JET Program Personal Finance: The Ultimate Guide (Part 2)
This article serves as the second part of our financial guide for US Japan Exchange & Teaching Program participants. Part 1 covered steps outgoing JETs should take before departing for Japan, while this article explores practical ways JETs might manage their finances while in Japan.
Disclaimer: The content expressed in this post is the sole views of Boston Intercultural Consulting LLC. They do not reflect CLAIR, JET, JETAA, AJET, USJETAA, or the Japanese government. Contact your local consulate for official information. Confirm all data with any bank or credit card before applying, as rates and fees are subject to change. Investing carries significant risk, and Boston Intercultural Consulting bears no responsibility for financial loss.
When I moved to Japan at age 22 on the JET Program, my definition of a good month was when I positively impacted my community, forged great memories, and wrapped up the month with more money in my account than I started. As I look back a decade after my JET adventure, I see how this simplistic savings strategy helped me in the short term. That said, investing in a few more good habits back then could have resulted in healthier finances today. We'll see how dividing our finance strategy into three steps can make the difference of hundreds of thousands of dollars down the road.
Step 1: Pay Off High-Interest Debt
Credit cards can be awesome, especially if you're a point fiend like I am. But that is because I'm at a stage where I can automatically pay off my balance each month. If I couldn't, no airline miles would make up for the typical 15%-25% interest rate.
If you carry high-interest debt that you're not paying off in full each month, such as those connected with credit cards, you're not alone. In 2020, the US revolving debt balance for credit cards alone reached $756 billion. And like those in the US, you likely had a perfect reason to enter that debt and, if you didn't, it was likely due to misleading marketing from the credit card companies. If you do fall into this box, you may feel shame. No worries, the good news is that it eliminates all other options, as paying off high-interest debt should be your financial priority during JET.
Like most debt, our credit card balances are subject to compound interest, which is simply interest on interest. So, if in Month #1 you owe $1.00 at 20% monthly compounding interest and fail to pay your balance, in Month #2 you will owe $1.20, plus any missed payment fees. During Month #3, after another missed payment, you'll owe $1.44 ($1.20 balance + 20% of $1.20) and not $1.40 ($1.20 balance + 20% of the original balance of $1.00). Paying just the minimum will do little to curb the direction of an increasing debt balance. And, while this $.04 discrepancy might seem minor, it can have devastating consequences.
Compound interest is why a $200,000 30 year mortgage compounding monthly at 4.00% will end up costing the borrower a whopping $343,739 over the life of the loan, and how shaving just half a percent off that rate to 3.5% can save the borrower $20,000.
In the US, most credit cards compound daily, not monthly, with average interest rates fluctuating from recent lows of 12% to the highest of 26%, making real-life calculations a tad more complicated than the one we used above.
The takeaway is that if you have a balance on your credit card that you're not entirely paying off each month, eliminating as much of that debt as possible should be your highest priority before considering other personal finance options.
Step 2: Low-Interest Debt vs. Investments
Suppose you're at a point where you're paying off any credit card balance each month; congratulations! The decision where to put your extra cash just got more nuanced.
At this point, you'll want to take a look at your lower interest debt, such as student loans, as well as longer-term investment opportunities, such as a Roth IRA (Individual Retirement Account).
Decision time: Pay off low-interest debt now, or invest for down the road?
Tackling debt before investing seems like the logical course of action. After all, why put my money somewhere else while I still owe money and am setting aside monthly payments? Perhaps more importantly, paying off debt may feel good. If you have multiple student loans, eliminating one of them as low-hanging fruit may be psychologically satisfying and the correct choice for you.
Let's, for a moment, look at the numbers over the long term. Over the past ten years, public student loan interest rates have sat below 6.8% in the US. Meanwhile, the average 10-year return of the S&P500 is typically 10% (from 2010-2020, it averaged 13.6%). Consequently, over the past ten years, someone paying off $1 of public student loan debt could have earned $2 of investment income.
