Things I learnt from The Barefoot Investor by Scott Pape

I just read The Barefoot Investor by Scott Pape, here are the things I learned. 

The Barefoot Investor is a book about taking steps to achieve financial independence. Written by Scott Pape, an Australian author, media personality and former investment advisor. The book is written for Australians in mind who want to take back control of their finances. While many of the examples and recommendations are for Australians, the key messages apply globally. 

The book is set out in 3 chapters with 9 actionable steps. 

Here are the key things I learned from The Barefoot Investor. 

Automate your finances

The most actionable step in the book is to automate your finances. In can be done in minutes and all on your phone.

It involves setting up 5 bank accounts to help you manage your money. 

The accounts will be for the following.:

1. Daily expenses – think housing, food and bills. Daily expenses should make up no more than 60% of your weekly wage.
2. Daily wants or “Splurge” – whatever you like, eating out, shopping etc. 10% of your wage.
3. Short-term savings or “Smiles”– things that will take more than a few weeks to save for such as holidays. 10% of your wage
4. Long-term savings or “Fire extinguisher” – 20% of your wage. 
5. Emergency savings or “Mojo” – Emergencies such as hospital bills, insurance excess or losing your job. 3 – 6 months of living expenses. 

These accounts should all be zero fees and you should try to get as high an interest rate as possible on the savings accounts. 

By automating your finances you can live comfortably knowing you have dedicated enough money to your daily needs, are saving for things worth looking forward to, saving for things that will change your life and can still afford to spend guilt-free. 

Get out of debt

You may have heard of compound interest. Albert Einstein said it is “the eighth wonder of the world”. “He who understands it earns it; he who doesn’t, pays it,” Invest your money in the right way and compound interest can help you become incredibly wealthy. 

Debt is like compound interest in reverse. Paying interest on your debt will make you incredibly poor if left unchecked so we want to get out of debt as fast as possible.

The Barefoot Investor lists 5 steps to getting out of debt:

Step 1: Calculate – write down all your debts and how much they are.

Step 2: Negotiate – Call your banks and try and get some better rates. The book contains an exact script.

Step 3: Eliminate – Cut up your credit cards so you never use them again. 

Sept 4: Detonate – Start paying your debts from smallest to largest. This is known as the ‘debt snowball’ method. 

Step 5: Celebrate – Each time you pay off your debt, reward yourself. You are one step closer to being financially independent.

Buy your own Home

For many Australians buying your own home is many people’s dream. If you have ever seen the 1997 film The Castle you will understand why. Owning your own home will likely be the biggest financial decision you make in your life. Scott says that Mortgage translated from french means “an agreement till death” so you must do it right. 

One of the best things about a mortgage is that it’s a forced 30-year savings plan. In Australia, any capital gains you make on your primary residence are tax-free. 

Owning your home isn’t just a financial decision it’s an emotional one. It is where you may live the remainder of your life, you may raise your kids there, not to mention you can do whatever you like to your own home, no more rent inspections.

Speaking about rent, is rent money dead money? Maybe but so is paying interest to the bank. I’d rather rent until I find the right home rather than be locked into a mortgage. 

Scott lists 5 mistakes people make when saving and buying their first home. 

1. They are waiting for a crash. You don’t know when that will be and you can base your life on something you can’t control. 
2. They buy a home they can’t afford – Scott says a home can cost up to 5% of the purchase price each year. That’s $25,000 a year for a $500,000 home. 
3. They buy an investment property first. This will slow down 
4. They rent but forget to invest. Renting will more often than not be cheaper than owning because you don’t have to pay interest and upkeep. Financially you would be better off renting and investing the difference into the stock market as mentioned by Phil Town in this video. There’s just one problem with that strategy. Most people don’t actually invest the difference. 
5. They don’t consider other options. Many people get stuck with the idea of buying a specific home in a specific suburb without thinking about their other options such as moving to the city or the countryside. 

Set yourself up for retirement 

Scott says that according to a global study in 2015 by the OECD One in three Australian retirees lives in poverty. Australia’s high cost of living, together with the fact that our government spends substantially less than the OECD average on pensions, has resulted in millions of older Australians living in poverty. Since 1970, the price of a basket of goods and services has increased 11-fold—at an average annual inflation rate of 5.2 per cent, according to the Reserve Bank of Australia. Using a conservative 3 per cent inflation by 2066 you’ll be paying $100 for a steak and $10 for a loaf of bread!

If you want to make sure you can afford to put the heating on when you are retired then you better start planning for your retirement now. 

Step 1: Get yourself a low-fee index-tracking super fund. We want to be invested in shares. Shares have provided the best returns of any asset class. 

Step 2: Boost your super contributions to 15%. Your employer already contributes 9.5% of your wage so you will need to boost it by 5.5%. 

Step 3: 3 to 5 years out from retirement start investing all your contribution into cash so that you can weather any financial storms. 

Summary 

The book covers many more topics such as Insurance, increasing your income, saving for a house deposit, investing for your kids, getting the best home loan, and making the most of your super during retirement. 

I have selected the parts which I felt were the most important being. 

1. Automate your finances 
2. Get out of debt.
3. Buy your own home 
4. Set yourself up for retirement. 

The Barefoot Investor by Scott Pape is an excellent personal finance book that covers the basic things everyone should know about finance. The book has overwhelmingly positive reviews on Amazon.com.au. Of the negative reviews, I noticed people saying that this is a good book if you want to be average. This is true, this is a book about the things the average person should know, but unfortunately, they don’t. This book teaches you how to set up your financial foundations, but it will not teach you how to be an expert investor nor does it try to. 

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