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The Barefoot Investor Book Review

Barefoot Investor Review by Mike Beal Financial Planner Sunshine Coast

The Barefoot Investor Book Review (barefootinvestor.com)

The author has a cult-like following so I thought I better have a read. The concepts in the book are very good and it is a simple, enjoyable read, I can now see why the book is so popular. Here’s some of my takeaways:

Budgeting:

Budgets don’t work. Agreed. I try all the time to get my clients to do a budget but for the most part, people hate them, hence, the author, Scott Pape, advocates figuring out what your expenses are and then having 4 separate bank accounts split between a ‘main account’ (‘Blow account) where all your income goes and daily bills etc. come from – this represents 60% of your income, a second transaction account for ‘splurging’ 10% of income (‘splurge account’), this money can be spent but only up to the limit of the 10% – once it’s gone, no more spending! Another 10% goes to a savings account for shorter term savings (a ‘smile’ account), for holidays etc., and the final 20% goes to a bank account called your ‘Fire Extinguisher’ fund which is an emergency fund/pay off debt/long-term savings fund. He also recommends a ‘Mojo’ account at a different banking institution (so you can’t get it easily).

Superannuation:

Superannuation rocks, he loves super. Agreed. Minimisation of fees is a large component of his advice here. Agreed. Don’t pay big fees to evil financial planners – agreed! For clients with smaller balances I can operate off an ‘ad hoc’ advice arrangement so you’re only paying a fee as required. Find the lowest cost super fund you can. Increase your contributions to super when you can. Once you start, you won’t notice and this will be the simplest plan to create wealth (my opinion).

Self Managed Super Funds:

Do not have a Self Managed Super Fund. Mostly agree. For most people they’re not suitable vehicles, in fact I spend a great deal of time winding up inappropriate SMSF’s where there’s no point having them – why have an SMSF if you only own shares and managed funds? You’ll not only have more paperwork and hassle – and believe me the hassle is significant – but you’ll also have higher fees for accountancy, audits, and other levies. However, if your super fund is large enough and you can afford to diversify into a range of investments, spcifically direct property, then SMSF’s can work very well due to the leverage, which can magnify returns, it can also magnify losses of course.

Reduce Insurance Costs:

Only use insurance for the BIG things, reduce premiums where possible. Agreed. For my income protection, I prefer to have a longer waiting period in order to reduce my premiums. E.g. for someone like me, a 46 year old, non-smoker, in a sedentary occupation, $5,000 per month of income protection with a 30 day waiting period, payable to age 65, will cost $140 per month. If I ‘self-insure’ the first 90 days, i.e. have enough in savings to cover me for the first 3 months of sickness/injury, then the reduction in premiums is around 45%. Same goes for other insurances such as health insurance – insure for the bigger, greater impact events, for example, having hospital-only policies rather than all the bells and whistles extras, and having larger excesses for other types of insurances, for example home and contents insurance. This all assumes you have sufficient savings to be able to do this.

Be More Frugal:

Buy less stuff. Agreed. People spend a fortune on ‘stuff’. Live more frugally. This is a consistent message from other books such as ‘The Millionaire Next Door’ and something I can back up from observing successful customers. The people with the flash cars and big homes in attractive postcodes often have matching debt. The Millionaire Next Door revealed that many millionaires live in relatively modest homes so they have room to invest rather than paying all their money to their bank. They often drive modest cars. Be more frugal!

Domino your Debts

‘Domino’ your debts. Agreed. Do a table showing your debt, the minimum monthly repayments, the interest rate. Negotiate the interest rate where possible by calling the institution and (bluffing) saying you intend to move. Banks make a lot of money from apathy. It’s surprising the number of people that can be paying 22% on a credit card even though the same bank has other cards with only say, 13% p.a. rates, it can be quite easy to transfer these cards and save a small fortune. As each debt is eliminated it is easier to continue to ‘domino’ the debts. Also, get rid of your car loan. You’re paying a loan for a depreciating asset of course.

Buy your own home.

Agreed.

Learn about Shares:

Agreed. There’s not that many investment options – shares, property, cash, and bonds. Shares and property are the assets that are most likely to outperform inflation in the long term. I’m a fan of both. The more you learn about investments the better.

Figure out your ‘Retirement Number’

Agreed. The more the better of course but Mr Pape suggests that a lower figure is required than most advisers (like me) would advocate, to do this, for people with lower superannuation balances, you could consider working part-time for a lot longer to help supplement a private super pension and government age pension.

Estate Planning:

The book has a very good, simple recommendation for recording everything that is relevant in relation to estate planning, it’s something I hadn’t done myself and have done since reading his book.