I’ve been searching for the answer to the question “What is Money?” for quite some time.
I’ve been going down this rabbit hole for long but its really hard to know what money is. For some it might be everything, for someone it might just be a tool, for someone it might be way of freedom and for someone it might be the power. But what actually is Money? Who creates it? Why does it have value? What is Value? Why humans sacrifice their finite time out of their life to get money? Why is it so important? What if there was nothing such as money? Would we live the way we live? There are lots of questions like these which is very hard to answer but one thing is for certain. We as a human from the beginning of time always had desire to put value on something through a tool we call money. The form of it might have changed from barter, to labor time, to glass beads, to salt, to stones, to gold, to silver, to coins, to paper and now to digits on a computer.
Even the term “interest” has been there for thousands of years. This is how banks today operate around the world. They lend money and earn interest on it. But how do they have all the money they lend to the people? Very interesting to think about. It is a kind of investment for the banks. These questions had led me to study about the taxes, pension and investment in general. As I’m based in Japan and learned through the process. Below are some information related to the taxes and pensions in Japan which can be utilized as a sub tool to leverage the tool that is Money. Pensions, taxes and investments are 3 most important aspects to get informed about when you’re trying to manage your money for long term. These are just the basic information regarding the taxes and investments. By no means, are these the only way to secure your financial future.
Normally, Japanese Social Insurance system consists of two tiers pension:
- Fixed Pension
- Employee pension
Those working for a company usually pay both of above while those who are self-employed may only be paying Fixed Pension. This will affect the amount of pension you receive after retirement.
There had been news recent years about insufficient pension known as “老後2000万円問題”. This news headline is misleading in many ways. The issue basically says that there is on average ¥20 million insufficient for 30 years after you retire from work. This doesn’t apply to everyone, some people have more than enough, while others fall short. It’s important to know how much you personally need. In fact, this is the great opportunity to analyze one’s own position so that he/she can plan accordingly for retirement. It is therefore crucial for every individual to seek for investment opportunities. Recently, inflation has been the headline news around the globe. When inflation continues, the price of goods rises, which means the value of cash decreases. Relying solely on savings in cash for future is a huge risk.
- Countries around the world aims for a 2% inflation rate, which means the value of money decreases by 2% each year at the very least. The actual inflation rate are way higher than the nominal rate we are provided in news by the mainstream media.
- A smart way to protect your money is a dual approach of saving and investing.
You may notice the deductions from your monthly salary. These deductions normally include taxes and social insurance. Tax-saving points for employees include deductions. The Social Insurances include Medical Insurance, Pension, long-term Care Insurance and Employment Insurance. Japan’s insurance coverage is widely known as the strongest in the world!
- Its important to understand what is covered by public insurance, and consider private insurance for any gaps that you need on personal level. This differs individually.
- Its wise to separate savings-type insurance from deposit-type insurance!
The pension contributions made by citizens are invested by the government. The GPIF(Government Pension Investment Fund) is the largest pool of retirement savings in the world and is the largest public fund investor in Japan by assets. Its a major proponent of the Stewardship Principles. For perspective, GPIF made an investment gain of ¥10.3 trillion($72 Billion) on the first quarter of 2023.
“Compound interest is the eighth wonder of the world. He who understands it, earns it. He who doesn’t, pays it” – Albert Einstein
Its important to know that compound interest increases the speed at which money grows over time. Long-term investment for retirement funds and compound interest work well together. iDeCo(個人型確定拠出年金 – Individual Defined Contribution Pension) and Tsumitate NISA(つみたてNISA – Nippon Individual Savings Account) are investment vehicle provided by the government.
- One can create the third tier of pension through investments.
- Looking at the interests that bank pays today on your saving (0.001% Japan Post Bank), It would take over 70,000 years to double your money. In addition to that, it costs you money to take your own money out from ATM. So shifting towards investments instead would be the better alternative.
There are several common investment strategies which include savings deposits, bonds, investment trusts and stocks. Investment trusts are packages of stocks selected by professionals. Its wise to choose index fund that tracks an index. These are the commonly used investment strategies.
- Treat investment trusts like savings and continue accumulating for over 15 years. (Its like saving in stocks instead of cash)
- Its wise to consider index investments linked to either USA or the World, if one believes in the global growth.
There are numbers of online securities brokerage company which are convenient and easy to use.
As of Tsumitate NISA, only investment trusts that meet the Financial Services Agency’s standards can be purchased which is considered as safe investment in general compared to other strategies. Its also important to know that investment gains from Tsumitate NISA are tax-exempt for 20 years.
- Once you purchase investment trusts, it’s best to leave them untouched.
- There’s a way of spending only the gains from the investment, which is known as “4% rule”. You can gradually spend only 4% and your money will last for a lifetime.
There is one more investment strategy recommended by the government of Japan. Its called iDeCo which has high tax-saving benefit. Its because contributions are fully deductible, and taxes at the time of withdrawal are preferential. The upper limit and tax deduction amounts for iDeCo varies depending on one’s employment status. To save on taxes, employees should make year-end adjustments, while freelancers and sole proprietors should file a tax return.
- There are 2 methods of receiving iDeCo (lump sum or partial withdrawals) which can affect the tax amount.
- People receiving retirement benefits around age 60 should be cautious as they might incur losses depending on the method of receiving iDeCo.
These are the latest information but might change frequently. You should DYOR to plan your finance and future because no one knows your situation better than yourself. Thank you for reading and see you on next one.
You can buy me a coffee if you found the info helpful 😉
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