Scott Pape’s The Barefoot Investor: The only money guide you will ever need book, has taken on a world of it’s own and become a bestseller here in Australia.
Everywhere I turn someone is sporting their orange ING cards and referral codes are found at every turn (sorry I don’t have one).
I read his previous book which was written more than ten years ago now. Which detailed 5 steps to financial freedom for someone in their 20’s and 30’s.
The 5 steps were essentially setting goals, managing cash flow, debt reduction, investing (or working your Mojo account – yep the Mojo was around back in the early 2000’s) and insurances.
Given I was only in the early stages of my financial journey it was a good book to lay a foundation.
But after the latest book came out, I was not really that inclined to buy it. From what I had read on the steps I didn’t really think it could teach me anything I did not already know.
But since a reader reached out to me and asked me to do a book review, I bit the bullet and grabbed a copy.
Since reading it, I can see how it is a great book for a beginner. I think he has done a fabulous job in making more Australians comfortable with talking about money more openly, which in my eyes is only a good thing.
But as someone who is working towards financial independence there are some of his 9 steps that I am worlds apart in terms of my thinking.
Even if you have not read the book yet, you can check out a summary of the steps here, before I let you know where I think he has missed the mark for me.
Schedule Date Nights
The first step I am totally on board with.
It is all about making the time every month to track your progress (my spend tracker could help) and stay accountable.
Speaking openly with your partner about your debt as well as your joint goals is something that I think is essential in any relationship.
Hiding debt or spending from your spouse is a recipe for disaster, except in exceptional circumstances, such as the need to escape an abusive relationship.
Since me and my husband have two young children, we don’t actually get to go out to dinner really at all.
But we do find the time to chat about our finances and we are both very much on board with our main financial goals.
Set up buckets
The second step is all about managing your cash flow. Essentially it is the same as detailed back in the original book and where the Mojo account first made its appearance.
The current book details you want a Blow bucket for daily expenses, the occasional splurge and to fight any financial fires.
You then want a Mojo bucket which is some safety money, and then a Grow bucket which is to save and build for long term wealth.
The premise of keeping separate accounts is a great one. But I never really set my accounts up exactly like this in the past.
These days we just channel all of our funds into our offset account. We don’t actually have any savings as such, just all of our money gets pooled in the one place. And we use our credit card to earn points.
If I am honest, I think the way we are currently doing things has resulted in us increasing our spending. So going back to the bucket approach is something I am looking into with my bank. To see if we can have multiple offset accounts against the one loan.
Getting a handle on your debt is really important for financial freedom.
I agree with The Barefoot Investor approach to just focus on your consumer debt here. Negotiating a better deal on your interest rate is also sound advice.
Having worked in banking, I have seen it first hand that the bank wants to keep your business, so will very rarely not come to the party with a better rate.
Whilst it is suggested to cut up your credit cards, I think this is good advice for most people, but not everyone.
There are people out there who can have a credit card and use it to their advantage to earn Points for things such as free travel. These people are very disciplined and always pay off their card each month.
So here is where you need to make a judgement call on the type of spender you are. If you do decide like us, to keep a credit card, if you start to not pay it off each month then you should follow the Barefoot Investors advice to cut it up.
The approach to eliminating your debt in the book, is called the Domino effect. Which is basically paying off your smaller debt first regardless of if it is the lowest interest rate.
This concept is not new. Dave Ramsey speaks of this as the snowball method compared to the avalanche approach which is paying off the highest interest debt first.
I see the merit in the domino and snowball approach, and I think it works well to motivate people to stay on track.
But for me personally, if I had something on interest free and it was the smallest debt I would not make that my priority. I would calculate exactly how much I need to pay to pay it out completely before the interest free period. Not just pay the minimum as that is where they catch you out when it converts to an insane rate.
Once I have worked out that amount I would pay that amount each month, then channel all my other funds to another debt that I am paying interest on.
Buy your home
The Barefoot Investor advises to save a 20 per cent deposit so that you can avoid being hit with lenders’ mortgage insurance (LMI).
The premise behind it is if you buy a place for $500,000 you need to pay more than $15,000 for this insurance, which when added to your mortgage adds more than double that to the amount you end up repaying.
Now I see the point behind this, as you want to demonstrate that you can save and therefore be able to afford to pay off your home.
It also helps to have some equity built in from the start which give you a bit of breathing space and your repayments start at a lower rate.
For our first place we had a 20% deposit, but for our investment properties we definitely did not. And we have more than made up for the cost of the LMI due to capital appreciation over the past few years.
With prices the way they are in Sydney, I think 20% is a hefty goal but one worth striving for. The key for us to be able to achieve that was to not go in and buy the forever home. We started with a modest two bedroom dated unit and worked our way up from there.
