How We Got Our Finances On Track

Don’t wait until a disaster happens before you open your eyes to changes needed in your life! For us, it took the March 2011 Japan earthquake and the subsequent Fukushima nuclear scare to make us realize our finances were off the rails.

Leaving Japan and seeking temporary shelter in another country while waiting for the nuclear power plants situation to get resolved left us with an acute feeling of displacement and great anxiety with regards to how our finances would cope if we had to move once again. We didn’t have an emergency cash fund; we were relying on the sum total of our bank accounts, which was fortunately padded by a recent bonus received. We hadn’t noticed until then that we had been essentially living from paycheck to paycheck. Sure, we had a little bit of savings but it was negligible compared to the income earned. That was our turnaround moment. Since then, we’ve been able to get our finances in better order and we are now setting aside a third of our gross income to retirement and investment funds. Our net worth has grown significantly in the last 3.5 years, although we are still far from where we should ideally be at our age (mid-thirties).

Are your finances on the right track?

Are your finances on the right track?

Tracking Expenses: Where has my money gone?

The first thing that we started to do was figure out where we were spending all that money. Theoretically, this exercise should be simple enough – just collect information on all your purchases for a few months. If you live in a country where debit or credit cards are accepted in most places, like the United States, your first step would be to review your bank statements or credit card bills at the end of the month.

Japan is still a cash-based society though, so for us, this exercise took a lot more effort. We collected all the receipts and I (being the more obsessive-compulsive one) would sit down at the end of the week to sort them out and tally our expenses. This turned out to be more challenging than anticipated since the receipts are in Japanese! I couldn’t figure everything out but at least I could categorize most of them, which was a good start.

Our findings:

  • We were spending way too much on dining out, take-out and delivery.
  • Despite eating out a lot, our grocery bills were also huge.
  • We were buying a lot of expensive items for the house.
  • Every year, there was at least one electronic equipment getting bought or upgraded.
  • Our vacations were eating up a significant percentage of our income.
  • I was taking too many taxi rides!

Lifestyle Deflation: Cutting down on “wants”

We started to figure out our “wants” versus our “needs”. We didn’t need to dine out every weekend. We didn’t need to buy the beautiful but expensive furniture for our little studio apartment. I didn’t need to take a taxi to the station that was a 13 minute walk away!

A lot of the spending were a result of the “I can afford it now so why not?” mentality that came with having a good income. Every time I got a raise or a bonus, I used it as justification to spend more, thus the lifestyle inflation through the years. It takes some mental adjustment to start questioning your consumerist desires. “Yes, I have more than enough money to buy the latest iPhone, but do I really need one when my old iPhone 4s still works just fine? Will there be any significant changes in my life if I had the new one?” Once we got into the habit of questioning ourselves, letting go of items that we wanted, not needed, became much easier. This made it possible for us to actually go through lifestyle deflation.

Budgeting: Milestones toward achieving our goals

Once we had an idea of where our money was going and became conscious of what items we could do without, it was time to create a workable budget. There are a lot of people who hate the word “budget” and I’m guessing it has to do with the abrupt, painful end to spending that’s deeply ingrained as well as the high chance of failure when the goals are set too high. The experience is not much different from going on a crash diet, which I myself dislike and have never succeeded in.

When just starting out, the last thing you want to do is create an unrealistic budget that leaves you demoralized at the end of the month. It’s good to set an ultimate goal at the start, for example “bring down expenses from 100% to 50% of net income”, but to expect yourself to get this done immediately is setting yourself up for failure. For people new to budgeting, I recommend setting milestones for your goals and building your budgets accordingly. Returning to the example goal, the corresponding milestones can be to decrease expenses first to 95% for the first three months. Then 90% for the next three months, then 85%, and so on.

We built our initial budget based on our expenses with items not needed cut out but we still left a lot of wiggle room. Succeeding months had more items pared off until we found a good equilibrium where the spending was within our targets and we still had our creature comforts.

Savings: Maxing out company matching in retirement accounts

Once we had a reasonable budget to keep expenses down, we were able to start growing the money in our bank account. In 2012, we started to put the money into my company’s international retirement plan to get the maximum company matching contribution that was part of my benefits package. I didn’t understand all my benefits when I relocated to Japan; I was unaware of the company match so I lost the opportunity to receive over $40,000 through the years! I was fortunate to have discussed finances with another expat in our company, who made me realize my error.

Don’t be stupid like I was – learn what benefits your company provides! Company matching contributions is essentially free money and people should be availing of this when possible. I’m sure there is probably an exceptional case out there, but I can’t really think of any where you would not want to max out company matching in retirement plans if you can.

Investing: Building our portfolio

After contributing to get the maximum company match, we started to put the leftover cash we had into the stock market. Admittedly, I was initially scared of investing with the 2008 crash still fresh in my mind but I was fortunately persuaded to dive in before it was too late. Stocks were no longer as cheap as they were during the crash but we still locked in some good prices for solid securities that have been on the upward trend.

The best advice I’ve received has been to invest in index funds and I highly recommend it as well. Building a diverse portfolio by individually selecting stocks requires a lot of research, has to be actively managed, and just carries a lot more risk. The only reason we’ve initially gone down the latter road is that my husband loves the challenge of finding good stocks to invest in and has the time to spend actively managing our portfolio – he effectively treats it as a part-time job. At this point in our lives, we feel that we can accommodate the additional risks with this portion of our income. We will likely be changing our strategy in a few years, when the amounts we are dealing with are much larger and our window to retirement starts to get closer.

Our financial picture today

Since we started working on our finances in 2011, we’ve achieved some significant milestones:

  • We are now saving 33% of our gross annual income.
  • Our net worth has increased from almost zero to about 1.5x our annual income.

It’s an ongoing process and we continue to repeat certain steps, refining them to get more efficiencies. We also still have a long way to go in terms of implementing a full financial plan; for example, we are still working on our emergency cash fund and haven’t yet figured out our retirement plans. With a baby on the way, there are a lot of additional complications.

We’re thankful that we got our moment of clarity in 2011 and we are finally getting our act together. It would have been a greater disaster if we had realized the error of our ways much later in life!

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