The Importance Of Being Frugal And How To Get Smart With Your Yen
Tips On How To Reduce, Save And Invest For Your Future Self
How a more intentional approach to money can dramatically increase your wealth (and make you happier!)
Picture this: You’re living in Japan away from your family and friends back home. You have a wonderful life now, a stable partner, a job that gives you just the right income, security and fulfillment, and access to every seasonal Starbucks latte you’d ever want. But you wake up tomorrow and suddenly this is all gone. What are you going to do and will you be able to protect yourself financially? Do you even know how much you spend each month?
Now, forgive me if I sound like your grandma back home, but these are important stuff to keep in mind — especially when you live abroad in a country where no job is really that secure.
As the late Carl Sanburg said, “money is power.” While these words usually get associated with politics, the actual meaning lands much closer to home. Having your own stash of cash means that you will be able to weather divorce, death or disaster. Money allows you to save yourself from abusive situations, as a lack of independent funds is often a reason why many women stay in unhappy relationships. Money allows you to walk away from a soul-crushing job, negotiate raises or tell your handsy boss to go to hell with no fear of starving. Most importantly for me, it is also the ticket to retiring several decades early to pursue your passions. And this, I believe, is the ultimate freedom.
Having your own stash of cash means that you will be able to weather divorce, death or disaster.
However, like all worthy endeavors, it requires a few lifestyle changes and joining a simple three-step program: reducing expenses, saving up and then making your money work for you. Here’s what you can do to boost frugality and investment in your daily life.
Reducing expenses: The other “F Word”
Frugality is a concept that many shy away from, as it inspires images of boring people who haven’t bought new clothes in a decade and subsist on beans and expired milk. But this is a rather skewed view. Japan is particularly dangerous to the wallet, as the ever-present convenience stores, limited seasonal flavors and vending machines tempt you at every corner.
Truth is, many frugal people (or minimalists) look pretty normal. They have nice clothes, do not live in hovels, and are known to buy things like laptops, bottles of wine and gourmet coffee. However, they only buy a few pieces of long-lasting, quality clothing per year, or do frequent clothes swaps. Their rent is kept low, by choosing locations that are just a little bit further from central Tokyo or smaller than is common. Purchases are made intentionally and fall within a pre-set budget. They are likely to pack lunches and eat out less.
You can certainly keep some luxuries (mine, for example, are yoga classes, regular lunches at vegan restaurants and hiking day trips) but you can’t have them all every time you are tempted. Think whether eating expensive lunch out every day is worth working another five years of your life.
Tips on how to reduce your monthly expenses in Japan
- Download a free budgeting app (I like Toshl because you can easily switch between currencies) and get in the habit of logging all your expenses, to see how much you spend per month.
- Find areas in which you can start cutting down with minimal pain, but don’t try to change your whole lifestyle all at once, as you will get discouraged.
- Start packing a bento lunch at least three times a week. Eating out (even from conbini) every day is both very expensive and unhealthy.
- Revise your mobile phone plan. If you’re still paying ¥10,000/month, you’re probably doing something wrong. High fees for phones and internet are avoidable — with a little research you can slash your bills in half.
- When moving or searching for an apartment, make sure rent is less than 25 percent of your salary. Just by choosing a spot a 10 to 15-minute walk from the station, you can get a nice place for a decent price. See Real Estate Japan for recommendations in English.
Savings: Not impossible
While it varies by country, in general people tend to save an amount that is easily reachable and doesn’t cause a ‘squeeze.’ In the US, the average savings rate is just five percent, while Europeans’ average is 12 percent. Japan is on the high side with around 30 to 35 percent. However serious savings and investing opportunities happen when you start being able to sock away 50 percent or more of your income.
Aside from saving cash for emergencies, by teaching yourself and your family to spend and consume less, you quickly get used to a still-cushy lifestyle that is well below your means. This saves you from the vicious circle of lifestyle inflation — where the more you earn the more you spend.
Serious savings and investing opportunities happen when you start being able to sock away 50 percent or more of your income.
My tips for saving (in preparation for investing)
- Set yourself a goal to keep on track, like paying off student loans by 2020, saving 50% of your post-tax salary or accumulating a six-month emergency fund. Having a clear number in mind makes it much easier to stay focused.
- If you don’t have one already, open an account with Shinsei Bank. Not only do they have excellent English customer service and free withdrawal from most ATMs, but they also offer international transfers to certain countries for a flat ¥4,000 rate. Use this as your savings account.
- If you are planning to save and invest for retirement, a good rule of thumb is to have 25 times the amount you plan to spend yearly invested by the time you retire, so you can live off the interest of your investment. Take a look at your average expenses using the budgeting app as a guide, and figure out your “magic number” accordingly.
Just saving is not enough — start investing
While saving money is a worthy endeavor, it should not be the final goal. Money kept in a regular bank account is actually not doing you much good. Due to inflation (and Japanese banks’ almost nonexistent to negative interest rates), money that is simply left to sit in a savings account slowly loses value over time.
My favorite option is investing in a low fee Index Fund. In simple terms, indexes are a giant granola bag of stocks, which allow you to own a little bit of stock from many of the world’s top companies without having to pick them individually. There are many different index funds you can choose, but I tend to go with funds that track the US stock market, as you can usually expect around 10% growth per year in compound interest on your investment.
Money kept in a regular bank account is actually not doing you much good.
For a very simple example of the power of compound interest, let’s say you start spending more intentionally and save ¥20,000 (~ $190) per month by cutting out the spur-of-the-moment purchases mentioned above. Every month you transfer that amount into a simple index fund with a nine percent return. In 10 years, you can expect to have around ¥30,400,000 (~$34,650) in your pocket, despite only having invested $22,800. This means you essentially got an extra $11,850 for free, as your money is working for you. If you do this for 20 years, you would have around $116,645 and in 30 years $310,781 — all with one tiny change.
How to start investing in five easy steps
- If you’re earning money overseas, your best bet is to invest using a Robo-Advisor — an automated financial planning platform. US citizens can use companies like Betterment or Wealthfront, but these services are popping up all over the world. Make sure to do your research before applying, and pick one with fees under 0.30%.
- Fill out the questionnaires and input your goals into the Robo-Advisor, so it can create the right combination of investments for you.
- Transfer as much money as you can from your Japanese bank savings account to the bank account in your country of origin.
- Set up an automatic transfer, so that money is regularly deposited into the investment account.
- Check the account a few times a year to make sure things look okay, and let compound interest do its magic.
If this sounds like gibberish to you, don’t worry, that’s how I felt when beginning my journey. To learn more about basic investing, upping your savings rate and maybe even retiring a decade (or two!) early, some of my favorite financial informers are the hilarious Bitches Get Riches, the family-oriented Mama Fish Saves and the classic Mr. Money Mustache.
Do you have any frugal tips or saving tricks to share? Let us know in the comments!