The Barefoot Investor Book Review – Part 2 Episode 94

While most finance books will instruct you to cut out your daily latte or stop that Netflix subscription. This book takes a different approach. Pape believes that while there is a limit on how much you can save, there is no limit on how much you can earn.

Freelancing

Turning a hobby into freelance work on the side can be a lucrative way to enjoy your hobby while also making some extra money. With apps like Etsy, Airbnb and Neighbourly, it’s easier than ever to turn a passion into another income.

Making yourself invaluable at work

Pape talks about researching your job description before your performance reviews. If you are being underpaid in relation to what the market is offering the same job, you have an opportunity to ask for a raise.

He also suggests setting clear goals with your manager on what success looks like and what would result in a pay-rise in 12 months time. He then suggests working extra hard to exceed expectations so that you can not only secure a pay rise but maybe a possible promotion or similar.

What we like

While every situation is different, we usually like the idea of increasing your primary income more than trying to find side hustles for two main reasons:

• Earning more per hour for your current work hours is a more efficient way to increase pay
• Banks will usually only take 50% of surplus income into account when assessing your financial position, whereas they’ll take 100% of your primary income as sustainable income.

Pape believes in saving up a 20% deposit before buying your first home. In the current market, we are seeing it taking very long for people to save up a full 20% deposit, so people are opting to use 10% or even 5% deposit options whenever possible. You might have a bigger loan but the goal would be to get on the ladder as fast as possible, pay down the debt aggressively and let the power of compounding do it’s magic.

In relation to the current NZ housing market, with interest rates rising so quickly, we’re seeing test rates reach extraordinary levels. This results in less purchasing power, as the bank’s test rate increases outpace the rate of property prices decreasing, meaning waiting longer to get onto the property ladder can have detrimental effects to your purchasing power.

Saving your deposit

Pape has some tips around saving your house deposit as fast as possible:

• Rent a cheaper house – Rent will most likely be your biggest expense, so make a sacrifice to decrease it temporarily (much easier with flexible work schedules nowadays).
• Increase your income – outlined above.
• Sell things you don’t need.
• Look into first home grants available online. The most common one in NZ is the First Home Grant

While Pape encourages putting in extra into your super account, this relates specifically to Australian superannuation accounts. There is little benefit to putting extra money into your KiwiSaver account if it’s not matched by your employer. The only example where it could be beneficial is if you’re not very good with your money and need to lock yourself away from it.

The thing to consider with the share market is net returns. On average, the sharemarket grosses around a 8% return. Once you take off fees, tax and inflation, you’re probably netting around 4%. If your mortgage interest rate is around 5%, it’s more effective to pay off your mortgage debt. With debt, you’re locking in a rate of return, it’s not taxed and isn’t inflation adjusted, so it’s cheaper when inflation is high.

Pape outlines that he doesn’t like investment properties because of the transaction costs invovled. While this might be the case in Australia, it’s not so relavent in NZ. The reason Kiwi’s love property is the ability to leverage and invest $100,000 to get a return on $1,000,000.

Arming your kids with solid financial habits early on will set them up for financial success. Making them work for their money rather than handing them money will teach them the right mentality around money.

If you are putting money away for your kids future. You will want to consider the vehicle in which it is kept in. Keeping the money in a bank account will only yield a small amount of interest, while investing in a long term index fund will likely yield a better result.

Get the banker off your back

Pape recommends keeping your mortgage at a reasonable level. Do not get the most expensive home you can find.

Don’t opt for the extra features on your mortgage, keep it simple with the lowest rate available.

Pape discusses some pretty specific circumstances in his book, he even suggests getting a part time job at a supermarket to keep your brain ticking along. This can be a little misleading, having a discussion with a financial adviser will take all the guesswork out of this process.

He also leans on superannuation being available for everyone. We believe that if you’re under 50, you should be planning on funding your retirement without superannuation.

That was the review on the grow and harvest sections. While some of the examples and methodologies are specific to just Australia, overall we like the way Scott Pape recommends building a financial foundation. It covers all the must know sections in finance in a step-by-step method. In the next episode we will outline the grow and harvest sections.