We review the #1 Australian best selling book by Author Scott Pape; The Barefoot Investor. Scott Pape believes this is the only money guide you’ll ever need, so we put it to the test.
Part I of a II part series. The book is broken up into three key stages; Plant, Grow and Harvest. The plant section is all about setting up good financial foundations. Grow is about buying your first home and growing your wealth. Harvest is about preparing to live a comfortable retirement lifestyle. In this episode we go through the plant section, the next episode will outline the grow and harvest sections.
Alpacas vs. Groundhogs
We love his analogy of the two distinct financial mindsets of people: Are you an alpaca or groundhog?
Alpacas are fierce go-getters who will take the bull by the horns and do what it takes to be successful and better themselves. They’ll work their butts off to pay out the debts, they’ll buy a cheaper car if the current one is too expensive to run and they’ll have no qualms in cancelling Foxtel (Sky TV) if it’s not getting used enough.
Alpacas take full responsibility for their financial situation and will get ahead, whatever it takes.
Groundhogs sit back and complain about the way things are, but never actually do anything about them to bring change. They’re full of excuses, “I don’t earn enough,” “I don’t understand budgeting,” “the cost of living is too high.” Groundhogs want the magic solution without having to do any of the work.
Groundhogs take no responsibility for their financial situation and will never get ahead.
So, are you an alpaca or a groundhog? The fact that you’re reading this post probably means you’re an alpaca.
The book breaks down the key actions to building a strong financial foundation into ‘date nights’. A booked time and place where you sit down with your partner or friend to discuss your finances. It creates a safe environment where each person can feel confident to talk about their situation.
Date night 1 – Bank accounts
Set up two everyday accounts with zero fees. These are your everyday transactional accounts. One is for daily expenses, one is for splurging.
You then want to set up two savings accounts. One called the ‘smile’ account, dedicated to fun longer-term savings goals such as a wedding, honeymoon or a holiday and one ‘fire extinguisher’ account for big savings goals too, but more towards less fun things like saving for a house deposit or paying off your mortgage faster.
Finally, you want to set up a ‘mojo’ account, this is your emergency fund. Initially you want to have around $2,000 in this account, then slowly grow it to have 3 – 6 months of expenses in it.
Date night 2 – Superannuation
Pape recommends prioritising low fees, as he believes traditionally is hard to outperform the market over the long term. He believes the threshold for fees should be less than 0.85% fees. While the argument between performance and fees can be contended either way, what’s important is that making an active choice, will have a drastically different outcome than just sticking with your default provider and fund.
Date night 3 – Insurance + buckets
Insurance is comprised of 3 different rules:
Rule 1 – Only insure against things that’ll financially wipe you out; i.e., burglary, car accidents, sickness or disability and death. All other insurances are not required.
Rule 2 – To decrease ongoing costs, opt for higher excesses on your policies.
Rule 3 – Re-negotiate your insurance premiums annually. While this might not result in a significant cost savings ever year, it’s important to review your cover regularly as your situation changes.
Private health insurance – Pape believes that if you’re under 31, earn less than $90,000 or your household income is less than $90,000 you don’t need health insurance.
Income protection – Pape refers to getting income protection with your superannuation. This is something that is only available in Australia and not in NZ, you will need to pay for income protection separately in NZ.
Pape then recommends to contribute the following to each ‘bucket’ account per payslip
- 60% living expenses
- 10% splurge account
- 10% smile account
- 20% fire extinguisher
Date night 4 – Domino your debts
Domino 1 – Calculate your debts with interest rates associated with each of them.
Domino 2 – With your larger debt repayments, it’s recommended that you call the creditor and try to negotiate your larger debts with lower rates or better terms. While this can be tough to do, it definitely worth a shot to secure a lower rate.
Domino 3 – Cut up those credit cards.
Domino 4 – Order your debts in order of smallest to largest and focus your energy on tackling the smaller debts first. This will get you some easy wins on the board and more motivation and momentum to tackle the larger debts.
Domino 5 – Once each debt is paid, make sure to celebrate!
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.