Japanese Women and their secret savings

I've long been intrigued by the fact that in Japan, it is reportedly standard for women to control the family budget, giving their husbands pocket money.

Having read some more about Japanese women and money, I've learnt a few things:

• Japanese housewives tend to control the family budget, as this is seen as part of the role of the homemaker.
• Food shopping in Japan is often done on a 'little and often' basis. This seems to be partly because of an emphasis on the freshness of food, limited storage space in small flats, but also because of a concern about avoiding waste. It seems that the Japanese would rather pay slightly more per unit, than bulk buy and then throw food away.
• Credit cards are much less-used than in the West.
• Women have traditionally made savings from their shopping budgets which are kept secret from their husbands, and the rest of their family. This money, called 'hesokuri' which may eventually be used to buy stocks, or property, is often kept in cash, in their homes.
  
• When couples marry, they are both expected to have saved money, often through living at home with their parents while earning, until they marry.
  

See recent Bloomberg articles, however, on the fact that Japanese women have had to dip into their savings, over the last year.

Budgeting for the not-very-budget-oriented

I dislike spreadsheets, and it might be said of me that I am 'better with words than numbers'. The concept of a budget, as described by some experts, is therefore mildly horrifying to me. However, I am interested in making sure that my finances add up, and that I am able to pay for things that are important to me, and also to save for the future. My preferred approach is therefore as follows:

Every year or so, or whenever we have a significant change in our finances, we review and update an ongoing list of our fixed monthly direct debits, for mortgage, electricity and so forth, and make sure that this is up-to-date, looking through our bank statements to check that we have captured any changes, and giving some thought to any direct debits we might want to cancel or amend. The list of regular fixed payments includes a separate allowance for each of us, as well as payment to a 'fun', 'holiday', and 'car' jar.

The list of direct debits includes one to an 'annual bills' jar, which is calculated using a list of those bills which need to be paid less often than monthly, for instance car servicing, insurance and car tax. These are added up and the total is divided by twelve, to come up with an average monthly amount. (Money is transferred from the annual bills jar to the current account as these irregular bills need to be paid.)

We then check that the amount we have estimated for non-fixed expenses like travel and food is still appropriate, by looking through our credit card expenses for the last few months, and taking an approximate monthly average.

We check, and update as appropriate, the amount we have listed as income.

Once this has been done, we have an approximate idea of how much money we have spare each month, once essentials have been paid for.

This is where our system becomes rather chaotic; we have never found it practicable or helpful to allocate fixed amounts for different types of expenditure, but instead prefer to operate the 'pay yourself first' system. Under this, and taking account of the calculations above, we transfer out a certain amount of money to savings each month as soon as we have been paid. Sometimes we need to transfer some money back later for particular purposes, but as a general rule this works fairly well, and because the money is not sitting in the current account, it cannot be spent quite as easily. And as both savings and regular payments have been accounted for, the money spare can be used however we see fit, without us having to worry about whether we have over-spent on travel, or entertainment, or eating out, that month. (Over the last month or two, however, I have been trying to get a more precise idea of our spending, by tracking our expenditures on a spreadsheet.)

The paragraph above assumes that there is some money left over for saving once essentials have been taken into account; I will look at the question of reducing monthly outgoings in future posts, as well as the subject of self-employment and budgeting for taxes. I will also include some more expert opinions than mine on budgeting, and its value.

"Orchids on Your Budget, or Live Smartly on What You Have"

I mentioned that I had ordered this book a week or two ago; I have now read it, and been delighted by more than the title. The author wrote the 1930s bestseller "Live Alone and Like it" before writing "Orchids on Your Budget". This book is not aimed at those with serious financial problems, but at people interested in living well, responsibly and stylishly on moderate means.

It is filled with creative and inspiring ideas, some of which I will definitely revisit in future posts, but the main points I took from it were the following lessons:

