Should You Follow the Barefoot Investor Steps?
The Barefoot Investor (by Scott Pape) was the first investing book I read. This book helped me kick start my journey to financial independence. I learned how to take financial control and plan my family's future. In saying this, did I follow all of Scott Pape's suggestions to the letter? Let's see below which steps I followed and how I am tracking against the Barefoot Steps.
9-Steps to Financial Freedom
The Barefoot Investor introduced his 9-steps to financial freedom. These instructions were meant as a guide to achieve financial freedom. We'll run it one by one and see if I completed or failed the step.
Step 1 - Schedule a Monthly Date Night, completed
The book was suggesting that you and your partner should dress up, go out, and discuss your financial plan over a nice dinner. Well, you don't have to go out. You can do it in a nearby coffee shop, or even in your bedroom.
I think the hard part is getting your significant other on board. For most couples, money is a delicate subject. In the past, conversations around our financial plans have never been a thing. We learned that if we want to change our financial future, we need to plan together as a team and not as two individuals. If one is a saver and one is a spender, it won't work well.
Once my husband was on board and understood what we want to achieve, we openly discussed everything about money... everyday. I guess, we loved the idea of financial independence and we would do our very best to achieve it. Financial planning was our little project and made my relationship with my husband stronger. I am so blessed that I married someone that share my passion.
Step 2 – Set Up Your Buckets, completed
When I was a kid, I saw my mom put money into different envelopes labelled as groceries, electric bills, water bill etc. Now, the idea of "buckets" is done via different bank accounts.
The buckets we created were the following:
Mojo - we had our emergency fund here, which is sitting in the offset account of our home loan. This "safety money" should cover at least 3 months of our family's living expenses.
Grow - contains the money to be invested into index funds. We also salary sacrifice to our superannuation, more on this in step 5.
Blow - for our daily expenses, we also allotted a certain percentage for occasional splurge and travel funds.
Splurge - Purchasing stuff has now the been the least priority. I stopped shopping at ASOS, Catch Of The Day, Amazon and Boohoo. If there is an unexpected purchase that we need to make, that will be allocated into our Splurge bucket. If our family decided to eat out (which is not often), that will fall into Splurge as well.
Smile - My family enjoys travelling - local and overseas. The kids love it. We decided on this lifestyle - this is a way to spend our time with the kids on special places. We love going to the beach. We are so blessed with the abundance of beautiful beaches in Australia. Don't get me started how we love the waters in Hawaii, Philippines and the South Pacific!! Ok. I think you get a point, we save like crazy for our travels. This is our Smile bucket.
Step 3 – Domino Your Debts, failed
Nope, we are not doing this. We still have credit cards, and we make sure these work in our favor. Don't get me wrong, we are not spenders. We just know how to manage our credit cards by paying the balance in full before the due date. We also don't have to pay annual fees - one of the benefits of working in a bank. I get reward points which I use to purchase gift cards like Visa, MasterCard or store cards. I also enjoy free travel insurance from my card.
We used to have other loans like a car loan and 0% balance transfer. Now, we already detonated these and paid in full. So I guess I can say we have partially completed this step except for getting rid of the credit cards.
Step 4 – Buy Your Home, completed
Long before we read the book, we already bought our first home. We used our little savings for a deposit on a reasonably-sized townhouse. It was a big decision we took and it worked for us.
Step 5 – Increase Your Super to 15 Per Cent, half-complete
Our employer is providing free money in terms of the 9.5% contribution to our superannuation. Now, the book suggests that making an additional contributions of 5.5% will work best.
Contributing more to superannuation was logical and tax efficient. However, the earliest we can access the money is at preservation stage (60 years old). So we opted to do an additional 2.5% salary sacrifice and the other 3% will be allocated to investing in index funds.
Step 6 – Boost Your Mojo to Three Months, completed
Our savings makes me sleep at night. Yes, our emergency fund is so important to us. I would probably like it to be six months worth, but for now, I'll settle with three months. Money is parked in our offset account of our home loan.
All our properties still have loans tied to them which currently stands at 74% LVR. For the past 2 years, we tried to get banks to refinance our portfolio but our efforts were futile as bank lending were so strict. This year, 2019, we successfully moved to another bank, got good interest rates, set-up Interest-Only loans for our properties and pulled equity.
We have 3 properties on variable interest rates and 1 property on fixed rate.
As for making additional repayments for our home, yes we contribute marginal amounts to our home loan offset account. All other money are directed towards investing in the index fund.
Step 8 – Nail Your Retirement Number, half-complete
In my previous post, I had discussed what is my plan to hit our FI number.
We're not relying on age pension. So our plan is totally different from the book. Our retirement number will be funded by our index fund portfolio, real estate property investment and super funds.
Step 9 – Leave a Legacy, half-complete
We haven't reached financial freedom yet. But it doesn't stop us to give to others in need.
I would like to include some points from Scott Pape's other book Barefoot Investor for Families, which I found very important to my family. We need to prepare for the worst and whatever happens, our family should be financially protected.
Me and my husband set-up a life insurance cover worth at least $1M each. If something happens to one of us, at least the other will get a sufficient amount of money to pay for the home loan, and plenty left for whatever other expenses. We asked a solicitor to help us make a will for $220 each (for me and my husband). We clearly laid out how our assets be distributed.
This book also suggested to have the Fearless Folder - which contains important documents, property paperwork, bank accounts and a will. For the complete list, check out his book.
We also bought the water/fire proof case from Bunnings. It is just nice to have one repository of all the important documents.
The book is a great entry point if you are trying to work out where to start in taking control of your finances. This Barefoot Steps may not be your ticket to becoming rich, but is definitely something that the average Australian can use to guide us through better financial status. I would definitely recommend this book. In fact, I have gifted my family and friends a copy last Christmas. I hope this will kick-start their own journey to financial independence.