If you get a mention in The Betoota Advocate it’s a good indicator that you’re on the national agenda and no doubt The Barefoot Investor AKA Scott Pape has taken the nation by storm, selling over 1 million copies. And rightly so, it’s a refreshing no BS approach to personal finances.
I’m in a few Barefoot Facebook groups, mainly to help me get a gauge of what’s worrying people financially and it concerns me that people seem to be acting blindly on his recommendations (you don’t have to go and buy a $150 latex pillow if you’re happy with your current pillow!). Naturally, finance experts are going to butt heads on some things so I thought I’d share some of my views on some of his points.
Banking structure – the takeout here is whatever you do, have a thought-out plan that works for you e.g. having one transaction account and one savings account may not be the best solution. He recommends 5 accounts in total (daily expenses, splurge, smile, fire extinguisher and mojo) between two banks which may or may not be overkill for some. The idea behind this is behavioural and some people no doubt achieve better results by separating their spending; the “envelope budgeting strategy” has been around forever with great results. He’s also not big on offset accounts (assume for the possible negative behavioural effects). Offset accounts are great so if you think you can incorporate it whilst managing your budget, go for it.
Superannuation – he’s very specific in recommending Indexed Balanced within Hostplus. This is one of the cheapest options available and agree that low costs within super are essential. One concern I have with this is this is one investment option that’s relatively aggressive so depending on your risk profile it may not be appropriate for you. Another concern is even for experts, superannuation options are very complex and not made easier with there being so many options and are made harder with other, more expensive funds having exposure to other assets such as unlisted property, infrastructure and private equity. These assets have performed well over recent years and although no one really knows if this is going to continue it does add an additional element of diversification. The key considerations are that low fees are very important but not the only consideration, Hostplus’ other comparable Balanced fund that is more expensive has outperformed the Indexed Balanced option over a number of years.
Insurance – he recommends a prescriptive amount of Life & TPD insurance (10 – 12 times annual salary) and 75% of salary for income protection within super. Although not bad advice, the amount of insurance coverage required is very personal taking into account a number of different inputs. Insurance in super is sometimes cheaper however on some measures may be poorer coverage than is available through an insurer. I love that people get empowered with their money and in most instances can act on their knowledge however, unfortunately, life insurance is one area where it’s near impossible to DIY. The reason is that the higher quality policies are only offered through financial advisers ATM, surely will change eventually. When getting advice, try and pay a fee upfront for this advice and ask for the policy to have no commissions as this will result in savings of around 30% for the life of the policy.
Budget – he’s very specific on the percentages of what should make up your budget e.g. daily expenses should make up 60% of your post-tax income, 10% to splurge, 10% to travel etc. and 20% to paying down debt or saving. I think it’s good to manage and measure your finances and these percentages are a good start but they’re not for everyone e.g. someone on a lower wage could find these harder than someone on a higher wage.
Clearing debts – his strategy is to “domino your debts” by paying them down smallest to largest. Technically speaking, it’s better to pay them off highest interest rate to lowest, however, good results can be obtained from the mental benefits of starting small and gaining momentum.
Investment strategy – he’s very keen on Listed Investment Companies (LIC’s) and specifically recommends two old ones: AFI and ARG. Although they are big, cheap and diversified I personally prefer ETF’s as you are always paying for what you are buying e.g. with LIC’s at times you can pay $100 and only get $98 worth of assets.
Property – outside of your home he’s not in favour of property investment, mainly due to its expensive costs. I’d imagine many people disagree with this as property investment can provide great results over the long-term if you do your research. Admittedly, property investment is probably too complex to be a chapter in a book but I think property investment can definitely be a successful wealth accumulation strategy over the long-term for the right person.
First home deposit – he recommends a 20% deposit to avoid Lenders Mortgage Insurance (LMI) and in most cases to avoid LMI you do need a 20% deposit plus costs (stamp duty, legal costs etc.). In a perfect world, you would reach this goal but if you have saved a smaller deposit as low as 5% you may have an option to get onto the property ladder earlier by either paying LMI or if you’re lucky, getting assistance from your parents by utilising the value of their home. These add an additional level of complexity and risk but there are times where this strategy can work financially and emotionally.