Personal Improvement

The Ultimate Guide to American Personal Finance for New Immigrants

new immigrants
Table of Contents  
  1. It's All Greek
  2. Bank Accounts
  3. Establishing Credit
  4. A Thin File
  5. Housing
  6. Insurance
  7. Investing
  8. Taxes
  9. We Dive Deep

Matters of personal finance vary widely by country making them confusing for newcomers. We want to help them navigate their new home, so we wrote the ultimate guide to American personal finance for new immigrants.

It’s All Greek

Personal finance is like languages, each country has its own and while it may share things in common with other systems, there are aspects that are individual to each country. Personal finance for new immigrants might be the most confusing aspect of their new country.

Yes, Americans and Britians speak the same language, but fanny in each language means two very different things (It’s dirty, so I’m not gonna write it, you’ll have to look it up).

At LMM we want everyone to have a solid understanding of personal finance. But we write under the assumption that everyone has at least some basics. And most of you do because you were born in America or have lived here long enough to understand the basics of our personal finance system.

But without meaning to, we have left out a big chunk of people who may need more help than anyone.

We are going to correct that with this article. At LMM, everyone is welcome. Welcome to listen to the podcast, read our site, and join our community.

If you’re new to America, welcome, this is for you.

Bank Accounts

First thing’s first. Opening a bank account will make a lot of the other things on this list easier to accomplish.

new-immigrants-bank

Banks are Safe

Not every country has a safe banking system but putting your money in a U.S. bank is 100% safe. A bank can fail, but if that were to happen, you wouldn’t lose the money you had in that bank.

The reason for this is the FDIC. The FDIC is the Federal Deposit Insurance Corporation. It was created in 1933 in response to bank failures during the Great Depression. The FDIC is a government agency that protects the money consumers deposit into banks.

Nearly all U.S. banks are FDIC insured. You can check here to find out if a bank you’re considering doing business with is insured. Each checking and savings account is insured for up to $250,000. If you keep more than that in a bank account, you can open more than one account and divide the money between them.

Accounts

Most people have two types of banks accounts, a checking, and a savings account. A checking account is where people store the money they use to pay bills. A savings account is where people store money they are saving such as their emergency fund.

Some banks charge various fees, but there are plenty of banks that don’t charge for things like not keeping a certain amount of money in your account and a monthly fee just for having an account. When you’re shopping for a bank, choose one that offers free checking.

Banks typically pay interest on the money you have deposited with them.

For example, if you have $100 in a checking account that pays 1% interest, you will earn $1 per year. Most banks offer less than 1% though so the amount of money you make is negligible.

If you’re choosing between a bank that offers free checking and one that has a higher rate of interest, choose the one with free checking. You’ll save more in fees than you will earn in interest.

Online banks typically have fewer fees than brick and mortar banks, but it’s complicated and maybe impossible for non-residents to bank with them.

You don’t have to have both a checking and a savings account. Of the two, checking is more important. You can keep the money you’re saving in your checking account. The reason some people choose to have a savings account in addition to checking is to make it a little less accessible. If it’s harder to get to, it’s harder to spend.

Checking Accounts are Convenient

You don’t have to have a checking account, but it makes life more convenient. Many employers pay via direct deposit. This means rather than giving you a paper check to deposit or cash; the money is just automatically deposited into your checking account.

If you don’t have a checking account, you will have to take your paper check to a check cashing business, and they charge a fee to cash a check.

Most Americans pay their bills from their checking account. There are other ways to do it but like money orders but they’re a hassle and often cost a fee. You’ll have access to a debit card; we cover that in detail next. Unlike cash, when you pay a bill from a checking account, you have proof of the transaction should it be disputed for some reason.

Debit Cards

When you open a checking account, most banks will provide you with a debit card. A debit card acts like cash. If you have $5,000 in your account, you can access $5,000 on the debit card. Debit cards are typically branded with a Visa or MasterCard logo.

This doesn’t make them credit cards, but it does make them an acceptable form of payment in any establishment that accepts those credit cards.

It may take you longer to get a credit card than it takes to get a bank account, so the attached debit card is a convenient way to pay for things.

