It will also lower your insurance premiums since insured car value will also be lower.
Also, when deciding to drive, it is a good idea to understand the “total cost of ownership” rather than just the car and fuel payments. Insurance, annual registration and one-time sales tax, parking fees (in some places) and interest costs (if you borrow) can add up to a lot! And then of-course there are the regular service and ad-hoc maintenance costs. Total cost of ownership for Car with all costs baked in is pretty high in US!
6. Not understanding the Federal and State taxation
Saying that US tax system is complicated is something of an understatement! Around 58% of returns filed are done with the help of tax professionals! Just trying to understand all the fields in a W2 is likely to give us a headache, leave alone understanding a filled out 1040! And then there is a parallel state income tax system that varies from state to state.
But there are a few underlying themes in the tax system that we should understand, since they play a critical role in deciding the right investment setup and saving on taxes whenever we can.
For tax purposes, H1B visa holders (also L1) are classified as Residents (if they have been in US for more than 183 days in the year) and must pay taxes on their “global” income in US. So, one must remember to declare any non-US income we may have in our countries. Depending on the Double Taxation Avoidance agreement US has with your home country you will get credit for any taxes paid in home country. Also, do not assume that if something is not taxable in India, it would not be in US also. For example, income from PPF accounts is taxable as per US tax law. A good accountant will usually guide you via a questionnaire to report all such reportable items. You may also need to file FBAR and FATCA depending upon how much foreign assets you may hold in accounts outside India.
I have summarized the key elements of Federal and state taxation here using examples that you can review at your leisure.
7. Purchasing a home before being financially ready!
Buying home/apartment is usually the largest chunk of investment that many people make early in their careers. US has a high home ownership rate of about 65% (this number is for 2018) and the appeal of owning your own place may be quite irresistible for a lot of people. (Ownership rate is defined as proportion of occupied households that are occupied by the owners)
Since most people will need to take on a mortgage to fund a home purchase, that means perpetual monthly payments for multiple years! It also involves paying for property taxes, home insurance, HOA dues and any ad-hoc maintenance expenses.
Before deciding to look for a place to buy, especially on an H1B visa, one should do a renting vs buying cost analysis and consider the mobility needs you have if you intend to switch jobs to a better employer. Also understand what level of mortgage payments would you be comfortable with before talking to a realtor or lender. Realtor and lender bank are interested in making the largest possible loans and do not have your best long term interests in mind.
Please note that most lenders require purchasing Mortgage insurance if you pay less than 20% down payment that furthers increases your costs! One should not even consider buying a house unless you have 20% down payment saved up. Actually, you need to save a little more than 20% since there are additional one-time expenses involved in buying (closing costs that include a myriad of fees) that can vary from 2–5% of the price of property.
Hopefully this list equips you to avoid these money pitfalls as you continue to build wealth and a great career in United States! Good luck!
