Financial independence means something different to everyone. You might be able to survive on 150,000 yen (the average employee pension in Japan), but others may need x10 times this amount to pay for the desired lifestyle of their family.
If you want to become truly financially independent, these ten steps can help:
1. Define Financial Independence
What are you goals when you retire or you want to be financially independent? For some people, this means:
- Being able to continue living their current lifestyle without having to work
- Being able to be self-employed without the financial risk of failure
- Working on pet projects
- Dedicating your time to leisure, friends and family
Write down what you want in your retirement and look to really understand what kind of capital base you are going to need to create to be financially secure.
2. Determine Your Net Worth and Annual Spending
You need to know where you are currently to be able to plan out how and when you can become financially independent. This can be done in two main ways:
- Calculate your net worth
- Calculate your average annual spending
These two steps, especially calculating your annual spending, will require you to spend some time really analyzing your finances. Apps (or some of our own free financial tools) can help you make this process a little easier.
3. Calculate the Actual Money You Need to Make
You know how much you spend annually, your net worth and what you want from financial independence, and now is the time to truly calculate how much you’ll need to reach your goals.
Working with your financial planner you will be able to calculate the amount of money that you’ll need to accumulate in order to pay for your lifestyle, independent of work, for the rest of your natural life.
You may already have income generating investments which would serve to reduce the short-fall between where you are now, and your target, but all of this will be taken into consideration when running the numbers.
You should, at this point, start making your monthly and even weekly savings goals to reach financial independence at your desired age. Younger individuals have a lot more leverage when saving than an older individual because they can take on more risky investments and have longer to ride out the bumpy periods in markets.
4. Start Adjusting Your Lifestyle to Meet Your Goals
Monthly spending in Japanese households averaged ¥277,000 in 2020. If you want to reach financial independence, you need to live below your means. You need to invest and save aggressively, so maybe you find a way to spend ¥200,000 per month and put the remaining amount towards savings and investments.
You’ll want to look for areas where you can cut back on spending, including:
Find smart ways to cut your costs so that you can keep more of your income and lessen the load for your investments.
5. Find Ways to Generate More Income
For a lot of people, there’s a certain level of spending that they can cut back on before they’ve reduced everything to the point that there’s no possibility left to save more money. If you’ve reached this level, the only way to put more towards financial independence is to earn more money.
You can try finding ways to generate more money that can be dedicated specifically to reach your saving and investing goals.
If you can find a way to generate enough additional income to cover your monthly expenses, you’ll be firmly on the path to financial independence.
6. Make the Most Out of Your Retirement Accounts
You should be putting as much money into your private retirement account as possible every month. This figure differs depending on the type of employment you maintain. When you get to the end of the term, you’ll have the option of:
- Lump sum payment
- Monthly installments
A number of international accounts also offer tax deferral which will serve to reduce your costs and maximise your investment value over time.
7. Invest Any Extra Yen You Have
Once you’ve made your monthly savings, should you have any cash accumulated in the bank on deposit earning 0.01% p.a with a Japanese bank you should look to monetise that next.
Invest in the stock market and make sure to create a diverse investment portfolio that focuses on equities (stocks) and funds that contain equities.
If you’re younger, you can allocate to equities more aggressively, but your risk appetite should decrease as you age.
8. Create a Backup Plan
Life is uncertain, and while you may have a solid plan to reach financial independence, you also need a backup plan. You might have financial independence and loathe retirement. There’s also a risk that the market will crash, or you may lose your job.
If any of these scenarios occur, you’ll need to adjust your current plan or at least have a backup plan in place that you can follow.
9. Research Options for Term Life Insurance
Term life insurance provides you with peace of mind that if something were to happen to you, your loved ones would be taken care of financially. Your goal may be to become financially independent while living in Japan, but life is unpredictable. If you were to die before you reach that goal, term life insurance will provide your family with financial security whilst protecting your financial legacy.
10. Remain Consistent with Your Plan
You’ve taken the time to create a plan, so make sure that you stick to it. Sure, things may need to change because life happens, but be consistent and remain disciplined throughout your journey.
Plans only work if you do.
Remember that while it’s important to stick to your plan, you should also make sure that you’re living in the present. Sacrifices must be made if you want to be financially independent, but you don’t have to sacrifice everything. Reward yourself once in a while. Enjoy life now because you never know what tomorrow may hold- and save, a lot.