Guest Post: northSaver’s Story part 4

This is a guest post (4 of 5) from a member of the retirejapan community. You can find northSaver on the forum.

Part 1: What is Early Retirement? 
Part 2: Laying the Foundation
Part 3: The Principles of Early Retirement

In the third article I wrote about the principles of early retirement, and in this one I’ll expand the first two points of the method and explain how they can be achieved in Japan.

1.  Reduce your monthly living expenses as much as you can

Most of this is common sense, and a lot has been written about it by other people already, so I’ll just list some of the things that work for us up here in Hokkaido:

• reduce commuting expenses by living close to your work
• cycle and walk whenever you can
• consider buying decent second-hand items instead of new ones
• reduce electricity bills by using low energy light bulbs, turning off lights whenever possible, washing dishes by hand, and hanging clothes up to dry instead of using a dryer
• reduce heating bills by upgrading your home insulation, draught-proofing windows, tolerating lower room temperatures, and adding foil to the walls behind radiators 
• reduce water bills by using less water to flush the toilet, and use leftover bath water to wash clothes and water the garden
• reduce eating and drinking out to once or twice a month
• stop using satellite TV (e.g. SkyPerfect)
• avoid expensive mobile phone plans
• do any maintenance jobs to your home, car and bike yourself if possible
• carefully consider every irregular purchase and ask yourself if it will make your life richer  
• never buy anything that you don’t need

There’s probably a lot more we could be doing to save money, and in some areas we spend quite a lot (such as on good-quality, healthy food; and flights to the UK for all the family every two years). But we’re within our comfort zone at the moment and we don’t want to stray outside it by being too stingy.

If you can, try to calculate some basic figures every year, such as your monthly living expenses and your savings rate (which is the amount you saved expressed as a percentage of your take-home pay). I find this hard to do in Japan because there are still a lot of businesses that don’t accept credit cards, so you can’t just look at your credit card statements to see how much you’re spending. I’m also not the kind of person who can make a note every time I buy something! Instead, I estimate it every year based on the tax form figures and the amount of money we’ve actually saved in local banks or sent abroad. We adjust it a little for business expenses and large irregular personal expenses. It’s probably not very accurate but it does give us a rough idea, and allows us to compare the figures from year to year. Last year our monthly spending was ¥270,000 (excluding tax, and loans that will be paid off by the time we retire), and our savings rate was 39%. The year before that was ¥310,000 / 23%, so at least we’re going in the right direction! Mr Money Mustache’s spending is the equivalent of ¥210,000 per month, but we aren’t as extreme as him and it’s probably not fair to compare between different countries and currencies. I wonder how we compare to other people living in Japan? Please feel free to share your figures in the comments below!

The idea of reducing your living expenses is not only to save more money, but also to get used to living on less in retirement. The lower you can live on, the earlier you can retire. You can also increase your savings rate by increasing your income, but for most people it will be easier and more beneficial in the long run to work on reducing your living expenses before trying to increase your income.

2.  Eliminate high-interest debt as fast as you can

High-interest debt – such as credit card balances and car loans – must be paid off as quickly as possible, and all non-essential spending – such as eating out, going on holiday, upgrading your phone – must be stopped until the debt has been paid off. This means that any existing savings, and all new savings – which should be substantial if you’re truly treating this as an emergency – must go towards the debt, and not towards any other kind of investments. Only when all your high-interest debt is paid off can you think about investing your savings.

We are fortunate to have avoided high-interest debt for most of our lives, so this step doesn’t really apply to us. But what about other forms of debt, such as low-interest loans and mortgages? Well, the “official” answer is to compare the interest rate of your loans with the returns from your savings, and put money towards the ones which are higher. But the need to pay off debt is overwhelming for some people, and it’s not such a bad thing to put money towards your low-interest loans instead of your potentially higher-interest investments.

Personally, I’m paying most of our monthly savings towards the apartment block mortgage, despite the interest rate being only 2.8% at the moment. Why? Here are some reasons:

a) with no mortgage, the passive income from our apartments at 75% occupancy will cover about two thirds of our living expenses, and semi-retirement will be possible
b) paying off the mortgage offers a guaranteed annual return of 2.8%, whereas other investments may be higher or lower in the short term
c) the mortgage interest rate is variable and likely to rise in the future
d) sending yen to overseas investments is relatively expensive at the moment due to the weaker yen

Of course, it could be argued that we’d make more money in the stock market in the next few years, and the exchange rate might be higher by then too, so paying off the mortgage with a lump sum when it’s time to retire is the better option. Maybe! But a “problem” like this is not worth losing sleep over and I’d recommend doing whichever feels most comfortable to you.

In the final article I’ll cover the third point, which is how to invest your savings wisely.