The Barefoot Investor

Feb 5, 2019

4 min read

Updated: Oct 26

Originally written in 2019. Some rules, rates and figures have changed since, so check the current details before relying on them.

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 can work well for people who can use one and still stick to their budget.

Superannuation – he’s very specific in recommending the Indexed Balanced option within Hostplus. It’s one of the cheapest options available, and low costs within super matter. Two things worth knowing: a “balanced” option can still hold a large share of growth assets, so how much risk it carries depends on what’s in it; and comparing super options is genuinely complex, because some more expensive options hold assets like unlisted property, infrastructure and private equity that index options don’t. Low fees are important, but they’re one factor among several.

Insurance – he recommends a set amount of Life & TPD insurance (10 – 12 times annual salary) and 75% of salary for income protection within super. Rules of thumb are a starting point, but the right amount of cover is very personal and depends on a number of different inputs. Insurance in super is sometimes cheaper, but the definitions can differ from cover held outside super. When this was written, many retail policies were only available through a financial adviser, and policies without commission generally had lower premiums.

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 (LICs) and specifically mentions two older ones: AFI and ARG. They’re big, cheap and diversified. One difference with ETFs is that an LIC’s share price can trade above or below the value of its underlying assets (e.g. at times you might pay $100 for $98 worth of assets), whereas ETF prices generally stay close to the value of their 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.

For a real-world discussion, see the r/AusHENRY debt recycling AMA and the r/AusPropertyChat AMA on loan structuring, where Kyle Frost answered questions from Australian homeowners.

I cover this in more detail in my video, Should You Pay Off Your Mortgage or Invest? (A Historical Backtest), on the Edvest YouTube channel.

Explore free Australian finance education from Kyle Frost at Edvest, including the Edvest debt recycling course.

The Barefoot Investor

Related videos and resources

Recent Posts

Comments