Online Coaching – Perfect Timing

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I hope everyone is safe and well in these difficult times. One thing you are probably doing is spending a lot more time at home. And with that comes a lot more time online, particularly using internet communication tools like Skype and Zoom.

You may have noticed that I offer personal finance coaching. This also includes online coaching, which was initially meant for people living outside the Kanto area, but is fast becoming the norm in these times of social distancing.

Now would be a great time to get your finances in order and take advantage of one of the best opportunities to invest you will see in years. Below is the 25 year chart of the S&P 500. You can see quite clearly the benefit of investing during severe market downturns in 2000 and 2008. Why not make use of the extra bandwidth you have and put some money to work for you?

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Source: https://tradingeconomics.com/

Among other things, I can help you figure out:

  • How much you have available to invest and how much you should be keeping in cash for emergencies.
  • What currency is best for you.
  • What kind of account would be right for you.
  • How to allocate when you get the account.
  • How to maintain your investments over the long run.

More information, including rates, is available here. If you would like to book a coaching session, or you have some questions before getting started, please get in touch with me via the Contact Form.

International Health Insurance

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If you live and work in Japan, you are probably quite satisfied with your health insurance coverage. The Japanese national health insurance system is super-efficient and covers 70% of medical costs. Unless you have a serious injury or illness, you are unlikely to get any nasty surprise medical bills.

This is how I’ve thought of my own health insurance until recently. I bought a little extra cover in case of an extended stay in hospital and figured I’m good.

Then a friend of mine got a critical illness. Without going into too much detail, the doctors in Japan told him to get his affairs in order, there’s nothing they can do. He then returned to his home country and found that actually there is an option to undergo immunotherapy. The cost, however, is around 2 million yen equivalent per month…

Thankfully, many years ago he took out some international health insurance with a UK insurance company. He faithfully paid his premiums for years and now, when he actually needs it, they have agreed to cover the full cost of his treatment.

I don’t think I need to spell this out much further. Google international health insurance, do a bit of research to find a policy that fits you, and sign up. If you are choosing from a well known provider the terms and costs are likely to be pretty similar. The one choice you will need to make is whether you want US cover or not.

You may pay your premiums for years and feel like you are wasting money. Hopefully you’ll never need the cover. However, like my friend, there may come a time when you will be glad you had it.

What’s the Plan?

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Looking back, I have posted on a wide variety of subjects over the last year or so. It’s interesting to note that the posts that get the most views are almost all related to specific investment products.

I found this out years ago when we were doing financial planning seminars. Often we would spend 20-30 minutes on a specific financial planning issue, and then for the last 10 minutes we would have a guest from an investment company talk about an investment product or fund. All of the enquiries after the seminar were related to the product, not the planning process. I concluded that people find it easier to examine a product and decide if they like it or not, than to think about long term planning.

Maybe planning is just too hard? Certainly many people are busy and pushed for time. For that reason I’ve decided to boil it down to its simplest form. Financial planning in three quick steps. Here we go:

  1. Have a plan!
  2. Cover the basics
  3. Think about where you will spend the money

If you do nothing else then at least spend some time on these three points.

Have a plan – are you more likely to succeed if you have a clear goal and a simple step by step plan how to reach it? Of course you are! Where are you going to be in 10, 15, 20 years? What do you want to have? About how much do you need?

“I should save money for my daughter’s education” is not a plan. “I need $80,000 in 18 years time for my daughter’s education, and I’m going to start investing $200 a month from now in order to get there.” – now that sounds more like it! (calculated on average return of 6.5% p.a. by the way)

Ask yourself some simple questions and at least get a basic roadmap. The plan can be adjusted as you go.

Cover the basics – read this post, take action on these three points and breathe a sigh of relief! (Emergency cash reserve, basic insurance, some kind of pension)

Think about where you will spend the money – Are you staying where you are now forever? Are you likely to return to your home country or go somewhere else? Go with the most likely outcome and save in your base currency. Also, think about the most tax efficient way to get the money you save now back there. You may need to get some advice on this but at least start thinking about it.

And that’s it! If you get to work on these three points, you have probably done more financial planning than most people do in a lifetime!

Financial Planning for Babies

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You may have noticed that there have been no updates on here for over a month. Apologies for that – our first son was born in early May and we are just getting into the swing of things!

