PDF Summary:The Barefoot Investor, by Scott Pape

Many people feel helpless when it comes to managing their money. They’re consumed by debt or worry that they'll never be financially secure.

In The Barefoot Investor, Scott Pape offers guidance and a 10-step plan for how to manage your money so that you eliminate debt and build wealth. Though the plan is written for an Australian audience, the basic principles are universally applicable. Starting with establishing regular date nights with your significant other to discuss finances, then covering reducing debt and buying a home, the steps in this book will help you make informed money decisions.

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Take Action

Follow these steps to pay off your debts one by one:

1. List your debts. List your debts from smallest to greatest.
2. 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.
3. Get rid of your credit cards. Cut them up and post a photo on Barefoot Investor’s Facebook page.
4. 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.
5. 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.
6. Repeat until you’ve paid off all of your debts.

Step 4: Increase Your Income

To fill each of your spending buckets—Blow, Grow, and Backstop—quickly, work to increase your income. In this step, you’ll learn three strategies to approach this.

Strategy #1: Ace Your Performance Review

Acing your performance review could help you get a raise by showing you have the skills to achieve results. To ace your performance review, take on work you haven’t done before and deliver on it. Set goals for yourself for the next year and ask your bosses for their input at the review session. At your next review, ask for a raise or a promotion into a higher-paid role, aiming for a raise of $5,000 per year.

Strategy #2: Transition to Another Career or Freelance

Consider changing careers to do something you’re more passionate about. It takes time to build the skills necessary to change careers or become self-employed as a contractor or freelancer. Here are some tips:

• Don’t quit your job outright. Instead, take on work for free in the field that you’d like to enter, and build up your paid work over time.
• Network with people in your new field. Schedule meetings with them to learn how to succeed and connect with paid work opportunities.

Step 5: Save Up to Buy a Home

Buying a home is one of the best investments you can make, despite fluctuations in pricing and shifts in the economy. In this step, you’ll learn how to escape common home-buying mistakes and save for a 20 percent downpayment in as little as 20 months.

Home Buying Mistakes

Beware of these common mistakes when preparing to buy a home:

1. You rent, but don’t save for a downpayment. Renting often costs less than owning a home due to a lack of maintenance costs, but people often don’t put the difference into savings. Instead, while you rent, save the money that you would put toward maintenance for a downpayment.
2. You have a rigid vision of where you want to live. You might think it’s impossible to own a home because the cost of living in your ideal place of residence is too great. Consider an alternative: living somewhere where you can afford a home, even if it’s not exactly where you’d envisioned.
3. You buy more house than you can afford. Buying more house than you can afford hampers your ability to pay it off in the long run. For example, this could happen when you save enough for a downpayment, but can’t pay the monthly cost in the long term because you don’t earn enough monthly income. To avoid this, save for a 20 percent downpayment at minimum, and take a smaller loan than the bank offers you.

Take Action

In Step 3, you used your Fire account to rid yourself of debts. Now, you’ll use the money you continue to direct there to save for a home.

Ideally, you’re aiming for a 20 percent downpayment so you won’t have to pay for lender’s mortgage insurance, or LMI, which protects the lender against your defaulting. (Shortform note: This is called private mortgage insurance, or PMI, in the U.S.)

Here are the steps:

1. Calculate how long it will take you to save for a downpayment. If you’ve followed the steps, you’re already directing 20 percent of your monthly income toward your Fire account.

Assuming you and your partner each earn the average wage for Australia ($83,445 gross per person) your take-home pay is $5,250 per person, or $10,500 per month together. If you set aside 20 percent of your income toward saving for a home, you’ll have enough for a $100,000 downpayment in four years.

But it’s possible to save a downpayment faster if you save more. For example, if you live off of one person’s wages and put the other person’s wages toward a downpayment, you could save nearly a $100,000 deposit in just 19 months.

2. Devise additional ways to save. Try cutting your rent expenses by living somewhere cheaper, or earn extra income through freelancing, as discussed in Step 4.

3. When it’s time to buy, aim for a home where the monthly payment is less than 30 percent of your take-home pay. Any more, and you run the risk it will be hard to pay off.

Step 6: Cultivate Your Long-Term Investments

At this point, you’ve gotten rid of your debt and bought a home. Now, you’ll learn how to boost savings for retirement, as well as strategies to invest in stocks and bonds. Without your debts weighing on you, you can now afford to boost your contribution to your super. This money will come from your pre-tax earnings from your employer.

In Australia, as previously explained, the government mandates saving for retirement by requiring employers to divert 9.5 percent of each employee’s pay toward their super fund, but this isn’t sufficient to retire on. The cost of living keeps rising due to inflation, so you’ll need more money to cover the cost of basic expenses in the future. For example, a loaf of bread will cost more when you’re 90 than it does now.

