12 Financial Planning Tips for Living in Japan

investment strategies for foreign people living in japan

Financial planning is essential to building wealth and security for yourself and your loved ones in Japan. Many people make the mistake of putting it off – or assuming that there is a one-size-fits-all strategy, but in reality your personal circumstances significantly impact your planning decisions. These 11 tips can serve as a basis to start building your own financial planning strategy.

1. Start Building An Emergency Fund

Any financial plan in Japan needs an emergency reserve. Unforeseen circumstances like sudden illness can leave you with mounting expenses, making it difficult to make ends meet. Start an emergency fund by saving three to six months for living expenses. Start small and be consistent with this hard task. This can help you prepare for sudden and significant expenses before they happen.

What to do: Keep your emergency funds separate from your regular bank account. This helps you to avoid using your emergency fund for personal spending or day-to-day expenditures. To make your money work for you, you can also keep it in a savings account with high-yield returns (…and yes, that does involve opening an account outside of Japan!)

Be Cautious With Credit Cards

 2. Be Cautious With Credit Cards

Credit cards in Japan work differently than in many other countries. Some Japanese credit cards require that you pay the entire balance in full each month. This can be a positive, as it can help you limit your spending to only what you know you can afford each month. 

However, credit cards in Japan also offer the option to split payments over many months. The more you split your payments, the higher your interest percentage on each payment. This can turn into snowballing credit card bills accompanied by excessive fees. People who aren’t careful about their credit card spending can end up getting buried under debts that can take them years to pay off.

What to do: Establish a budget for your monthly expenditures in Japan as part of your financial plan. Track your spending, and use credit cards sparingly.

  

3. Start Planning For Your Retirement Early

Many people put off planning for retirement or make the mistake of assuming the national pension system is enough. Unfortunately, this often leads to detrimental consequences. Most national pension systems are declining, and Japan’s more than the rest due to its systemically declining population, shrinking workforce, and high life expectancy. If you want to retire wealthy, you have to be proactive. Fortunately, internationals living in Japan have many opportunities to invest their money with compounding interest so that it grows over time. 

What to do: Set up a retirement portfolio that included private retirement accounts, such as the NISA (Nippon Individual Savings Account) or the iDeCo (Defined Contribution Pension Plan), or more flexible international accounts. Remember, diversification is key when creating a financial portfolio for a secure retirement. Working with a financial adviser can help you establish a robust portfolio so that you can retire with ease when the time comes. The earlier you start, the greater your benefits will be. 

4. Consider Life Insurance

Even if you have no dependents, insurance can be crucial to protecting your loved ones from a financial burden in the case of your unexpected death or inability to live day-to-day without professional assistance. If you have debts from credit cards or student loans, life insurance can keep your loved ones from being left with these obligations after your passing. International life insurance can even cover the cost of repatriating your remains, if necessary.

What to do: Life insurance does not have to be expensive. If you are working with a limited budget, consider term international life insurance policies that offer affordable premiums and cover a limited period of time. If you have a slightly bigger budget, you can also consider whole-of-life policies.

5. Avoid Lifestyle Inflation

Consider Life Insurance

 It can be tempting to indulge in a more luxurious lifestyle when you settle into life in Japan and begin to generate a consistent paycheck. Even so, it is critical to avoid lifestyle inflation, which is the desire to increase spending as your income increases, such as purchasing a home with a higher mortgage. Making lifestyle decisions like this can lock you into higher bills, making it difficult to adapt to an unexpected life event like losing your job or suddenly being unable to work due to illness or disability. 

What to do: Even if your income rises in Japan, stay within your financial planning budget. Avoid upgrading your lifestyle with every rise or bonus. Living below your means and saving or investing the difference can help you reach your financial objectives and live comfortably in the long run.

6. Plan Early For Educational Expenses

Planning for college tuition early is crucial for parents living in Japan. Families in Japan often face substantial financial burdens due to the high cost of university tuition – particularly when sending their children to international school here in Japan, or sending them overseas for university. If you start saving for education early, you can make sure that you can pay for your child’s head start in life without putting yourself under financial strain or sacrificing your retirement.

What to do:  Consider a savings fund specifically for your children’s education expenses. Some people may also have access to dedicated education savings accounts or flexible savings accounts from their home countries, as well.

7. Understand The Difference Between Good Debt And Bad Debt

Some debt is unavoidable, and some debt can even be helpful. The terms “good debt” and “bad debt” are often used to describe the nature and impact of borrowing money on an individual’s financial situation. The difference between them primarily lies in the purpose of the debt, its potential return on investment, and its effect on one’s overall financial health.

Here are some examples of good debt

  • -Debt that is investment oriented: Good debt is typically used for investments that are likely to generate income, appreciate in value, or provide long-term benefits. Examples include taking out loans for education, starting a business, or purchasing (non-Japanese!) investment real estate.
  • -Debt with reasonable interest rates: Good debt usually has lower interest rates compared to bad debt. Lower interest rates make it more manageable and less expensive to pay off over time.
  • -Debt that offers tax advantages: Some good debt, like mortgage interest or student loan interest, may be tax-deductible, which can reduce the overall cost of the debt.
  • -Debt that enhances your financial position: Good debt can improve your financial situation by increasing your net worth, generating income, or increasing your earning potential.

