My wife’s cousin recently moved to Cote d’Ivoire, and our latest conversation centered around financial independence and early retirement. The topic is also known under the trendy term “FIRE”. You may have heard about it as “those darn milenials retiring in their 30s”.
A lot of the advice I’m familiar with is US-centric (or covering Canada, Australia, EU countries, and so on). I couldn’t find adequate resources for pursuing financial independence in emergent economies. I tried to research this subject, and here’s what I came up with.
This one’s mostly for you, Myriam – as a follow-up to our conversation.
I refer to “developing” economies in this article. I’m using this term interchangeably with low and middle-income countries, countries with emerging markets, or pre-industrialized countries. None of those classifiers are strictly defined either. This can be a controversial term, but I hope the reader will bear with me and focus on the primary goal of this article - financial independence outside of countries like the United States, Canada, Australia, UK, and others.
Before I dig in, I want to shine light on my credentials for this article: I don’t have any. I immigrated to the US at age 18. Before that I lived in Russia (which is often considered a developing economy). However I’ve never gotten a chance to become financially savvy in the country. Never held a full-time job outside of the USA.
My wife an I diversify into developing markets (and it’s less than 20% of our portfolio). We don’t have any inherent knowledge or in-depth understanding of emerging markets.
And I sure as hell don’t know what it’s like to live in a pre-industrialized country.
I’m bringing a perspective of a person who’s familiar with financial independence and early retirement in the United States (and vaguely Canada). This piece is a compilation of about 10 hours of research (give or take), with my own context applied to it.
This is not a professional financial advice, and I’ll be making culturally or economically ignorant statements about many countries. Read while having a tub filled with salt nearby.
Working to death
There’s a strong reason why the United States is a birthplace of FIRE movement as a media phenomenon. Limited worker protections, no government mandated vacation days or holidays, no maternity leave, low social security pension – you name it.
In fact, according to 2018 ITUC worker rights index, the United States is placed in “Systematic violations of rights” category. But this is where the first caveat comes in. A major chunk of emerging economies hold a “No guarantee of rights” or a “No guarantee of rights due to breakdown of the law” rating. Make of that what you will.
There’s the cultural aspect to an overwhelming desire to escape workforce: it’s common to live for the weekend in the States. Culturally life is often put on pause Monday through Friday. Enjoying life two days out of seven can be draining.
In the EU, one might take two months off (okay, not quite: 28 legally mandated days off + 7 weekends in between = 42 days). In the States (Canada, Australia, etc) you work to death, and getting out of the rat race is a priority.
This is where I need another disclaimer: I quite like living in the United States. I just think it’s worker protections are shit and should be improved.
Of course the United States and the likes don’t have a patent on working long hours or having workers protection. But there’s a reason why FIRE is prevalent in the industrialized world (in contrast to developing nations). One word: “stability”.
Despite the popularity of FIRE in the United States, similar formula applies for achieving financial independence in the rest of the industrialized nations. And there’s a constant across those countries: stability.
It’s as simple as that. To ensure your financial future you need to plot and plan ahead. You can’t plan effectively in an unstable landscape. Currency hyperinflation or hyperdeflation, risk of regime and major law changes, corruption and nepotism.
When considering financial independence within developing nations, it’s important to acknowledge and asses the stability of the economy, currency, and political regime. These constants are treated as somewhat of a given in many FIRE conversations, but most recommendations and arguments quickly fall apart when faced with a lack of stability.
There’s no recipe for dealing with a lack of stability, but hedging against it would likely have to be a key part of one’s financial independence strategy. I found a few things that are worth considering – and I’m sure there are many more aspects that escaped my surface-level investigation.
The FIRE recipe
In it’s core FIRE comes down to three principles: increase income, decrease expenses, and invest the difference.
Decreasing expenses is simple, but not easy. Increasing income is hard work that pays off if successful: drastic income increase helps speed FIRE along. Investing the difference carries significant risks due to aforementioned lack of stability.
I’m going to dive into all three principles, but regardless of plans for retirement, building up an emergency fund is always the first priority in nearly every financial conversation. Let’s talk about that first.
The first question you might get asked when talking about FIRE is “do you have an emergency fund?”. There’s always a straightforward recommendation of having N months worth of living expenses in a savings account. Of course this blanket advice breaks down the moment we discuss developing economies.
Lack of faith in the currency or the government puts savings accounts under question. Granted, banks in the developing nations are quick to offer high interest accounts. You might get a 20% return on investment, only to realize that the currency lost 25% of its value in a year.
If the country allows for holding foreign currency, foreign currency could be used to hedge against that. The United States dollar is the most widely held reserve currency. Euro is pegged by 19 countries, making it a relatively stable bet as well. Japanese Yen (JPY) is the third most commonly used reserve currency.
I titled this section “Parking cash” and not “Emergency fund” because I wanted to mention an alternative to savings accounts often used in developing economies. Real estate.
While not a place for storing emergency funds, longer term reserves are often held in what’s perceived as the most stable asset – real estate. Due to a significantly lower cost of labor it’s common (and is often sensible) to purchase land, and then build on that land.
Although lower risk than other asset classes, it’s worth examining potential for asset seizure. 1980’s land redistribution in Zimbabwe is the prime example of this. Less stable political systems are at a higher risk for similar events.
Non-primary residence (that is: a house you don’t live in) can be used as an investment – either through having tenants, or through an act of reselling. Investment through real estate is work, and it’s the type of work I don’t think I would enjoy. I haven’t researched anything on the subject and will zoom past real estate and onto another topic.