Supercharge your wealth
This is the step where me and The Barefoot Investor come to blows. We are most definitely not on the same page with how to supercharge your wealth.
The book advised that the best place to invest, for someone of any age, is in Superannuation.
As soon as I read that I groaned thinking there is the investment advisor in him coming out.
Now I get it. It is a tax-efficient strategy and the straight out maths would say it is better than investing your after tax dollars is something like shares or index funds.
But if the Barefoot Investor is able to go against the maths in his domino approach to debt, then I am able to here when it comes to growing your wealth.
If I was over 50 I might agree with his approach. But as someone in my mid-thirties who plans to retire well before the Government will let me access my own money, it is simply not going to happen me paying more than the employer contribution.
Fellow Aussie blogger, Pat the Shuffler, explains the case for and against Super over on his blog. It is a fascinating read.
My major problem with Superannuation is that I am not in control of that money. Sure I can change the balance of my portfolio, but at the end of the day the Government can up the age I can access my money and there isn’t a thing I can do about it. They have just changed a bunch of rules in relation to how much you can contribute, so my thinking is, when will they stop making changes?
I see why for the country it makes sense for it to be controlled so people don’t waste away their nest eggs, and we end up with a larger welfare bill.
But in my personal circumstances, contributing extra to Super is simply delaying financial independence.
The reason I feel so strongly about this, is because my dad died at aged 55. Before he could access what he had worked so hard for.
For me, if I can build up to my freedom number (the amount I need to be financially independent – which as a rule of thumb is about 25 times your annual expenses) over the next 8 years I won’t actually need to wait until I am 60 to retire.
The cynic in me also thinks the Government will increase the age you can access your Super to much older by the time I get to this point in time.
For me, my retirement is all about cash flow. If I can be earning enough from rent and dividends to fully replace my full time wage then I have hit the point of financial independence.
And I plan for that to be a long time before the Government will let me access my Super.
Boost your Mojo to 3 months
This step is all about having three months of living expenses saved up in the case of an emergency.
I definitely think is a good idea. Having peace of mind if you lose your job or are made redundant can help you to feel a lot more in control of your finances.
For myself currently, we don’t have a large buffer like this available. Two lots of maternity leave certainly tick a hit on our savings.
Whilst not ideal, if we were to face this kind of emergency, we do have a line of credit available which would mean we could be OK until we were able to sell one of our properties, which we are planning to do anyway.
Get the banker off your back
There is a school of thought that you should not pay off your home loan faster, as the interest rate on the mortgage is less than what you could potentially earn by investing the excess funds.
But I share the Barefoot Investor’s view here that you want to get the banker off your bank. The security of owning your home mortgage free is something that is very important to me, particularly after having kids.
In an upcoming blog I will go into more detail about ways to pay off your mortgage quicker. The Barefoot Investor suggests there is only two ways to do this.
Either lower your interest rate or make extra payments. Which is mostly true, but if you really wanted to get drastic with your mortgage free status you could consider downsizing or moving to a city that is not as expensive.
Nail your retirement number
This is another step where the Barefoot Investor and I come to blows.
I can see the value in him letting people know that you do not need a million dollars to retire. That for couples a paid off home and $250,000 is enough.
It makes people feel better about their current situation and causes them to be less worried about their retirement, as the goal is now more realistic and achievable.
But where I have a real problem is this will only afford you a comfortable lifestyle when combined with the Aged Pension.
As someone who is in my thirties, planning my retirement based on assumptions that the assets test will remain the same in thirty years times or that the rules to access the Aged Pension won’t change drastically by then is something that concerns me.
Plus the age to access the Aged Pension, I predict will continue to creep up, so I will need to be 101 by the time I qualify (OK 101 might be a bit dramatic but you get the idea).
Hence the safety net is not something I am willing to put all my cards on.
Instead of calculating my retirement number. I much prefer to calculate and work towards my freedom number. The amount of money I need invested in order to bring in enough income to cover my living expenses.
For me this amount is over the million dollar mark. And something I am striving to achieve.
Leave a legacy
This is all about giving to others as a way to be remembered for something.
To me, the most important legacy I can leave is to my two daughters.
Hence my focus on retiring early so that I can spend much more time with them whilst they are young.
With this extra time, I also envisage us being able to give back much more time in our local community.
So now that all the steps have been discussed, I can now answer whether it really is the only money guide you will ever need.
If you were to only read one book on money in your life, it’s a decent one to read. The fundamentals of money management are all there. And in the end it will afford you a comfortable retirement.
But for me, reading other books and educating yourself about different schools of thought could add a more well rounded view of what you would like your retirement to look like.
So I would say, use your new found interest in the subject to go deeper and read some money books that interest you. Use the book as a starting point to fuel your interest and perhaps follow some other Aussie bloggers and see what they are up to as well.
What did you think of the Barefoot Investor book? Do you agree with all of the steps?