It’s an important distinction
I saw this article the other day, about the Beckhams building a swimming pool or some such nonsense in their ‘6 million pound house’. Then I realised that 6 million is a fraction of their yearly income.
For them to build a 6-million pound house is kind of like for me to buy a house for 500,000 yen. I wouldn’t really have to think about it too much.
This shows us the importance of relative cost. Relative to what? Your income, of course. Income is the key metric. Wealth is less important than how much income it produces sustainably.
This is the key concept behind ancestral wealth: never spend the principal, only the income.
I think a lot of people miss this. It’s probably why lottery winners go broke so often. Also people who inherit more money than they are used to. They don’t understand this concept. It’s not how much money you have, it’s how much cash flow you can receive each month or year.
Financial Samurai’s car-buying rule uses the concept of relative price. I like it very much. Of course, applied strictly, that rule means that we would just about be able to buy our current car again today 😉
The ‘value of your time’ metric from Your Money or Your Life is based on a similar principle. Figure out how much money you make per hour working (make sure you include the time spent commuting, or getting ready for work, shopping for work clothes, etc.) and then use that figure when you think about buying things. Is this <thing, experience> actually worth x hours of my time?
Right now we’re thinking about buying something that costs seven times my gross annual income. It’s a very new experience for me and I don’t have a good mental model for it.
I guess thinking about the monthly or yearly payments on the mortgage compared to our monthly or yearly income would be one way of looking at it.
We could also compare it to alternatives, like how much it would cost us to rent, or continue living in our current place.
I’ll have a lot more to say about the house in our next post, but until then how do you think about money? Do you have any metrics you use to figure out the value of things?
Since I moved to Japan, I tried to be more careful about money without giving up too much fun.
I do a Google Drive spreadsheet for each daily expense including everything and split up by categories.
Then on another sheet I can see my monthly expenses by month and by categories, but also my monthly revenues.
It gives me a nice view on my monthly balance and thanks to that I was able to know my true saving capacity but also to setup expenses objectives.
Having it done on Drive is very useful because I can access to it from everywhere and with all my devices. When I say that to people they think it takes me a lot of time to update, but it’s actually a few seconds to update once every thing has been automatically programmed!
Thanks to these monthly objectives by categories I try to be more careful about my expenses. I also include a category for Izakayas/fun activities so that I can manage them pretty well.
I think it’s always important to keep that kind of “fun activities” budget monthly even though it represents X hours of your salary so that you don’t feel like oppressed and make some impulsive shopping because you didn’t felt “rewarded” for your hard work for too much time. On the other hand, it allows me to have more coherence in my spendings because I don’t have unplanned expenses every months.
It happens of course to spend more than my goals on certain events like Travels, Christmas etc, but then I try to spend less on another categories the next months (for exemple if I bought too much in my “others” category because of Christmas presents, I’ll cut down my “Clothes” and “Fun” categories the next month to stabilize).
I may overthink about money recently, but trying to save while being young has to be a good thing I guess ahah.
Hi Kiyora
I use Moneytree (https://moneytree.jp/ -smartphone app) and credit cards to keep track of my spending now. Takes about ten minutes a month to copy it all into a spreadsheet.
I think budgets are useful until you get a handle on your spending and money management, then you can almost do things ‘by feel’.
Automating saving also helps.
And getting started early is priceless 🙂
Ben, I’m sure you already thought of this, but thinking about your house building, I was thinking that you should pay off your apartment, since the mortgage is so low, and then rent it out. You could use the monthly rent payments to pay off your house mortgage… just an idea. Nancy
Hi Nancy
It’s a good idea, but the numbers don’t seem to work in our case.
We could sell the flat at the moment for 13-14 million and make a profit, but renting it out would only bring in about 80,000-90,000 yen a month.
The mortgage and service fees are 50,000, so it would only yield 30,000-40,000 yen a month. Throw in vacancies, repairs, cleaning, agent letting fees, etc. and it’s just easier to sell it.
I would expect 13 million invested to yield something like 3%, which is 390,000 a year, more than the rental yield would be! And that for zero hassle, no nightmare tenants, no repairs, no stress.
Nice article. 🙂 Plenty of good ideas to be reminded of. I’ll have to check out some of those links later.
About owning vs. renting, here’s a nice post by another blogger that I like http://jlcollinsnh.com/2012/02/23/rent-v-owning-your-home-opportunity-cost-and-running-some-numbers/
You’re outside of tokyo, somewhere around Sendai?
And you’r thinking of committing to ¥42M, for the structure….!?!!???!?
All those warning lightbulbs should be going off all over the place.
Hi CS
It’s actually pretty cheap for the quality of building. The same grade from other companies would cost a lot more.
I guess I have lower standards for what acceptable housing might be…!
It’s a very personal decision. Also, in this case 42 million is the cost for the entire job -the house itself is ‘only’ about 30 million 😉
For me, acceptable housing is where we are now -a 9 million yen ‘manshon’. I’m very happy there and wouldn’t move if it weren’t for my wife’s request.
If I’m going to build a place in Japan though, where you can’t really expect to sell it, I’m going to build it as good as I can. Otherwise I’d buy a reasonable 10-15 year old house… (again, not an option in this case).