-Don't feel you have to maintain a front of a fancy lifestyle to impress others, while scraping a miserable existence behind the scenes. Instead, forget others' expectations, take down the front and spend the money saved on things you care about.
-Work out what you want, and then work away of having that, whether by generating more money - and she offers many creative suggestions for doing so - or by making savings in other areas.
-Know the difference between real luxuries and habits. E.g don't buy a daily newspaper out of habit if you don't actually read it.
-Don't spend so much on housing, or food, that you don't have enough money for miscellaneous extras, whether those are orchids, holidays or theatre trips, or savings. The author is an advocate of getting a slightly smaller house or flat than you think you can afford; this will save not only on rent or mortgage, but also on the extra maintenance of a larger place.
-Plan ahead, whether in relation to your clothes - she suggests adopting a single colour for your wardrobe each year, and sticking to it fairly strictly - or entertaining.
-Play to your strengths, in terms of your assets and skills. My favourite example was that of a woman with a lovely silver tea service, whose preferred form of entertaining was therefore to have tea parties.
-Enjoy the challenge of doing a lot, and having fun, on a little money.
-Don't assume that you would be happier, better dressed and so on, if you were rich. The author considers that those who know about clothes will be well-dressed regardless of how much money they have; they spend time and effort instead of money.
-Do your social duty; return invitations, even if you can't afford a lavish party, and take responsibility for your problems if you do get into serious financial difficulty.
-Don't follow other people's rules on budgeting too slavishly; everyone is different, and you need to adopt a system that makes sense to you.

Using credit cards

I recently read an article on get rich slowly - www.getrichslowly.org - where the author suggested abandoning using credit cards and using cash instead. I thought this was an interesting suggestion, although one I might find it inconvenient to implement in practice, but I do agree that it is best to simplify one's credit card situation as much as possible. My thoughts on using credit cards are as follows:

1) Credit cards are a terrible way to borrow money; the interest rates are huge compared to any other type of loan.
2) Credit cards can be a useful way to pay for many purchases, but only if you already have the money for them.
3) It is worthwhile signing up for a credit card with reward points or airmiles. (Mine gives 2% cashback.) These benefits are only worthwhile if you pay off the full balance every month, however, as they would not come close to offsetting the interest payable.
4) Having used various cards in the past, I have now simplified my situation to the following; using one Mastercard for all household bills and most large items.
5) I have online billing, meaning a) you can check the state of your account at any point, and b) it is set up to pay the full balance every month, so you don't need to bother with a bill and worry about avoiding late fees. If you do not have this option, make sure that you have a way of keeping track of the due date of payments, so that you avoid running up charges for late payment.
6) If you need to have a back-up card, for instance for travelling or to pay for large one off items, keep it tucked away somewhere safe, and not in your wallet, when not needed.

Savings - different purposes - retirement

I've tackled emergency funds, paying annual bills, and saving up for large purchases, and this time am going to begin the subject of saving for retirement. (Remember - I am not an expert, so deal in these questions in fairly broad terms...)

In summary, while most of us working now may receive some kind of state pension on retirement, it seems likely that the vast majority of the money we need to live on in retirement will have to come from our own resources.

There are various possible sources for this income, the most obvious and generally applicable being a pension, to which we will have contributed while working.

There are essentially two kinds of pension; one, a 'final salary' pension which is based on receiving a proportion of the salary you are earning just before retirement, for the rest of your life, and often involves a lump sum being paid on retirement as well. The proportion of your salary which you will receive will depend on how many years you have been a member of the scheme. Final salary schemes are currently available to those working in the public sector, as well as in a very small, and declining, number of large corporations. The advantages are obvious, and the contribution you will have to pay as an employee relatively small compared to the benefit of a decent, guaranteed income in retirement. It may be worth making additional contributions in order to get the maximum benefit from these schemes, if you join late and can afford to do so.

The second type of pension is a 'money purchase' scheme. Under this scheme, employee and employer will usually each contribute a percentage of the employee's salary into a pension fund, which will build up into a sum that can be used to buy an income for the rest of the employee's life when he or she retires. Usually the pension will be held with a financial institution chosen by the employer, but the employee will often have a choice about which funds they invest in, and which are most appropriate will depend on your age, and how much risk you are prepared to take.

The pension contribution offered by different companies will vary, and companies generally match the employee's contribution up to a certain maximum, normally around 5%, maybe up to 10% if you are lucky. It is worthwhile thinking about making the maximum contributions in order to get the greatest benefit from the employer contributions, if you can afford to do so. On retirement, the money in your fund, which will hopefully have grown considerably over the years, will be used to buy an income for the rest of your life, called an annuity. There are various factors which will influence the value of your money purchase pension, including how much you have managed to contribute, which funds your money has been invested in, how much these have grown, and annuity rates - the rate at which it is possible to buy an income - at the time you retire.

