Can you really find financial freedom by reading a book?

Millions of Australians have embraced The Barefoot Investor for its easy to read and practical advice.

The book’s goal is to help you get in control of your finances by following nine straightforward steps, usually over dinner and drink or two with your partner. Say goodbye to excessive bank account fees and hello to a love of budgeting and a paid down mortgage.

All of those things are fantastic. We’re certainly all for them.

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So, if you read this book and follow its steps, can you relax knowing you’re finally in control of your finances and on track for a happy and wealthy retirement?

Not necessarily…

The work of The Barefoot Investor is excellent, but it’s general advice that obviously can’t take into account your personal circumstances. Below, we’ll discuss some examples of The Barefoot Investors’ advice and show how important it is to consider the bigger picture so you don’t do something that could disadvantage you.


1.

Buying your home:

Should you save a 20% deposit to avoid LMI?

The Barefoot Investor’s view: Save a 20% deposit

Scott Pape, in step four of his book, recommends you save a 20 per cent home deposit so you won’t be hit with expensive lenders’ mortgage insurance (LMI).

Our advice: Why saving a 20 per cent home deposit may not be right for you

Considered on its own, saving a 20% deposit to avoid paying LMI makes sense. If you’re purchasing a home for a million dollars, the LMI could be around $30,000. So by taking the time to save a 20% deposit, you could potentially save $30,000 on a purchase of this size.

However, if you rely on only one little piece of advice and don’t look at the whole picture — including where the property cycle is— you could be doing yourself a lot of harm.

Consider this scenario:


You’ve saved enough for a 10% deposit and are in a position to buy that million property today, but you want to avoid LMI. So you decide to wait and save an extra 10 per cent deposit which you think will take you two years.

In reality, saving this extra amount turns out to take you longer — another three years. In this time, the property market goes up. By the time you’re ready to buy, that million dollar property is now a $1,250,0000 property.

You might have saved yourself the $30,000 in LMI however you’re $250,000 worse off when it comes to the price you’ve had to pay for the property.

Mortgage insurance might be costly, but it can be a much quicker way to get you on the property ladder. By investing in property earlier, you might not only save money in the long-term, but you’ll also struggle less with emotional stress — e.g. taking the pressure off by getting a bigger house for your growing family sooner rather than later and locking in a home closer to the school of your choice.

2.

Paying down a home loan:

Is faster better?

The Barefoot Investor’s advice on: paying down your home loan

If you have a home loan, The Barefoot Investor recommends making a plan to pay it off faster. He outlines the two ways you can do this:

  • lowering your interest rate
  • making extra repayments.

Our advice: The other things you must consider

Repaying your home loan as fast as you can is sensible. But if this is all you do, your retirement income will suffer. Putting all your income into repaying your home loan isn’t going to replace your income when you retire. If you’re planning to retire and live in this home, it’s not going to pay you any income.

If you have no other way of generating an income in retirement, you may end up on an aged pension with a home. So before you direct as much as of your income as possible into your mortgage, consider your longer-term lifestyle goals. You need to put an overall strategy in place to achieve them.

Your strategy should not be just relying on your super funding your full retirement. You may find it hard to get enough money into your super before you retire because the maximum you can put in is $25,000 per year.

You may find it hard to get enough money into your super before you retire because the maximum you can put in is $25,000 per year.

Plan to build income generating assets

We recommend you get advice to find out how you can have the ability to pay down your home loan as well as having funds to acquire other assets.

By proactively building other assets such as an investment property or a share portfolio, you’re going to generate passive income for your retirement.

It may not seem intuitive, but you might be able to pay off your home loan a lot faster if you don’t direct all your money into it.

Consider this scenario:

If you borrow money against your home to buy an investment property the value of that investment is going to appreciate over time.

Let’s say the investment property appreciated from $500,000 to $800,000 over 10 years (fairly modest growth when considering recent returns). Then even after taking into consideration holding costs and capital gains tax, you’d have a significant lump sum that could be put towards the early repayment of your loan.

Or even better, you could hold onto the asset for future growth and then utilise the positive income to help fund your retirement. By proactively building an investment portfolio over time, you’re likely to be significantly further ahead than if you had just directed all your money to pay down your home loan.

3.

FUTURE THINKING

How much should you invest in your super?

The Barefoot Investor’s advice: Your superannuation strategy

For longer-term investments, The Barefoot Investor recommends investing in your super. His advice is to contribute 15% of your gross wage, however old you are, to “slash your tax bill” and build your wealth automatically.

Don’t forget, he says, your employer pays super of 9.5%, so you’ve only got to find an extra 5.5%.

Our advice: Don’t put all your eggs in one basket

When you’re considering your super strategy, you’ve got to be realistic about what things you might be about to go through in your life and what’s really important to you. For example, if you’re in your mid-twenties and with a partner, you might be considering marriage and buying your first home together.

If you’ve tied up your money in super up to this point, you’re not going to be able to do the things that you want or need to do. Putting money into your super is another thing that shouldn’t be looked at in isolation.

While it’s a really efficient way to save for your retirement, it could be detrimental to your overall position — depending on your age or your financial situation. This is where a book is limited.

If you’ve got other assets outside of your super and you’re in a wealth accumulation phase, then it might work well for you. However, if you’re not in this position, you need to consider the ramifications of putting extra money into your super — like for instance delaying getting you on the property ladder.


4.

Tracking your money:

What works for you?

The Barefoot Investor’s advice: Budgeting

The Barefoot Investor offers a simple solution to keeping track of your money. It’s quick and easy to do — you’ll be dividing your salary into three different accounts. You’ll be more in control because this system makes sure your daily expenses, emergency money and savings are all covered.

Our advice:
Everyone is different

As financial planners, we’ve seen how differently our clients like to manage their money. While the Barefoot Investor’s approach is clever, it won’t work for everyone because it’s not tailored to an individual’s style.

We’ve advised engineers who arrive for each meeting with every dollar they’ve spent and saved tracked in a spreadsheet. We also have creative clients who are just not into tracking their money and the sight of a spreadsheet is their worst nightmare.

When people come to us for financial advice, we’ve found a lot of them just don’t know where their money is going on a weekly or monthly basis. Our expertise is in really getting to know our clients. That way, we can create the most appropriate method for them to track their money. We’re careful to design a structure that’s manageable, comfortable and transparent for each individual client and their style.

The things we look at include understanding where and how you spend your money. Do you pay with cash or use credit cards (especially for points)?


Our expertise is in really getting to know our clients. That way, we can create the most appropriate method for them to track their money.

Additional tips

Ways to improve your
financial wellbeing.

Be cautious with credit cards

When it comes to setting up a financial strategy, a one-size-fits-all approach doesn’t work. A personalised strategy combines all aspects of your financial lives taking into account your current and future needs, coupled with the guidance that only an expert can provide. Sometimes having that impartial advice can be all that’s needs to break the deadlock between a couple who just can’t agree how the move forward.

Get a personalised strategy

When it comes to setting up a financial strategy, a one-size-fits-all approach doesn’t work. A personalised strategy combines all aspects of your financial lives taking into account your current and future needs, coupled with the guidance that only an expert can provide. Sometimes having that impartial advice can be all that’s needs to break the deadlock between a couple who just can’t agree how the move forward.

Get started

Take control of your financial direction

The first step in taking control of your financial direction is finding a financial planner you can trust. That’s why we offer a free one-hour consultation to all new clients: it’s a no-obligation chance for you to get to know us and for us to get to know you.