It’s not convenient to carry cash, and if it were lost or stolen, you have no way of replacing it. You can also use a debit card to get cash from an ATM, automatic teller machine and at certain retail outlets like grocery and drug stores.

You can find ATMs in lots of places, in banks, in stores, in bars, and in restaurants. When you receive your debit card from your bank, you will choose a PIN, a personal identification number. This is usually a four-digit number. You can insert the card into an ATM and withdraw cash, usually in denominations of $20.

If you use an ATM affiliated with your bank, there is no charge to take out cash, and when you get cash back during a transaction at a store, there is no fee.

If you use an ATM not affiliated with your bank, you will be charged a fee to do so, usually around $3. The machine will make you aware of the fee, and if you don’t wish to pay for it, you can cancel the transaction.

Checks

Your bank will give you a few checks which you can use to pay your bills. The check will have two sets of numbers at the bottom.

The first is the bank’s routing number. This is used to identify the bank. The next is your checking account number. This identifies your account.

Each check will also have a number in the top right corner. This is the check number to identify that particular check and the checks are numbered sequentially.

Checks are pretty out of date in the U.S. though. I don’t use checks for a single bill or expense I have. If you prefer checks, you can order more from your bank.

Establishing Credit

While a bank account doesn’t directly help you build credit, having one does establish a relationship with a bank, and you’ll need that if you want to borrow money in the future for something like a mortgage or car loan. We’re going to fully cover how to establish credit in the U.S.

Requirements to Open a Bank Account

It’s legal for non-citizens to open a bank account (for now anyway). That said, banks do have a responsibility to verify the identity of their customers so you will have to provide some documentation to open an account.

Name and Date of Birth: You can present a valid passport, your birth certificate, a U.S. or foreign driver’s license or identification card, or a consular identification card.

Identification Number: Documents with an acceptable ID number include a valid passport, driver’s license or ID card, a Social Security card, an alien identification card, or an ITIN, an individual taxpayer identification number.

ITINs can be issued to non-resident aliens not eligible for a Social Security number who file a U.S. tax return. This explains the process to apply for an ITIN. The process takes 6-8 weeks.

A Street Address: You can prove your address with your lease, a utility bill, or a driver’s license.

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Establishing Credit

American personal finance relies heavily on credit and credit history is something that doesn’t follow you to a new country. As a new immigrant, you should start working on establishing credit as soon as you can.

new-immigrants-finance-credit-score

What is a Credit Report?

A credit report is a summary of how you handle credit and debt accounts. It includes information about how much debt you have, if you pay your bills on time, and if you’ve ever had a bankruptcy.

It also covers  any financial judgment against you, if you’ve had a home that was foreclosed on or an automobile that has been repossessed (the bank that loaned you money for these things took them back because you failed to make the payments.)

This information is sent to credit bureaus, there are three major ones in the U.S. and is what makes up your credit report. Your credit score is a number calculated using this information. Once you have established some credit, you can see both your credit report and your credit score for free at Credit Karma. 

Why You Need a Credit Score

Not only do you need a credit score, you need a good credit score. Anytime you do something like renting an apartment, apply for credit or borrow money from a bank or an online lender, your credit report and score will be pulled.

This shows how likely you are to pay your rent on time and pay back borrowed money.

The higher your score, the better your credit. The better your credit, the lower the interest rate when you borrow money. The lower your interest rate, the cheaper the loan. If you borrow $100 and your interest rate is 5%, you have to pay back $105.

A Thin File

If you don’t have much or any credit history in the U.S. it doesn’t mean you have “bad” credit, but your credit file is “thin.” A thin file can make it hard to get credit so you need to build your file.

Credit Cards

This is a card that works like the debit card that we discussed earlier. The difference is, a debit card is tied to your checking account. You can only spend as much money as you have in your checking account on a debit card.

A credit card is not tied to your checking account. It comes with a pre-set limit partly determined by your credit score and a fixed rate of interest.

The interest isn’t determined by your credit score. The average interest rate on a credit card is about 15% but it can go much higher, and your set rate may go up if you miss or make late payments.

Ideally, you pay off the entire balance on your cards each month. If you don’t, you’re charged interest on the balance. This is how many, many people get into financial trouble.

Credit cards are not free money. If you can’t pay the balance every month and run up the balance, it can take years to pay off the card, and you will have paid hundreds or even thousands of dollars in interest alone.

