Of course I am going to rewrite them
It mentions the index card personal finance rules. They look like this:
1. Strive to save 10 to 20 percent of your income.
2. Pay your credit card balance in full every month.
3. Max out your 401k and other tax-advantaged savings accounts.
4. Never buy or sell individual stocks.
5. Buy inexpensive, well-diversified index mutual funds and exchange-traded funds.
6. Make your financial advisor commit to the fiduciary standard.
7. Buy a home when you are financially ready (at least 20% down).
8. Insurance — make sure you’re protected
9. Do what you can to support the social safety net.
10. Remember the index card.
Hmmm. Mostly okay, I guess 🙂
1. Strive to save 10 to 20 percent of your income
I think this is a decent start, but most people should aim to end up saving more (20-30% for normal people, much more for people who get interested in financial freedom). Of course, you need to put the money away for ever, and hopefully invest it so that it grows over time.
2. Pay your credit card balance in full every month
We’re lucky that most credit cards in Japan make you do this automatically. I quite like credit cards, as you can get points/air miles/cashback and they conveniently track your spending for you. However, research shows that most people spend more if they use cards, and if you can’t be disciplined with them credit cards aren’t worth the risk.
3. Max out your 401k and other tax-advantaged savings accounts
I think everyone planning to stay in Japan should max out their iDeCo account (except for younger US citizens). If you have more funds to invest NISA is very handy too. Those are the main tax-advantaged accounts in Japan.
4. Never buy or sell individual stocks
I’m not sure about this being an absolute rule. I think if you take the time to understand what you are doing you can do okay with individual stocks. For most people I recommend putting most of your investments in index funds and playing Warren Buffett with just a small part of your portfolio.
5. Buy inexpensive, well-diversified index mutual funds and exchange-traded funds
Costs and diversification are two of the only things you have control of with your investments, so this should work well for most people.
6. Make your financial advisor commit to the fiduciary standard
Or learn enough to be able to take care of your own finances. It’s not hard to learn the basics, and no one is going to care about your money as much as you do 🙂
7. Buy a home when you are financially ready (at least 20% down)
Don’t agree with this: some people will be happier not owning real estate, and I bought my manshon with a 110% loan (the loan paid all the fees and even left me a bit extra to invest). Obviously you shouldn’t buy a home if you are not financially ready.
8. Insurance — make sure you’re protected
This is fine, but remember that insurance is to protect you from catastrophic damage. Unlimited coverage of third parties on your car insurance is probably necessary -an extended warranty on your new DVD player might not be. Also beware of being overinsured, or using insurance for the wrong thing (like investing for retirement) -both pretty common in Japan.
9. Do what you can to support the social safety net
Not sure what this means and assume it’s a US thing -not sure it really applies to Japan, although I do recommend giving to charity.
10. Remember the index card
Making a plan and reviewing it every so often is definitely a good idea.
As ESI says in his post, I also think that focusing on making more money and spending better are going to make as much if not more of a difference than investing more effectively.
What do you think? What would you add to the list?
Hey! I really appreciate your blog! It has helped a lot with understanding how to better grow my money in Japan. I have a question about the idea of owning a home vs renting a home. The idea of the home being an investment back in the states makes sense. (Property value goes up.) But here in Japan with property being a depreciating asset, what are the real benefits of buying instead of renting? Thanks for sharing your knowledge!
Hi Lucas
Thanks! Really appreciate the kind comments. Funnily enough, I have a draft post on Renting vs. Buying a Home in Japan that I am working on -should make an appearance soon 🙂
“1. Strive to save 10 to 20 percent of your income”
Yeah… this should be higher for sure. Of course everyone is different, some people must own a car or they have children, etc. I’m putting my wife through grad school and still easily able to save 25% a month with room to spare for fun and travel. When she is done next April, I am bumping that up to 33%. I know its unrealistic, but if she can get a job that pays close to mine, and we could save 45-50% we can retire millionaires by 65 on teachers salaries (assuming no bubble bursts and crashes for the next 30 years). And that’s with us starting nearly 15 years too late.
“research shows that most people spend more if they use cards, and if you can’t be disciplined with them credit cards aren’t worth the risk.” This is an interesting reddit post about a guy who ran an experiment of cash vs CC. He made nearly 400$ back with points and rewards which is amazing, but also realized he spent 19% more money when using a CC vs cash.
https://www.reddit.com/r/personalfinance/comments/78ce81/i_ran_a_selfexperiment_where_i_went_from_using/
http://freakonomics.com/podcast/everything-always-wanted-know-money-afraid-ask/
The freakonomics podcast had a good one about basic money handling, and it included the index card (I think it was the first time I had ever heard of it). They interview the guy that came up with it, and talk about each of the steps. Number 9 refers to paying taxes and so forth to keep the social security net a viable option for people. In Japan that would also include enrolling and paying health insurance, and enrolling and paying national pension, something that a fair amount of foreigners try to avoid.
Yeah, I guess you are right. That comes up a lot here, and my starting point is that it is both a legal and moral obligation to pay into the health and pension systems here. They’ll get around to enforcing it at some point, so I think everyone should start paying their share now. Don’t want to preach about it though 😉
I completely disagree with number 4) Don’t buy individual stocks. There is nothing wrong with having stocks as part of a well diversified investment strategy. Terrible advice. Owning an individual stock gives one opportunity to learn about buying and selling shares. If you know what you are doing you can make good money on individual shares. And if you have specific knowledge about an individual share you mau be missing a great opportunity.
I believe the number 4 rule is also a reference to not trying to time the market. The index card is for a buy and hold strategy. The growth in index funds, over long periods of time, is the most stable thing observable about the stock market. So a lot of advisers, like Jack Bogle, suggest holding low-cost index funds or etfs. Buying individual stocks is the opposite of this, as it requires buying when the stock is undervalued, and selling when it is overvalued, which is timing the market, the exact thing they tell you not to do.
While the car says “never”, I believe it is meant that it should not be part of your asset allocation. If you have some free cash that you want to play around with, that is not part of your aa or emergency fund.
Just discovered your informative site! I am a U.S. citizen in mid 30s, planning on living in Japan long-term and looking for options to invest my yen earned from my Japanese employer. iDeCo account with cash-based investments looks attractive to reduce tax paid and make a little extra interest, but you mention iDeCo is not the best option for younger US citizens. As I have not been able to track it down on your site, what do you recommend younger US citizens do instead?
Hi Jerry
Welcome 🙂
iDeCo might still make sense if you are paying the top rate of income tax, or if you are comfortable filing foreign domiciled mutual funds with the IRS. Way beyond my pay grade, that one!
Otherwise I would take a look at NISA. We’re planning to publish a new Guide to NISA at the end of this month, or check out the books on the Further Reading page if you are comfortable reading in Japanese.
Feel free to ask questions in the Forum too.