As some of you will know, having a new born baby is very exciting, but also exhausting. Going from a solid 8 hours of sleep a night to waking up every 3 hours is a shock to the system. However, after a couple of months the little one starts sleeping longer and the brain starts to return to something approaching normal functionality. That’s when you may start thinking, “So what do we need to prepare financially now we have a new baby?”

Before I get into the financial planning stuff, I found an excellent blog: 2020 Mum in Tokyo – the “baby admin” section here is really helpful when it comes to working out what paperwork needs to be done to register your baby’s birth in Japan and overseas. It’s particularly useful if one or both of the parents is British.

So what kind of financial review should you conduct after a new addition to the family? Keeping it simple, I would look at two things: Insurance and Savings.

Insurance

Assuming you have already covered the basics and have an emergency cash reserve, basic medical cover, and income protection insurance in case you are sick or injured long term, the main thing to address after the birth of a child is life insurance. You may not have thought about it this way, but life insurance is really about replacement of income – if you were no longer around, what income would your family need to have the lifestyle you want them to have and be able to do the things you want them to do?

It’s also important to cover any liabilities. Do you have any debt that you would want to have paid off if something happened to you? If you have a loan on a property in Japan in your name, you will almost certainly have adequate life cover to dispense of this loan in the case of your death. If the loan is in your spouse’s name only, you may need additional cover. If you have loans on property overseas you need to check if they are covered. Do you have any other liabilities? Make sure you get an accurate total.

On to income – what income would your family need monthly if you were no longer there to provide it? If both parents work, keep in mind that if one of you is no longer around, the surviving parent will need to take care of the kids and may not be able to earn at the same level they do now. Do you want your child / children to go to university? What would that cost per year? Many Japanese life insurance policies can be set up to pay out an income rather than a lump sum – you may find something like this easier to plan with. (talk to an insurance professional to make sure you understand the options)

If you are looking at a lump sum payout, here’s how to calculate what you need:

If annual required income is $50,000, for example – at an interest rate of 5% per year you need $1,000,000 in order to generate the income without spending the capital. If you calculate at 2.5% you need to double that. If you are assuming zero interest rates, a million dollars will last 20 years. It’s up to you how conservative you want to be.

So if you need $1,000,000 to cover the income and you have uninsured loans of $280,000 (for example) you need $1,280,000. If you are adding in 4 years of university at $25,000 per year, then you need $1,380,000 in life insurance cover.

Obviously if you have significant assets already that could cover some of these costs, you can reduce the amount of life cover accordingly.

Savings

A new baby can be a great motivator for saving money! What is interesting is that I often find that people are less willing to take risk on money they save for their kids. They take it so seriously that losing money is not an option and they become overly conservative. While I understand why someone would feel this way, it’s a little counterintuitive. The time when kids really start to cost money is when they go to college / university, and that’s still 18 years away. Saving money in cash for that time frame means you will barely keep up with inflation. Also, the dollar cost averaging effect of regular saving means you can afford to take some risk in the early years.

It’s a good idea to start with a target in mind, so do some research on what school costs today. Don’t forget to factor in that higher education costs are rising faster than inflation year on year. This article may help get you started.

Once you have a target in mind, work backwards to how much you need to save each month. Use a simple online savings calculator to help figure it out. Here’s a simple one you can try.

In terms of investment vehicles, look at tax advantaged investments first. Japan’s Junior Nisa is a good example, allowing parents / grandparents / guardians to make contributions on behalf of children under 20 up to ¥800,000 per year. (the UK has a Junior ISA, while the US have 529 College Savings Plans)

Lastly, you may find you are entitled to reimbursement of medical costs related to the birth / child benefit in Japan. This can be a good way to kick off a savings account for your new family member!

Disclaimer: This should go without saying, but the information contained in this blog is not investment advice, or an incentive to invest, and should not be considered as such. This is for information only.

Planning for the New Year

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First of all, Happy New Year! If you have been following this blog in 2017, thank you very much for reading. Starting from mid-May last year I managed a total of 55 posts. I hope some of them were useful. Now to try and keep up that pace in 2018…

A New Year, of course, means New Year’s resolutions. Some people are very good at making and keeping resolutions, and some people let their gym membership lapse in February. Often, when you look back on resolutions that didn’t work out, you will find that it was the initial goal that wasn’t clear enough, not just a lack of discipline or willpower. So here are some simple tips for setting financial goals for the year:

Be realistic – we’d all like a million dollars in the bank, but if the number is unreachable it will be easy to give up.