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Bad debt” does not necessarily mean debt that you must avoid altogether. However, you should focus on keeping your bad debt limited. Bad debt includes:

  • -Debt for consumptive purposes: Bad debt is incurred for non-essential or consumptive purposes, like buying luxury items, vacations, or consumer goods that don’t provide long-term value.
  • -Debt with high interest rates: Bad debt often comes with higher interest rates, such as those associated with credit card debt or payday loans. High interest rates can make it difficult to pay off the debt and can lead to a cycle of increasing debt.
  • -Debt with no tax advantages: Bad debt typically doesn’t offer any tax advantages, so the borrower is responsible for paying the full amount of interest and principal.
  • -Debt that harms your financial position: Bad debt can negatively impact your financial situation by increasing your overall debt burden, lowering your credit score, and creating financial stress.

What to do: Start by doing your research to understand the implications of good and bad debt. Work on paying down your bad debt. Use the money you save by doing so to invest in high-interest accounts and build your nest egg. Make sure that most of the debts you incur in Japan are contributing positively to your long-term financial plan.

8. Continually Increase Your Income

Understand The Difference Between Good Debt And Bad Debt

Many people are tempted to remain complacent once they have reached a comfortable level of income. However, you may find that a comfortable income in your twenties and early thirties doesn’t adequately cover your increasing expenses as you age.  

The cost of living in Japan can be relatively high, and the more your family expands the higher it will become. A higher income ensures a better quality of life by providing the means to afford housing, healthcare, education, and other necessities. 

In addition, inflation will continue to erode the purchasing power of money over time, making it crucial to continue increasing your income to maintain or improve your lifestyle. Furthermore, pursuing income growth throughout your life enables you to save and invest more for retirement, ensuring financial security and peace of mind in your golden years.

What to do: Keep seeking opportunities for advancement in your company. While you have ample income, you may also consider starting a small business, one that can grow with time on the side. If you have the time, a side hustle is always a good idea.

9. Take Advantage Of Tax Benefits

Tax benefits can be an essential part of financial planning in Japan, offering individuals various ways to reduce their taxable income and increase their savings. Proper tax planning means considering your taxes throughout the year, rather than waiting until tax season. Setting up a consistent system helps you do this. 

What to do: Work with a financial adviser who understands Japanese tax rules and regulations and can help you determine which deductions and credits apply to you. Your advisor will help you choose tax-deferred retirement accounts to help you optimize your investment gains and tax savings. From there, they can assist you in monitoring your financial situation to ensure that you are taking advantage of all available tax-saving options.

10. Understand The Japanese Housing Market

 

Take Advantage Of Tax Benefits

Many people think that owning a home means owning an investment that appreciates in value. This isn’t always the case, even in Western countries. It is almost exclusively not the case in Japan, as Japanese houses are constantly depreciating in value. This means you should think very carefully before purchasing a home outright. 

What to do: Make sure to fully evaluate the value of a potential home before purchasing. Take into account the attached property value, and whether property in the area has a history of rising or falling. Weigh the cost of down payments, depreciation, mortgages, and housing and property tax against the potential investments you could be making with that money, instead.

11. Consider Supplemental Insurance for Critical Illness and Disability

Japan is famous for its universal healthcare system. However, the system has its drawbacks. Treatment options are limited for severe illnesses such as cancer. Health insurance also won’t help you if you suffer an accident that results in a disability rendering you unable to work. Disability and critical illness insurance can cover costs associated with intensive medical treatment and even offer income replacement if you become unable to work. 

What to do: Don’t wait until you’re older to think of your health. Discuss critical illness and disability insurance options with your financial adviser to find a plan that works for you.

12. Don’t Do It Alone

Creating a full financial plan requires a lot more insight than most people realize. It isn’t just about budgeting and retirement accounts, but about leveraging all of your money and assets to work for you to create a lifestyle that supports you and your loved ones whilst continually monitoring that plan over the long term. A financial adviser can help.

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Sources and Further Reading

Japan National Pension Office. (n.d.). Nenkin. https://www.nenkin.go.jp/international/japanese-system/nationalpension/nationalpension.html

How much money should I save each year for retirement? | Fidelity. (n.d.). Fidelity. https://www.fidelity.com/viewpoints/retirement/how-much-money-should-I-save

How Much Should You Be Saving for an Emergency? (n.d.). Wells Fargo. https://www.wellsfargo.com/financial-education/basic-finances/manage-money/cashflow-savings/emergencies/

-"Does the Fear of Debt Deter Students from Higher Education?", Journal of Social Policy, Cambridge University Press (Volume 34, Issue 4)

Internal Revenue Service Code (Publication 970, Chapter 09), Tax Benefits for Education

- "Section 529 Savings Plans, Access to Post-Secondary Education, and Universal Asset Building", New America Foundation, Asset Building Program (February 2005 Issue)

- “Crypto asset ownership, financial literacy, and investment experience.” Hiroshi Fujiki. Applied Economics. 2021.

- “Tax incentives in other countries to promote personal saving.” Keith Lawson. Investment Company Institute Global. 2017.

The Japanese Real Estate Investment Market. Nomura. 2016

- "Japan Real Estate Second Quarter". Deutsche Asset & Wealth Management. 2017