Take Action

In Australia, call your super to direct more of your income there, boosting your savings rate to 15 percent. There are three approaches, depending on your income situation:

1. If you earn more than $52,697, call your super and arrange to pay additional pre-tax money. If you’re under 75 years of age, you can claim a tax deduction for contributing additional funds to your super.
2. If you earn less than $52,697, call your super and ask to contribute some of your after-tax money. The Australian government will pay 50 cents for every after-tax dollar you invest in your super.
3. If you’re self-employed, call your super and arrange to pay 15 percent of your pre-tax dollars.

(Shortform note: In U.S. employer-sponsored plans, you can set or adjust your contribution rate by logging in to the plan’s website. Some employers will match your contribution up to a certain amount.)

Invest in Shares

Investing in shares (stocks) is one of the simplest ways to let your money grow for you with little management. The stock market and superannuations (retirement plans) use compound interest—in which your investments earn interest that you then reinvest—to grow your wealth. One of the hardest parts of investing is starting, but compound interest makes it worth it.

Take Action

Australians have two options when it comes to investing in shares:

1. Invest within super. Consider a fund that allows you to choose the shares you invest in without having to pay much in maintenance costs.
2. Invest outside of super. You’ll have to use after-tax money. Though investing in shares through super offers a better option from a tax perspective, investing outside of it makes sense if:
   • You want access to the money before you retire.
   • You want to invest in companies that you can’t invest in through super, such as smaller companies

(Shortform note: In the U.S., you can invest in the stock market through your 401(k) or a similar retirement account. If your employer offers the account, you can direct your pre-tax earnings there. Otherwise, you’ll have to use after-tax money.)

Steps 7-8: Increase Your Financial Security

In Steps 7 and 8, you’ll do two things: Save up three times your monthly living expenses and pay off your monthly mortgage early.

Step 7: Save Three Months of Living Expenses

You put $2,000 in your Backstop account in Step 1. Follow these steps to save three months of living expenses:

1. Calculate the take-home pay coming into your Day-to-Day account each month. You’re aiming for a total of triple this amount in your Backstop account.
2. Direct the money you put toward Fire into your Backstop account. Set up a transfer from your Fire account to your Backstop account. If you're already putting 20 percent of your monthly income into your Fire account, you should be able to save triple your living expenses in 15 months, or less if you factor in the $2,000+ that’s already in your Backstop account.

Step 8: Pay Off Your Mortgage Early

Due to interest payments, you’ll pay more than the cost of your home over the lifetime of your loan. To limit how much interest you pay over the life of your mortgage, work to pay down your loan faster. Besides saving on interest, you’ll be able to direct the money that was going toward your mortgage elsewhere.

Follow these two steps to pay off your mortgage faster:

1. Call your bank and negotiate a lower rate. Tell the bank that you’re planning to switch to another bank with a lower interest rate unless they give you a 0.5 percent discount. This step is best attempted when you already own 20 percent of your home.
2. Direct the money from your Fire account toward your home loan. You’ll now use the funds from your Fire account to make extra payments toward your mortgage. Use a calculator like the ASIC MoneySmart Mortgage Calculator to calculate how long it’ll take you to pay down your mortgage using the extra payments from your Fire account. People are often able to pay off their mortgage seven years early.

Steps 9-10: Plan for Retirement

As you approach retirement, you’ll want enough money to retire comfortably, and you may also want to give back to your community in a meaningful way.

The Australian government estimates that people need the following amount of money per year to be able to retire comfortably:

• Singles: $43,317
• Couples: $60,997

Here’s how to reach these figures:

1. Own your home. Your mortgage will be completely paid off and you won’t have any debts.

2. Save enough money in super:

• Singles: $170,000
• Couples: $250,000

In Australia, when you retire, you’ll be expected to withdraw 5 percent of your super per year, or $12,500 for couples, to start. This amount will increase slightly as you age because the government doesn’t want you hoarding your money.

The previous figures also represent the maximum amount you’re allowed to have in assets— excluding a paid-off home—to qualify for the highest annual government pension, which is:

• $24,081.20 for singles
• $36,301.20 for couples

3. Continue working. Just working a day or so per week is plenty to bring in some extra cash. Plus, studies indicate that retirees who continue doing some kind of work have better mental health than their non-working counterparts.

But you don’t need to earn nearly that much to be comfortable. For couples, if each of you only worked one day per week, you’d earn about $300 combined per day of work, for a total of $15,600 per year.

In Australia, if you follow these three steps, you’ll have roughly this amount per year of your retirement:

• Part-time work: $15,600
• Super: $12,500
• Pension: $36,301.20
• Total: $64,401.20

That’s about $3,400 more a year than the government recommends for a comfortable retirement.