Savings - different purposes - saving to spend

Today, I'm tackling saving up to buy something in the future. For example, you may wish to save up to buy a car, or home improvements, or perhaps a wedding or holiday. I have also saved up for an occasional expensive item of clothing, and in one case a watch. I contend that these expensive purchases don't make me financially irresponsible; I didn't use credit to buy these items, but chose to save my personal spending money to buy them in place of a number of smaller, more forgettable, treats. (While saving up for the watch, I decided to forgo new clothes for several months in order to buy it; maybe a sign that my priorities are a little peculiar, but it worked for me.)

Anyway, my point is that if you want to buy something expensive, it is, in general, with some exceptions which I will tackle in future posts, more efficient to buy it with money you already have than to borrow the money to do so. And while you are assembling your cash, you may as well get some interest out of it.  You will probably want to keep the money somewhere accessible, although if you are planning fairly long-term for your purchase, you could sign up for an account with some notice attached, if that gets you a better rate.

My recommendation would be to consider the following: using your Cash ISA allowance if you are a taxpayer and have not already done so; using an offset facility on your mortgage if you have one; or, failing either of these, using an ordinary savings account with a good interest rate. Unless you are planning fifteen or twenty years ahead, I would not invest the money in anything stockmarket-related.

You might also consider buying some premium bonds with the money.  There are sites you can visit which show how to calculate the effective interest rate, and this may be worth considerable. I had quite a few bonds for a while, but wasn't lucky enough to win more than a very few small prizes, so I eventually decided to cash in all but a couple of them. (This was rather illogical of me as the more bonds you hold, the more likely you are to win, but after all I am not a computer!)

I suggest deciding to save a certain amount towards your goal each month, bearing in mind what you can afford and when you plan to buy the item, and setting up a direct debit to the designated account each month. If you have the chance to name the account to suit your goal, which is sometimes possible, that may help you.  As mentioned in a previous post, I use my mortgage offset account to save, and have recently set up a "car" jar, into which I will save a small monthly account towards the next car I expect to buy several years' from now. 

Finally, it may be that it is unrealistic to save the full amount you need for the purchase in question before the time you need the money, but even if you are able to send 20% or 30% of the money needed, that will reduce what you need to borrow, and therefore save interest, and will help you to get into the habit of planning ahead.

Savings for different purposes - the emergency fund

The next category of savings I'm looking at is the emergency fund.  Unlike the annual bills fund, this money is intended not to be spent, all being well, but instead to serve as a back-up fund for use if you lose your job, become ill, the roof falls in, or a similar emergency arises.

I would suggest putting your emergency fund in an account with the best interest rates you can manage, while still keeping the money accessible on either no, or very little, notice indeed.  (You may be confident enough to rely on credit cards or overdraft facilities to tide you over until you can access your fund, but I'd strongly suggest not tying up the fund for too long.) If you are a taxpayer then it is definitely worthwhile making use of your cash ISA allowance for this purpose.  Alternatively, if you have an offset facility on your mortgage, you can use that, as I do.

In terms of the amount, the sum of six to eight months' living expenses is often recommended by experts. Depending on your income and other commitments, that may be an ambitious target, but is I think a good one to aim for.

Savings - different purposes - annual bills

While I've long recognised that saving was a sensible and probably virtuous thing to do, and have been in the habit of saving money where possible, it has taken me quite a few years to work out that there are several different categories of saving, which it makes sense to treat separately.

In this post,  I'm looking at annually recurring bills: saving for these this is not really saving at all, just spreading the cost of household bills which need to be paid for irregularly.  I used to find that my savings account would get a severe beating in mid-summer every year, when several insurance policies, car servicing, not to mention holiday costs, all fell due around the same time. A few years' ago I read somewhere about the idea of an "annual bills" jar.  The way it works is very straightforward; you need to add up all the bills which you need to pay less often than monthly, estimate their amounts, ideally add a bit to allow for miscalculations or increased premiums, divide the total by twelve, and then set up a direct debit from current account to savings for that amount each month.  You can then transfer money back to the current account to pay the irregular bills, as they come up.

Another advantage of this approach is that it should avoid the temptation to sign up for any regular payment schemes which you may be offered with insurance and similar; they usually include a hefty amount of interest and are therefore best avoided.

If you like, as well as annual bills you could include a payment for Christmas and Summer holiday expenses, as they are also recurring and standard; I used to lump these categories into my annual bills budget though I have recently, possibly over-fussily, set up a separate jar for holidays.