We wrote an entire article about how to use a credit card responsibly. 

Secured Credit Cards

That warning issued, credit cards are a good way to build credit. Because your credit file is thin, you may not qualify for a traditional credit card. But you may be able to get a secured credit card.

new-immigrants-secured-credit

It works like a debit card, you pay a deposit to the company that issued the card and that is your credit limit.

You still make a payment each month but if you don’t, the issuer has your money. The issuer will report your payments to one or more of the credit bureaus and boom, you have a credit history! Not all cards report so make sure you choose on that does. It takes about six months to establish a credit score.

Also, read the fine print, some secured cards come with a lot of fees. You can research cards at Credit Karma and choose the one that sounds best to you. Discover, and Capital One are both reputable companies that offer secured credit cards.

Authorized User

If you are close to someone who already has a credit card who is willing, they can make you an authorized user on their card. A card is issued in your name but under their account. They are responsible for any charges you make.

You can pay the balance each month or just don’t use the card. As long as the owner uses and pays the card, it will help you build a good credit score. The account holder doesn’t even have to give you a card if their nervous about this arrangement.

Not all cards report authorized user’s information to the credit bureaus though so be sure to choose one that does.

A Traditional Credit Card

Once you have established a credit file through your secured card which you paid off each month on time, you can apply for a traditional credit card. The best way to do this is to contact the company that issued your secured card and ask if they will transition you to a traditional card.

If that’s not possible, you can apply online for a traditional card. Credit Karma again is a good way to research cards. Each time you apply for a credit card, your credit score takes a small, temporary hit so you don’t want to apply for a card you”re unlikely to be approved for.

Credit Karma will show you a list of cards you’re more likely to get.

If you weren’t able to move from a secured card to a traditional one with the same company, don’t close the secured card. It will hurt your credit score. Leave it open, make one small charge on it a month and pay it off on the due date.

Your Rent

Some landlords and management companies will report your rent payments to a credit bureau. If yours does, sign up for the program. This is a great way to build your credit score with something you’re doing anyway, paying your rent!

Housing

Renting an apartment can be hard for U.S. citizens without a credit history or poor credit so recent immigrants will face even more significant hurdles.

new-immigrants-Rental-Home

How Much To Spend

Housing is the biggest expense for most Americans, and U.S. housing has become increasingly unaffordable. Ideally, your rent is no more than 30% of your take home (after tax) income. This can be tough but the closer you can stay to 30%, the easier your financial life will be.

Where To Look

There are all kinds of sites online to find apartments. Some of the biggest are Craig’s List, Nextdoor, Zillow, Walk Score, and local Facebook groups dedicated to housing.

You can also work with a real estate broker. You explain what you’re looking for in an apartment and your price range and it’s their job to find apartments that meet your criteria and show them to you.

In some cities, brokers charge for this service, and it can be a lot. In New York City, they charge up to 12% of the year’s rent, and they want the money up front. It’s a disgusting practice, and the brokers who charge that much are vultures whom I have nothing but contempt for.

If brokers in your new city charge huge fees, avoid using them at all costs. The service they provide in no way justifies their fees.

Lots of Documentation

This is what you’re going to need to rent an apartment on your own. You’ll need to verify your identity as you did when you opened your bank account. You’ll need a bank account, and that’s why we went over that first! Bring your bank statement showing your balance.

You will need proof of employment and something showing what your salary is. This can be pay stubs from your paycheck or a letter from your employer. If you rented in your home country, bring contact information from your previous landlords. That allows the potential landlord to contact them as a reference.

The landlord or management company will pull your credit report. If they charge for this, offer to bring the report yourself. You can get a free report at Credit Karma and so can the landlord, so there is no reason to pay a fee for this.

First and Last

Many apartments require first and last months rent at the time the lease is signed. Some may require an additional month as a security deposit. So long as there has been no damage to the apartment, you should get the deposit back at the end of the lease.

Most apartments rent for one year at a time, but you can sometimes find six-month leases.

Alternatives

If you’re not able to rent an apartment on your own, there are plenty of alternatives. You can sublet an apartment. A sublet means the original renter has moved out for whatever reason but still leases the apartment. It’s the renter who sublets it, not the landlord.

