A friend called to tell me that they are finally debt free. Twenty years after they got married. There is no story in that statement. Except that they are the average US-based NRIs. Wouldn’t they be rolling in dollars? Let’s see why that may not be the case. Our friends began their lives as newly employed graduates, who came to study in the US. They had a bank loan back home, which they repaid in the first two years of employment, thanks to the dollar rupee conversion. They also decided not to have children until they were feeling stable in their jobs. The tech meltdown had just happened and jobs weren’t easy to come by or keep.
The salary was above average, but not too high. Federal taxes and state taxes meant nearly 40% of the income was paid as taxes. They also contributed to their health insurance and retirement plan (401K) as these are near mandatory and highly recommended. What they brought home was thus a fraction of their income. That is true today 20 years later as it was when they began.
But normal household expenses are low in the US. Petrol, groceries, household utilities, are all not a huge percentage of their monthly income. They live a simple life and with both of them working, it should be fine. They had to however, lease two cars, to commute to work. They lived far from the workplace to save on rent and life was tough without a car as everything was far away and scattered across miles in the city they lived.
By 2003, interest rates had begun to drop.
In 2004, they decided to buy a house instead of renting as loans were easily available. And soon decided to also own cars as car loans were easily available. Taking a loan and repaying it in time led to a better credit score. That meant lower interest rates for future loans.
In the crash of 2008 one of them got retrenched. They renegotiated their loans and began to feel the pinch. They found out that they needed fertility treatment and other procedures to have a child. Those costs were not covered by insurance. The parents from both sides wanted to visit regularly. The tickets cut into their meagre savings. They postponed their India trip but couldn’t do so beyond four years. Tickets and gifts further eroded their savings.
By 2012 things had gotten better. They moved up in their jobs. They had twin children. Their household expenses moved up. They paid a sizable sum for daycare. But they also needed a bigger home, and wanted to move into a locality with good schools. And thus they took on another larger home loan. They did have a decent level of savings, but their parents insisted that they invest in property back in India. They obliged.
Cut to 2020. They both earned well and worked long hours. But expenses had moved up too. The children were pursuing one sport and one art activity, as is the norm in the US. They were ferrying the children to these activities, driving all week across the city and taking long trips for tournaments and competitions. Expenses creeped up on one count or the other, including annual holidays for the family and the mandatory India trip once in two years.
Home ownership also meant home improvements. Sometimes the bathrooms needed remodeling; sometimes it was the basement that needed to be done; and this was apart from routine expenses on upkeep, lawns, outdoor painting and such that was required by their homeowners’ association. Everything from cars, home, appliances and equipment had to be insured and premiums paid.
So the summary of their lives is that they earn well, but have a long list of mandatory payments for taxes, loans and premium that leaves little in their hands as savings or buffer. There is enough money to spend as needed, but nothing much to take care of emergencies. They lived a life where cash flows were fine for small outlays every month, but inadequate for anything large. Children mostly go to public schools which offer good quality education, almost free of cost. Plans for college are simple: send children to colleges in the same state they live in. Fees for in-state students is low and most of it is covered by one scholarship or the other.
How is it that upper middle class Indians pay high international student fee and send their children to US based schools, I began to wonder. We brought the numbers together and identified these differences:
First, NRI salaries are high enough to easily cover mandatory costs of everyday household, school education and utility expenses. But they incur a heavy load of expenses on taxes, 401k, home loans, car loans, medical and other mandatory insurances. Indian salaries are not high enough for household and utility expenses to be a low percentage, but there is no load of other large taxes and insurances.
Second, NRIs incur large chunks of heavy expenses periodically for their kith and kin back home. From funding trips and visits, to bearing hospitalisation costs, investing in property and retirement homes, many NRIs suffer the guilt of being too far away to refuse any of these large expenses. Since they have enough for living a good life, live in a large home and drive fancy cars, it is easy to assume they have a lot of money to spare for such expenses back home. Most don’t complain either.
Third, rates of inflation are lower in the US which means three things: Annual salary increments are lower; interest rates on loans are lower; and investment returns are lower. If home loans are available for 2.5%, investment portfolio returns at 6-8% and annual salary increments at 3-4%. So they may have a large dollar amount as salary, but it grows at a slow pace and savings accumulate at a lower rate. Indians may be paying higher loan rates, but enjoy a far higher investment return and salary increment.
There is nothing wretched about the average NRI life. It is comfortable and cozy. It is just that it is an income matched lifestyle where salary is allocated easily to loans and to expenses. It does not always have the buffer or the capacity for large chunky costs—even if it is to send the child to a private school or to an Ivy League School out of state. That reality is accepted by most average NRIs without complaint.
(The author is CHAIRPERSON, CENTRE FOR INVESTMENT EDUCATION AND LEARNING.)