If you're someone who values debt-free life or is having difficulty making monthly payments, then focus on paying more of your debt off. However, if you'd like to maximize the value of every penny you earn, consider setting cash aside to invest in a Roth IRA index fund. Unlike a Traditional IRA or employer-sponsored 401k, the money you invest in a Roth IRA will not be taxed when you retire. Currently, those under 55 can invest up to $6000 each year into a Roth IRA.
If you decide to go down this route, shop around to find one that's right for you. Vanguard's Total Stock Market Index Fund (VTSAX) is a tremendous low-expense index fund that invests in the US stock market as a whole. While the lower fees, which also compound, will save money over the long run, this fund requires an initial investment of $3000.
One of the unfortunate consequences of the foreign earned income exclusion is that most US JETs will not be eligible to contribute to their Roth IRA while on the program, with the possible exception of their departure year. This is because Roth IRAs have a contribution limit equal to one’s taxable earned income, with a maximum annual contribution of $6000. So, an outgoing JET who earned $2500 working over the summer before departing for Japan can contribute up to that amount. Likewise, a full-time employee who earned $20,000 during the calendar year leading up to their JET departure can contribute up to the $6000 cap. However, neither of these two JETs would be able to factor in their Japanese income.
While investing in bonds is also a good idea as you get closer to retirement, you only need to consider doing so; a) once you have saved up to a considerable milestone, such as $100,000, and 2) as part of a traditional IRA or 401k and not part of your Roth IRA.
One final note on fixed-rate, low-interest, long-term debt: As a general rule, with US inflation rates averaging 2%, our money is worth more now than in the future. Therefore, it's often better to pay off a loan in 2031 dollars than in 2021 dollars. As the stock market and interest rates fluctuate over time, I recommend sending money to your US bank account every three months while setting up your student loan billing to pay monthly.
Step 3: Savings
While investing in the future and paying off debt is vital to our future financial success, I'd like to make one final note about savings and how much money to send home to your US bank. In this guide, I've been careful to avoid most dollar figures and percentages, as tolerance for risk varies from person to person. The benefit to Roth IRAs is that you can always withdraw your principal (the amount you invested), penalty free. The drawback is that you can still only support a maximum of $6000, so removing $18,000 will set you back three years in your retirement goals.
That said, emergencies happen, and we each have different obligations. Some of us will send money back to parents, while others might want an additional buffer to prevent bad luck. Others might consider safer, shorter-term investments like CDs to save for a wedding.
Just remember that the average US inflation rate is around 2%, while savings account interest rates sit at an average of .05%. We're losing an average of 1.95% each year for the benefit of having our money immediately available.
Bonus Tip: After JET
JETs branch off into different directions after completing the program. Some will continue a robust career in Japan. Others might enter graduate school. For those who will join the full-time US workforce with a company that offers a 401k investment account, I strongly recommend investing whatever percent your employee matches.
A reliable priority would be: 401k up to what your employer matches => Roth IRA up to $6000 maximum => max out your 401k. 'Your 401k investments should be where you invest your bonds. Once you save up to $100,000 in your total retirement investments, begin investing in bonds, which are safer investments. Typically, you'll want to subtract your age from between 100 and 130. That number is the amount that you would invest in stocks, depending on your tolerance for risk. So, if you're a cautious 40-year-old, you'd subtract 40 from 100 and have 60% of your portfolio in stocks and 40% in bonds. Someone with a higher tolerance for risk would remove their age from 130, leaving just 10% of their portfolio in bonds.
Remember that all bonds should be in your 401k or Traditional IRA, not your Roth IRA. That means you may need to weigh your investments a bit. For example, let's say you've decided to invest $1000 into your Roth IRA and $1000 into your 401k. You want 20% of your investments going to bonds and 80% to stocks. That would mean you'd invest 100% ($1000) of your Roth IRA funds into stocks, but for your 401k funds, 60% ($600) will go into stocks, and 40% ($400) will go to bonds.
For some JETs, much of this information will be a review, while for others, it will help clarify and get you started on your investment goals. An excellent book on the subject is I Will Teach You To Be Rich by Ramit Sethi, full of conservative, well-tested investment advice.
With that, I wish you the best of luck in your financial journey and with your JET journey in general. If you have any questions, please reach out to me at dan@bostonintercultural.com.