Be clear – “Save more money” is not a clear goal. “Pay my credit card down to zero and have an emergency cash reserve of $10,000 by June 30th” is much better. Write it in big letters and stick it to the fridge if you have to!

Start with something you can do immediately – open excel and start a budget spreadsheet, download an app, open an account, fund an account. Find something you can take action on right now to get you started.

Stick with one or two major goals for the year and track them – if your list is too long it can become overwhelming. Start with one or two major goals, make them as realistic and specific as possible, take action immediately, and review every month.

If you are running short on ideas, here are some examples:

Track your money – if you are not clear on your income and expenditure then this is a priority. It doesn’t matter if you use a spreadsheet, an app or a blank sheet of paper. Spend the first two months of the year tracking all incoming and outgoing money so you know exactly where you stand.

Prioritise debt – make a list of your liabilities and prioritise them by interest rate. Pay the most expensive ones down first.

Cover the basics – emergency cash reserve, basic insurance cover, some kind of pension. Take care of these three things before moving on to loftier goals. Automate as much as you can.

Set a savings goal – how much are you going to save this year? What accounts are you going to max out? Start by maxing out any tax-advantaged accounts like an IRA or NISA.

Identify bad habits – are there things you need to stop doing? Whether it’s online shopping binges or overpriced lunches, see if there’s any financial fat you can cut out.

Start a side project – is there something you love that you could turn into a side business and increase your income? You never know, one day you might be able to quit the day job!

Invest in knowledge – find a book you want to read, sign up for a course, follow a blog! Educating yourself is a low-cost, high-return way to improve your financial situation. Share what you find with like-minded friends.

I hope this gives you some actionable ideas. Thank you again for reading and please feel free to comment, share and get in touch.

Wishing you all the best for a successful 2018!

 

 

Paying Down Debt vs Saving and Investing

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The question of whether to focus on paying down debt or to prioritise saving and investing is one that many people wrestle with. Like most trade-offs there are several variables to consider, so let’s see if we can simplify this into some workable strategies.

Firstly, you cannot come to a conclusion unless you have a handle on your budget. Getting clear on your income and expenditure is the first step. That way you will know exactly how much you have left at the end of the month to allocate.

The next thing is to make sure you have some basic financial security. If you don’t have any savings it is perhaps prudent to pay off the minimum on your debt until you can build up an emergency cash reserve. Aim for a minimum of three months expenses so you have some breathing space if you lose your current source of income.

Obviously you want to try to pay off any high interest debt first. Credit cards are the number one offender here. With APR often as high as 18% it is wise to clear this as quickly as possible.

Student loans often come next. For people who studied in the US for example, student loan interest rates seem to be around 6-7%. If you are thinking of investing the money to get a better return and pay off the debt later, this is not an easy hurdle to clear without taking a lot of risk.

Where the trade-off question gets interesting is with home loans, particularly for people living in Japan with floating interest rates below 1%. There’s a strong argument for making your minimum monthly payments and saving and investing everything you can. I certainly wouldn’t disagree with that, but everyone feels differently about debt. I know people who never bought their own home because they couldn’t stand the idea of owing the bank that much money. If it keeps you awake at night, there’s nothing wrong with paying off your mortgage as fast as you can.

Once again, it’s good to make sure you are clear on your budget. Then make sure you have an emergency cash reserve, and have protected yourself in case you get sick or injured and are unable to work. In Japan you are required to buy life insurance to cover the loan in case of death, but in other countries you may need to consider this yourself. Paying into some kind of pension plan counts as one of the basics too and I would prioritise that over paying down debt. In his book Rich Dad Poor Dad: What The Rich Teach Their Kids About Money That the Poor and Middle Class Do Not!, Robert Kiyosaki talks about the concept of paying yourself first – make sure you are saving and investing for your future before paying the bank back more than you have to.

That said, if you are hitting your targets for saving and investing, then paying down debt is certainly not a bad thing. It reduces the amount of interest you will need to pay over time and the number of years it will take to repay the loan. Even 1% per year adds up!

For people in Japan, here’s an unexpected bonus: In order to get a mortgage in Japan you are required to appoint a guarantor. For expats this usually means paying a loan guarantor company, and you pay them up front when the loan is arranged. If you make ad-hoc lump sum payments to reduce the debt, the guarantor’s liability is reduced and they actually pay you back some of their guarantor fee. We recently made a payment of ¥1,000,000 on our home loan and received almost ¥60,000 back from the guarantor.