A sublet will require less documentation. The leaseholder will probably just be interested in how much you have in the bank. The same is likely true of a leaseholder looking for a roommate. Airbnb is another option but will be more temporary than the other two options and probably more expensive.

For all of these options, you likely won’t be required to sign a lease. If you’re unfamiliar with your new city, one of these options is probably better than renting your own apartment. A short-term situation allows you to familiarize yourself with the city and learn what neighborhood is best for you.

These housing situations also give you time to build up your credit history.

Insurance

Health insurance is a huge problem in the U.S. whether you’re a citizen or not. If you’re coming from a country that had national health care, you’re going to be in for a terrible surprise. Socialized healthcare is coming to the U.S. too but for now, we have to pay, pay, pay.

Health Insurance

If you’re lucky in the U.S., your employer provides medical insurance. You may have to contribute, but the amount is less than if you were on your own.

If you don’t have insurance through your employer, you can buy it on the Health Insurance Marketplace, commonly called Obama Care. This is available to U.S. citizens, U.S. nationals, and “lawfully present” immigrants.

If you meet certain income requirements, you are eligible for subsidies. That means part of your monthly cost for your insurance policy will be covered by the government. You may also be eligible for Medicaid which is a free or low-cost medical insurance plan.

If you are not documented, you can still purchase medical insurance, but you will not be eligible for any subsidy.

No hospital can legally turn you away. If you are sick or injured and go to the emergency room, you will be treated. You will receive an enormous bill, but you are entitled to medical care.

Unless your situation is life-threatening, going to an urgent care clinic is often a better solution than going to an emergency room. The wait time will be less as will the cost. Urgent care clinics are not open 24 hours a day, but they do have extended, holiday, and weekend hours.

Auto Insurance

Auto insurance is relatively easy to get if you have a U.S. driver’s license. Currently, about a dozen states issue driver’s licenses to immigrants no matter their legal status. Auto insurance can be bought online.

Investing

Investing is the best way to build wealth. It’s easy for U.S. citizens with a Social Security number, they can open an account with a robo-advisor like Betterment and get started in five minutes. But without that number, it can be tougher.

Never depend on a single income. Make investments to create a second source.

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Until you have a Social Security number, you will have a hard time investing in the set it and forget it way we recommend at LMM. This is why so many new immigrants start their own business because it provides them with a job and an investment.

In the meantime, we can give you the basics of investing. 

Taxes

Immigrants to the U.S., all of them here legally or not, pay taxes. Billions of dollars worth of taxes. Those authorized to work pay taxes just like any citizen and those not authorized often pay using their Individual Tax Identification Number.

The best estimates come from research by the Institute of Taxation and Economic Policy, a Washington, DC, think tank, which suggests that about half of undocumented workers in the United States file income tax returns. The most recent IRS data, from 2015, shows that the agency received 4.4 million income tax returns from workers who don’t have Social Security numbers, which includes a large number of undocumented immigrants. That year, they paid $23.6 billion in income taxes.

Tax returns must be filed around April 15th each year. Employers provide W-2 statements to employees, this form shows the amount of money you’ve earned for the previous year as well as federal, state, and other taxes withheld from your paycheck.

Many Americans do their own taxes using software that walks you through the process. But it can be intimidating for first-timers. There is a program, The Volunteer Income Tax Assistance (VITA), that helps those who make under $54,000, have a disability, or have limited English, prepare and file their tax returns for free. You can find a location near you here. 

If you’re unsure of your tax status, the IRS has a page that explains it.

We Dive Deep

Personal finance for immigrants and for everyone else is why LMM exists. We want everyone to have the information they need to make good financial decisions. Because this is an article and not a book or a volume of encyclopedias, we’ve only skimmed each subject.

But LMM has dived deep on every subject; each link contains more in-depth information on the subject each section discusses. We have a toolbox that contains all of the stuff we use to manage our money.

We also have a robust, smart, and friendly Facebook community. Everyone is welcome, and you can ask your personal finance questions there or just get some support if you’re struggling with your finances.

America is a country built by immigrants. Whether your relatives came over on the Mayflower hundreds of years ago or you arrived yesterday, welcome to America.

 

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