What is Scott Pape’s book The Barefoot Investor about? Are Scott Pape’s personal management principles universally applicable?
In his book The Barefoot Investor, Scott Pape offers guidance on how to manage your money so that you can eliminate debt and start building wealth. Though The Barefoot Investor book is written for an Australian audience, the basic principles are universally applicable.
Here is a brief overview of Scott Pape’s book The Barefoot Investor.
The Barefoot Investor: Book Overview
In his book The Barefoot Investor, Scott Pape provides easy-to-follow step-by-step money management advice for Australian families. His advice sets off with establishing regular date nights with your significant other to discuss household finances and lay the financial foundation for your future.
Here is a quick summary of Scott Pape’s bestselling book The Barefoot Investor: The Only Money Guide You’ll Ever Need.
Date Night #1: Open New Bank Accounts
On this first date night, you’ll open new bank accounts that allow you to avoid banking fees.
- Set up two checking accounts with banks that offer online interfaces and don’t charge fees, including for ATM transactions. Nickname one account “Day-to-Day” and the other “Treat.” You’ll learn how to use these in Step 2.
- Set up two high-interest savings accounts. Label one “Happy” and one “Fire.”
- Set up an account at a separate bank that you won’t be tempted to use, called your Backstop account. Choose a savings account with a high interest rate, and deposit $2,000 in it to start with.
Date Night #2: Get a Better Deal on Your “Super” Fund
On this date, you’ll ensure you’re regularly directing money into a “super” account (Australia’s retirement savings plan) or an equivalent U.S. employer-sponsored plan that isn’t skimming off a large percentage of your deposits.
Opt for a low-cost super or similar retirement savings account. For example, an account that charges 0.02 percent annually versus 1 percent annually can save Australians $226,484 (AUD) over 30 years.
Investigate the annual fee on super(s) by googling the name of the super and “PDS,” or “Product Disclosure Statement.” If you’re being charged more than 0.85 percent per year, choose another super to invest in.
Date Night #3: Choose Insurance Wisely
On the third date, you’ll scrutinize your insurance choices and take action to support your financial well-being and your family’s.
Here are two pieces of advice to follow when choosing and managing insurance:
- If losing it won’t affect your financial situation, don’t insure it. For example, if you damage your phone beyond repair, you’ll be able to get a new one without putting yourself at a financial disadvantage, so don’t insure it.
- Negotiate your annual insurance premiums down. Companies want to retain your business. If you call them and tell them you’re thinking about switching, they’ll likely be willing to negotiate a better deal for you.
Australians can purchase insurance for income protection, life, and disability through their super fund. Parents with young children should aim to insure 10 to 12 times their annual income. In Australia, you can do this by calling your super fund and asking for three pieces of information:
- A quote on 12 times your annual income for combined life and total permanent disability insurance.
- A quote on 75 percent of your annual income until the age you plan to retire.
- How much additional money you’ll need to put into your super to cover these new insurances.
Date Night #4: Allocate Your Income
On the fouth date, you’ll put money from your take-home pay into three main categories:
- Blow: general spending money
- Grow: long-term savings
- Backstop: emergencies
This category consists of money that you’ll spend on a daily basis, as well as savings you’ll put away for longer-term purchases. Each month, you’ll have your take-home pay deposited to your Day-to-Day account. Then, you’ll redirect some of it into your other accounts.
In general, spend no more than 60 percent of your take-home pay on essentials, like bills, shelter, food, transportation, and insurance. This will leave you 40 percent to put toward other purposes.
Here’s how it’ll work—set up your Day-to-Day account to automatically direct:
- 10 percent to your Treat account. You’ll use your Treat account for treating yourself regularly to whatever you like to buy, from pumpkin spice lattes to clothes.
- 10 percent to your Happy account. The money directed to your Happy account (a savings account) allows you to save for bigger expenses that you can’t buy with one paycheck, such as a vacation.
- 20 percent to your Fire account. You’ll use the money in this account to deal with “financial fires”—any expenses you want to concentrate a good chunk of money on paying, such as credit card debt or saving for a home. You’ll learn how to prioritize what to focus on throughout this book.
This category consists of your long-term savings: your money for your super, as well as any investments you own, like rental properties or shares. In Steps 6 and 9, you’ll learn more about how to manage this category of savings.
Backstop is a bank account that holds money separately from the Blow and Grow categories. It is also its own spending category (like Blow and Grow). In Step 1, you created your Backstop account and deposited $2,000 in it, but if you didn’t, find some creative ways to get that money in there, like working overtime or selling some belongings.
Date 5: Make a Plan to Eliminate Your Debt
On the fifth date, you’ll create a plan to systematically eliminate your debts, freeing yourself to spend on other things.
Follow these steps to pay off your debts one by one:
- List your debts. List your debts from smallest to greatest.
- Renegotiate your interest rates. Tell your bank that you’re considering transferring your credit balance to another bank that won’t charge you fees for 18 months. Ask them to renegotiate your interest rate and waive your annual fee.
- Get rid of your credit cards. Cut them up and post a photo on Barefoot Investor’s Facebook page.
- Pay off your debts one at a time, starting with the smallest. Use the money from your Fire account to pay off this debt as quickly as possible, while making the minimum payments on your other debts.
- When you pay off a debt, celebrate. Pape suggests burning your credit card bills with a lighter. Apply the money you were paying on the now paid-off debt toward paying off the next debt on your list.
- Repeat until you’ve paid off all of your debts.
You can read the full summary of Scott Pape’s book The Barefoot Investor here.
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- A 10-step plan to eliminate debt and build wealth
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