So to summarise, cover the basics first, prioritise high interest debt, and make sure you are saving and investing for the future whilst paying off the rest.

 

 

 

Protection Review

 

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We mentioned earlier the three basics of financial planning: emergency cash reserve, basic protection, and some kind of pension. Below is a list of items to consider when reviewing if you have adequate protection in place:

  • Do you have an emergency cash reserve to cover at least 3-6 months expenses?
  • Do you have adequate health insurance?
  • Do you have any income protection insurance, in case you are sick or injured for the long term?
  • Do you have any critical illness insurance, in case you are diagnosed with a serious illness? (heart disease, stroke, cancer etc.)
  • Do you have any loans / liabilities that are not insured?
  • Do you have children? If so, have you considered life insurance?
  • Do you have a current will? Does it include all of your worldwide assets?
  • Have you reviewed your estate planning needs?

Obviously getting all of this done in one go is going to be tricky, so I would suggest making sure you have at least the first three in place before you consider making investments. The rest you can work on as you go.

What is your base currency?

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Soon we will get started with your financial profile, where you will be recording your income and expenditure and building your own personal balance sheet. In order to boil this down to the most important numbers you will need to decide which currency to calculate in.

For expats this can be a tricky business. You may live and work in Japan for example, and earn money in JPY. However you may have assets, or even income, in your home country or elsewhere in other currencies. How do you decide which is your base currency?

For completing your balance sheet and adding up your total assets we could argue that it doesn’t really matter. Just pick the currency you use the most and convert all values to that. However from a financial planning perspective there is a clear rule: Your base currency is the currency you are going to spend the money in. If you are just going to live in Japan for a few years and then move back to your home country permanently, then the fact that you earn in yen is largely irrelevant. You will need to plan in the currency of your home country as that’s where you will spend the money. This is important to help manage currency risk. It would be a shame to build up a tidy sum in assets in JPY, only to find when you move back home and need to start using the money, that the yen has crashed and you are getting a really bad deal on the exchange rate.

If you are going to stay in Japan forever and retire here it’s pretty simple. Your base currency is JPY. However, what if you plan to send your child to university in the UK and need to save for that? Yes, it’s actually possible to have multiple base currencies. In this case you would save for retirement in JPY and save to pay for your child’s education fees in GBP.

So before you start your financial profile, it’s important to work out your base currency. When you fill out your balance sheet use the currency that you are likely to spend most of the money in. Feel free to contact me if you are unsure.

A Simple Formula

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When it comes to taking complex strategies and tools and making them so simple, that anyone can apply them immediately to improve their quality of life, Tony Robbins is a master. Here is his simple formula for creating financial abundance:

  1. Spend less than you earn and invest the difference.
  2. Re-invest your returns for compounded growth.
  3. Reach a critical mass of investment capital that creates the annual income you desire for life.

If you are not sure what is meant by compounded growth, take a look at the charts in this article. (the article is a few years old but the charts tell the story well enough)

In the coming posts we will get started with your personal financial profile. The first item on there is income and expenditure, and hopefully you will find that you are already spending less than you earn!

Have you covered the basics?

 

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If I had to come up with three basic financial planning points that everyone should be taking action on, they would be as follows: emergency cash reserve, basic insurance, and some kind of pension. Without getting into too much detail, here are basic definitions:

  • Emergency cash reserve: this is money in the bank, not invested, and easily accessible. If you lost your job tomorrow, how long would you be able to survive before finding a new one? Typical advice is to have 3-6 months of expenses covered before you start thinking about investing. If you have a very secure job you might be comfortable with less. If you are self employed, or have a fluctuating income, you may need a bit more cash to feel comfortable.
  • Basic insurance: if you get sick is it going to cost you? If you work for a company in Japan, for example, you are likely to be covered by the Japan national health insurance. However what if you are long term sick? How long will your company continue paying you? Income protection insurance is designed to pay you a portion of your current income if you are sick and unable to work for the long term. It will often cover you up to age 65 for a relatively small monthly cost.
  • Pension: I deliberately referred to “some kind of pension” above. We are not going to get into details now of the options available. (we will later for sure) The question now is: are you currently putting aside even a small amount of money every month for when you are older and no longer inclined / able to work?

You may be surprised to hear that all three of these come under the umbrella of protection. A cash reserve protects you from having to dip into investments or borrow money in a crisis. Insurance protects you from events that can derail your ability to generate income. And a pension protects you from being poor in old age. How are you doing on these three basics so far?