Increased income is an important pillar of reaching financial independence. This is where you say:
I work in a highly specialized (and therefore well paid) field. I can talk all I want about saving and investment, but without the high earner salary, stock grants, and financial benefits my job provides - it would take me decades to get where it takes me years.
It’s possible to ensure your financial future with a lower income. It’s much, much harder.
There’s a significant luck element involved, and I’m not interested in peddling the “work hard and you’ll be rich” narrative. Load of bullshit if you ask me. There are however concrete steps one can take. These steps could open up the right opportunities.
Increasing earning potential is a massive boon in the FIRE world. Directing energy towards this goal might be a higher priority step compared to everything else I wrote about.
The most straightforward way to increase earning potential is through education (either formal or informal). College, university, books, online courses. If formal education is problematic, some industries (e.g. software engineering) are more open to self-taught professionals than others. Yours truly is a good example of that.
Networking is another avenue to pursue. It might be more difficult in certain nations due to inherent nepotism and lack of opportunities.
In fact, many developing countries make vertical mobility problematic due to corruption. In an increasingly connected world, earning internationally could be a feasible way forward to increasing income. That is if you have skills that are worth paying for.
Another “duh” topic, reducing your spending in proportion to income is crucial in achieving any type of financial freedom.
Expense reduction is very much a country-specific topic. In fact, it’s highly specific to individuals. Analyzing expenses and putting together a budget is a strong first step. Thankfully, reducing expenses is something commonly covered in media, with plenty of literature available around the globe. That, and this is something financial professionals frequently focus on.
A blanket advice I heard for expatriates living in another country is to avoid expat-friendly stores. Those often come with a premium, and shopping locally might reduce expenses significantly. That’s an extent of my knowledge on the subject.
“Earn more, spend less, invest the difference”. Generally “invest the difference” portion of the advice implies investing in mutual funds – a mix of stocks and bonds for a set of companies. But as you’ve come to expect in this piece, this advice comes with caveats when living in a developing nation.
General advice for investment into mutual funds is holding a 60/40 split of US/international assets. This represents the weight of the US-based stock and bond market in respect to the rest of the world.
But some countries might not allow for international investments. Some countries might introduce additional taxes on foreign investments. Or investments into certain markets could be made difficult due to local regulations. US in particular makes it more difficult for non-Americans to invest, introducing a number of hoops to jump through for identity verification.
To dig deeper, let’s investigate Cote d’Ivoire as an example - a country Myriam is living in.
Quick history recap of Cote d’Ivoire, a former French colony in West Africa. After gaining independence in 1960, the country enjoyed relative stability until 1999. A military coup led to an economic downturn, and two civil wars followed in 2002 and 2011. 2020 presidential election has resulted in unrest.
From those dates alone, political stability in the region at the moment seems problematic.
On the flip side of the coin, Cote d’Ivoire has the benefit of being a member of ECOWAS: Economic Community of West African States. This increases economic stability of the country, by pegging it’s economy (and currency) against it’s neighbors.
This is a nice bonus to economical stability of the region.
We’ve established that blanket investment advice might not exactly work with developing economies. A few questions come to mind:
- What are the restrictions on holding foreign currency or investments?
- How stable is the currency?
- What is the tax situation like?
Let’s dig into each one.
For financial independence, we’ll want to reduce risks where possible. This means hedging against a single country’s economy.Supporting local economy by investing in a regional stock market is responsible (please do!), but diversification is the name of the game. For a complete portfolio you’ll likely want to hold international stocks and bonds.
Certain countries either might not allow, or make it extremely difficult to hold foreign investments.
In Cote d’Ivoire, there doesn’t seem to be any restrictions on holding foreign assets. That’s a plus. Quick online search didn’t bring up a history of restrictions on ownership of foreign assets either.
Finding a broker that operates in the country of choice (or allows for investment from said country) would be a next step here.
Cote d’Ivoire uses West African CFA franc – a French treasury backed currency with a fixed CFA/Euro exchange rate. Political controversy aside, Euro pegged currency offers stability that many developing countries might lack.
To look at currency stability, we can look at an inflation rate or an exchange rate against other currencies. For instance here’s how many CFA a single USD would buy (from 2003 to 2021):
In contrast to that, some quick research surfaces official discussions for introducing “Eco” – a non-French backed currency for the West African region. While this could result in higher economical growth potential for the region, it comes with more risk.
Tax laws change how you invest. Our FIRE strategy is carefully crafted to leverage every tax-advantaged account possible: a good third of our assets is held in tax-advantaged accounts. And of course tax laws vary by country.
This is definitely the place where you want to bring in a professional. A quick search (and that’s the keyword: “quick”) indicates that Cote d’Ivoire has 1.5% salary tax, and 1.5% - 10% “national contribution”. Cote d’Ivoire taxes capital gains, dividends and securities. There’s pension both your employer and you pay into, which is nice.
There are likely country-specific tax law peculiarities one can take advantage of to optimize asset growth. This would require much more in-depth research.
Financial independence becomes a completely different beast in developing nations. Whatever little financial knowledge I have is challenged if not outright rendered useless when applied to emerging markets.
Yet there are a lot of directions for future research, and this piece only presents a view through a very much United-States-tinted lens. It could be that FIRE in developing countries might leverage creating a business and using more active forms of income generation.
Many of my findings are superficial, and I touched on a lot of different topics without going in-depth into any one of them. I can dedicate more time to this topic if there’s interest - let me know in the comments.