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October 2011 | www.selectasset.com
Disposable Income

"Beware of little expenses; a small leak will sink a great ship"

-Anonymous

Frequently, the thing people say when offered to meet with a financial planner is "I have no assets to manage".  Contrary to popular belief, our services are not exclusively for clients with large sums of money looking for better returns on their capital.  In fact, our services also benefit those who are looking to accumulate wealth in a systematic manner for their future financial stability. At times, we encounter potential clients who are skeptical.  Not only do they not count themselves amongst those who are living the good life in Tokyo, but they wonder how they are to squeeze water from a stone, and not only save a portion of their income, but have anything substantial to invest.  Likely, they've done some research which has provided a few ideas:  ask for a raise, get a second job, start a side business.  In reality, though, it has been proven time and time again that the most effective way to increase disposable income is to spend less.  Period.  But how?

A case study of Emmet*, gives us some clues.

Name: Emmet
Age: 40 years
Marital Status: Married
Job: Expat web designer, living in Tokyo


Emmet's day starts at 7:30 am.  Picking up his newspaper from his doorstep (4480 yen/monthly subscription), he rushes into Shinjuku Station, stopping first at Starbucks for his daily Venti Caffe Americano with an extra shot of espresso (490 yen).  Let's stop for a minute here.

It's only 7:30 in the morning and Emmet has already come face to face with 2 ways to save money.  By buying his newspaper on the newsstand for 180 yen per day only on the days that he rides the train to work (approximately 20 days per month), and reading the news on the internet at home on the weekends, Emmet could save 880 yen per month by cancelling his subscription.  And by cutting out that horribly overpriced coffee and simply making one at home and carrying it in a reusable travel mug, Emmet could save 9800 yen per month!

  • Total monthly savings by 7:30 am - 10,680 yen

Emmet now hops on the train and rides to Tokyo Station, 2 stops away.  Since this is the same route he takes home, he buys a monthly commuter pass which, round trip, costs 11,340 yen per month.  He works at his desk for a few hours, then steps out to the local ramen or sushi shop for lunch, buying the set menu for about 1,000 yen.  Time to take another look . . .

Emmet never goes to the Tokyo station area on the weekends so he really only needs 20 days worth of travel fare - or about 7,600 yen.  By substituting his commuter pass for a named Pasmo ticket charged with 8,000 yen per month, Emmet could save 3,340 yen.  Additionally, by bringing his lunch from home (the previous night's leftover dinner, for example) even just 3 times a week, he could save 12,000 yen!

  • Total monthly savings by lunchtime - 26,020 yen

Emmet now heads back to his office, rushing, of course, because he took a little too long at lunch.  He has a meeting, within 10 minutes walking distance from his office, but because he is running a little late he hops into a taxi and off he goes for 710 yen.  Emmet finds himself in this predicament usually about once a week, totaling about 2,840 yen per month.  After his meeting, he returns to his office.  The meeting went well, earning Emmet a small bonus, so when work is done, it's off for drinks with his boss (who picks up the tab, thankfully!).  He calls his wife on the way home and they decide to go out for a celebratory dinner, which costs about 8,000 yen.

Clearly, if Emmet were to budget his time a little better, he would be more successful at managing his financial budget.  By leaving a little earlier and walking to meetings nearby his office, he could save approximately 2,840 yen per month.  And, by skipping the dinner with his wife and simply opening up a bottle of wine at home, Emmet could save that 8.000 yen, and also avoid a very common pitfall called the marginal propensity to consume (MPC).  The marginal propensity to consume is a concept that indicates that an increase in personal consumer spending occurs with an increase in disposable income.  Emmet's modest bonus leads to his suggestion to spend a little on a nice dinner out with his wife.  By avoiding this, that 8,000 yen could stay in his bank account or, better, be invested.

  • Total monthly savings by the end of the day - 36,860 yen

That's quite a substantial savings by making a few simple changes each day.  Multiply that by 12, and Emmet has almost effortlessly freed up 442,320 yen in one year.  If saved an invested, this 36,860 yen per month turns into over 45,000,000 yen to be used for retirement when he turns 65, assuming Emmet averages just 10% per annum return on his investments.

We are sure there a lot of coffee aficionados that wouldn’t dream of forgoing their daily macciatos.  The point is, by reexamining and streamlining our daily expenditures, we could substantially increase the amount of capital we accumulate for our future financial goals. All it takes is a little foresight and discipline.  

Some other tips to increase your monthly disposable income:

  • Limit your credit card use.  If you do not have the cash to pay for something, you cannot afford it.  By using credit cards only for emergencies, you can significantly reduce the amount you spend on fees and high interest rates.

  • Take fewer trips to the supermarket.  If you go to the supermarket just once a week, as opposed to every day, you will find that you spend much less.

  • Most importantly, know the difference between want and need.  Do you need a 57 inch plasma television?  You need a roof over your head and food to eat, and, likely, enough money to provide these things after you have retired.  

With a little effort, saving money is entirely possible, and that little bit of effort now will surely help to make your life a little more effortless in the long run.  Contact one of Select Asset Management's senior advisors today to discuss how you can use your disposable income to build a secure future.

*The case study of Emmet is fictional.  Any resemblance to an actual person is entirely coincidental.

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