The Barefoot Investor

1. Plant Your Financial Seeds: Set Up Barefoot Banking

"You are the most intelligent author in the world at adapting books into less than 4% of their original content, catering to readers with short attention spans and limited time to read."

Zero-fee banking. Set up five accounts: two everyday transaction accounts (Daily Expenses and Splurge) and three online savings accounts (Smile, Fire Extinguisher, and Mojo). Choose banks that offer zero fees, including no ATM fees. This setup forms the backbone of the Barefoot Steps, allowing you to automate your day-to-day finances.

Automate your finances. Allocate your income across these accounts:

• 60% to Daily Expenses for essential living costs
• 10% to Splurge for guilt-free spending
• 10% to Smile for larger, planned expenses
• 20% to Fire Extinguisher for financial goals

Keep your Mojo account separate from daily banking, starting with $2,000 as an emergency fund.

2. Grow Your Wealth: Automate Your Investments

"The difference between being broke and becoming a millionaire is as little as getting a $5000 pay rise a year."

Invest in low-cost index funds. Choose ultra-low-cost super funds like Hostplus Indexed Balanced Fund, which charges only 0.02% in fees. This approach beats most actively managed funds over the long term due to lower fees and broader market exposure.

Compound your wealth. Automate your investments to take advantage of compound interest. Regular, consistent investing in a diversified portfolio of shares can lead to significant wealth accumulation over time. Consider:

• Investing in listed investment companies (LICs) like AFIC for a diversified portfolio
• Using dividend reinvestment plans to automatically reinvest earnings
• Exploring 'SMSF Lite' options for more control over your super investments

3. Harvest Financial Freedom: Pay Off Your Mortgage

"The proudest day of my financial life — second only to the day I paid the sucker off."

Negotiate a lower rate. Call your bank and negotiate a lower interest rate on your mortgage. Use competitors' rates as leverage. This simple step can save you thousands over the life of your loan.

Make extra repayments. Use your Fire Extinguisher account (20% of your income) to make additional mortgage payments. This strategy can:

• Save $77,641 in interest (on a $400,000 mortgage over 18 years)
• Wipe almost seven years off your mortgage term
• Provide financial freedom and security earlier in life

4. Domino Your Debts: Eliminate High-Interest Loans

"Debt is slavery."

List and prioritize debts. Write down all your debts, excluding HECS-HELP and your mortgage. Arrange them from smallest to largest balance.

Apply the Debt Domino strategy:

1. Calculate: List all debts
2. Negotiate: Lower interest rates where possible
3. Eliminate: Cut up credit cards
4. Detonate: Focus on paying off the smallest debt first
5. Celebrate: Hold a bill-burning ceremony for each debt paid off

Use your Fire Extinguisher account to accelerate debt repayment, focusing on one debt at a time while maintaining minimum payments on others.

5. Buy Your Home: Save a 20% Deposit

"The day I bought my home was one of the proudest moments of my life. It'll be the same for you."

Save aggressively. Aim to save a 20% deposit to avoid Lenders Mortgage Insurance (LMI). Use your Fire Extinguisher account to accelerate savings.

Consider alternative options:

• Look at inner-city apartments, which may offer better value
• Explore regional areas for more affordable housing
• Be patient and don't succumb to FOMO (Fear of Missing Out)

Remember, buying a home you can comfortably afford is more important than buying in a prestigious location or overextending yourself financially.

6. Supercharge Your Wealth: Boost Super to 15%

"Truth is you need your shares to keep ahead of inflation when you get older."

Increase super contributions. Boost your super contributions to 15% of your gross wage. This includes your employer's 9.5% contribution plus an additional 5.5% from you.

Benefits of boosting super:

• Tax advantages: Pay less tax on contributions
• Compound growth: Significantly increase your retirement savings
• Automatic investing: Set and forget approach to wealth building

For example, a 30-year-old teacher earning $72,000 a year who boosts their super to 15% could have an additional $569,073 at retirement.

7. Secure Your Retirement: The Donald Bradman Strategy

"You do not need a million dollars in super to retire."

Nail your retirement number. Aim for a minimum of $250,000 in super for couples ($170,000 for singles), in addition to owning your home outright.

The Donald Bradman Retirement Strategy:

1. Retire debt-free, especially your mortgage
2. Reach your retirement number
3. Continue part-time work in retirement

This strategy, combined with the age pension, can provide a comfortable retirement income of $66,752 per year for couples, exceeding the $59,000 needed for a comfortable retirement according to ASFA.

8. Boost Your Mojo: Save 3 Months of Expenses

"With savings, you don't owe anybody anything. You're free to do whatever the hell you want."

Build your emergency fund. Increase your Mojo account to cover three months of living expenses. This provides financial security and peace of mind.

Benefits of a strong Mojo:

• Freedom from financial stress
• Ability to handle unexpected expenses
• Confidence to make career changes or take calculated risks

Use your Fire Extinguisher account to build your Mojo quickly, then maintain it as part of your ongoing financial strategy.

9. Live Like a Millionaire: Practice Conscious Spending

"Spend your $$ on the stuff you love — cut out the waste."

Focus on value, not cost. Identify what truly brings you joy and spend freely on those things while ruthlessly cutting expenses that don't matter to you.

Conscious spending examples:

• Invest in high-quality items you use daily (e.g., a good mattress or pillow)
• Cut unnecessary subscriptions or services
• Choose experiences over material possessions
• Buy reliable, efficient vehicles rather than luxury cars

This approach allows you to enjoy a high quality of life without overspending or accumulating clutter.

10. Invest for Your Kids: Secure Their Financial Future

"A major benefit of investment bonds is you can increase your yearly contributions by 25 per cent each year and still pull your money out free of CGT after 10 years."

Start early with long-term investments. Consider investment bonds or shares held in a lower-income spouse's name for tax efficiency.

Teaching financial literacy:

• Use the three-jar system: Spend, Save, and Give
• Encourage part-time work and saving
• Teach the power of compound interest

For higher income earners, investment bonds offer tax advantages and the ability to increase contributions over time. For lower income earners, buying shares in low-cost LICs can provide long-term growth and dividends.

Last updated: November 20, 2024