Why You Need An Offshore Bank Account

Editor’s Note: Lief is busy today co-hosting Live and Invest Overseas’ Retire Overseas Conference taking place in San Antonio, Texas. He has suggested, therefore, that we rerun an Offshore Living Letter classique, the inaugural issue from January 2012. Lief will be back online Monday, in time for your next dispatch.

Welcome to the first issue of the Offshore Living Letter. Taking your life (or part of it) offshore is a new concept for most Americans, but much of the rest of the world has long embraced these kinds of options and opportunities.

The simplest going-offshore step is moving some of your money to another jurisdiction–specifically, for example, setting up a bank account in another country. This is standard operating procedure if you live in a country like Argentina where crisis is the norm. Following the financial crisis at the end of 2001, when Argentina dropped the artificial peg between its peso and the U.S. dollar, the country went into tailspin. All accounts in all banks in the country were converted into peso accounts overnight. Maybe they were dollar accounts the day before, but now they were denominated in pesos. And the peso went from 1 to 1 (where it had been pegged) to 4 to 1 overnight…meaning that everyone woke up the next day with 75% less money in their accounts in dollar terms.

Banks closed, and the country devolved into chaos…creating opportunity for investors but a serious bummer for anyone with any money on local deposit.

That group did not include savvy Argentinians. They have forever known to keep the bulk of their cash outside of their country…just in case. The crisis had a dramatically negative effect for many, but not for everyone. Those who’d kept their assets diversified in bank accounts in other countries were protected.

This kind of diversification isn’t an option for everyone. Citizens of some countries are prohibited from holding their money outside their home country. For years, South Africa, for example, limited the amount of money its citizens could take out of the country…even for vacations. Credit cards had small daily limits. Wiring money out of the country was virtually impossible. Those controls have been loosened over the years, and, currently, citizens of South Africa can transfer up to $5 million rand (about US$625,000) out of that country a year.

Many think that the United States is moving toward these kinds of restrictions with the new FATCA rules and the banking controls being put into place. The U.S. government is desperate for cash (well, let’s say revenue, as they can print all the cash they want).

The idea that, as a result of its desperate position, the U.S. government will limit the flow of capital out of the country seems ludicrous considering America’s long-standing free capital system. However, historically, more money has flowed into the United States than out. Foreign investment (the Japanese buying real estate in the ’80s…the Chinese buying Treasuries in the ’90s…) has meant more money coming in than going out.

This dynamic is on the cusp of changing…and, so, yes, it seems possible to me that U.S. foreign exchange policy will change, too, as a result.

Many also think that the U.S. dollar is on a perpetual downward trend, at risk of losing its status as the global currency of exchange (thanks in part, again, to the new FATCA rules).

On the other side of the Atlantic, the euro is thought to be in trouble, too. A friend made a dramatic prediction last week, telling me with confidence that the euro will collapse this summer. He even quoted a specific date (that I don’t remember). Get out of the euro right now was his advice.

The reason I don’t remember the date he referenced (and as I responded to him at the time) is because I don’t care what happens to the euro. I don’t care what happens to the U.S. dollar either.

It’s difficult over the short-term to time currency markets. Over the long-term, it’s impossible. I can’t predict what will happen with the dollar or the euro…or when. So I don’t waste time and energy worrying about it.

Instead, I have worked steadily and steadfastly over the past near-two decades to organize my life and my financial affairs so that it doesn’t matter. This is the key. So that no matter what happens with any currency or any government or any economy, you’ll be ok. You’ll be like those Argentinians who knew to hold at least some of their assets in non-Argentinian banks.

Even if you hold only a small fraction of your cash outside your home country, it means you have options should something tragic occur at home…economically or politically. And you can accomplish that by simply opening a bank account offshore.

Sure you can hold another currency in an account you already have in the United States, but that account would still be in the United States, subject to U.S. rules. Open an account in another country, transfer some dollars, and convert them to whatever currency you are most comfortable with. That is the easiest first step to internationalizing your life…and one you’ll be happy you made no matter what happens at home.

Lief Simon