Saving rate

Your saving rate is going to be the most important factor unless you have considerable amounts of savings already. 

Saving rate can be measured in two ways, but one is much more useful than the other:

a) by the amount of money
b) by the proportion of your income

Answer b) is the better metric. The absolute amount of money doesn’t tell you very much. Compare the two examples below:

David saves 300,000 yen a year.
Julia saves 800,000 yen a year.

Based on total amount of money, Julia looks to be in a much better position, right?

How about if I tell you that David makes 3 million yen a year (250,000 a month) and Julia makes 12 million (1 million a month)? As a proportion of income, the figures then become:

David saves 10% of his income.
Julia saves 6.6% of her income.

This is actually a much better measurement of how effectively our two case studies are saving. David is actually saving more: for each ten years he saves, he could live on his savings for one year (ignoring interest and inflation). Julia, on the other hand, would need to save for 15 years to save enough to live on for a year.

Increasing your saving rate is incredibly effective, because it actually helps your finances in two ways:

You save more money.
You live on less money.

The less money you need to live, the more you can save and the less you will need in the future.

I started thinking about saving after reading Your Money or Your Life, by Vicki Robin and Joe Dominguez. It had a huge impact on my thinking and still sits on my bookshelf.

Your first assignment: buy, borrow, or steal (don’t get caught) a copy of Your Money or Your Life and read through it carefully. Do the exercises. Weep over how much money you have wasted in your life (I did). Unfortunately the investing advice at the end of this book no longer works due to our low-interest environment, but it’s one of the best consciousness-raising books about money I have ever read.