By Lana Pavlovic
What if I told you there were only nine steps you need to be financially free?
That is what Scott Pape (aka the ‘Barefoot Investor’) proposes in his book <i>The Barefoot Investor</i>. Chances are you’ve heard of <i>The Barefoot Investor</i> before, whether it was through university, from an online recommendation list, or from finance savvy dad talking it up at a barbecue. The easy-to-read personal financial crash course has garnered Pape a cult-like following, with the book having sold over 1.5 million hard copies in its various forms.
As a student with study, work, social (and pub-crawl) responsibilities making below average income, following nine seemingly simple steps to never having to worry about money again feels like a blessing. But how does Pape’s nifty sounding finance-for-dummies manual stack up when it comes to uni students? Is this an overhyped, watered-down equivalent of an astrology guide, or something that might actually help uni students take control of their personal finances?
Step one is simply scheduling one day a month towards putting the steps in place, encouraging readers to go out and turn it into a date (over strangely copious amounts of garlic bread and wine). It also introduces them to the ins and outs of superannuation, bank account fees, and insurance.
Step two teaches readers about ‘bucketing’ your money to various accounts with quirky names such as ‘splurge’, ‘fire extinguisher’, and ‘mojo’ to organise spending and saving; step three teaches readers about debt and how to get rid of it; and steps four to nine cover how to double your income, how to buy your home in 20 months, how to maximise returns on your investment with the least effort possible, and how to retire comfortably.
Spending and Saving
Whilst the book features an array of success stories from retirees to young single mothers, the emphasis on date nights may leave many broke, UWA love letter recipient hopefuls – whose nights are spent grinding out assignments at 3am in Reid Library – uninspired to organise their financial future. However, once you are able to make it past this mental defeat, the book provides a simple structure on how to plan and organise your spending and saving without providing strict budget guidelines that are a pain to stick to. It also doesn’t take long to set up and it provides real suggestions for bank accounts that have zero fees, which can add up to sizeable savings in the long run.
The percentages that Pape suggests should be taken as a guideline only; students may need to modify these based on their specific circumstances. For example, Pape suggests that you allocate 60 per cent of your income for daily expenses, but if you’re like me, you tend to get by living frugally, in your parent’s home or in a share house. This means that income which would otherwise be spent on rent and home insurance can be reallocated toward saving up for something such as a car, or making extra contributions to superannuation. For students who live away from home, the mojo account can be a lifesaver for financial emergencies, such as losing your job.
Supersizing Your Super
The book also places an important focus on superannuation. This is a much needed wake up call for uni students, who usually struggle to decide between which two end of exams parties to attend, let alone thinking about their retirement. Pape provides potentially life changing advice regarding super, encouraging readers to carefully consider their options to ensure they select a low cost fund. He also suggests young people to select high growth funds to begin maximising returns early, with time in the market counterbalancing the additional risk. Finding these funds will require additional research because the list of funds that Pape recommends is limited and mostly contains balanced funds.
Pape recommends boosting your super contributions only after you have paid off your own home – some advice such as this is specific and may not be the best approach for some people. For those planning to live at home whilst saving for a deposit, or for those who don’t plan to start a family or own their own home, forgoing the extra income now is often manageable and can make a significant difference to your retirement savings.
The Wonderful World of Investing
Investing is often seen as a foreign concept reserved for Gina Rinehart or the ex-private school Wolf-of-Wall-Street wannabes from the business school. Pape does a good job of de-mystifying the share market and highlighting the accessible yet powerful nature of passive, diversified investing to build wealth over time. The book does not, however, delve into specifics such as the type of investment options available and mechanisms through which you invest.
Pape suggests readers consider a listed investment company (LIC) for their first investment – the Australian Foundation Investment Company (AFIC). This is where the barefoot investor might be behind the times. A listed investment company is an investment which is traded like a stock but operated like a managed fund, and varies based on fees and investment strategy (i.e., types of companies included). Not mentioned in the book, however, are exchange traded funds (or ETFs). They often provide exposure to a wider pool of assets than LICs and are typically more passive, usually tracking an index such as the ASX 200. According to research done by Stockspot and the Barefoot Blueprint, LICs on average underperform ETFs because they tend to target high dividend yielding stocks. This means that ETFs may be a better choice for young people who are not reliant on dividends as a stable source of income. They are also less transparent and, on average, have higher fees. AFIC’s net assets have on average tracked the ASX200 accumulation index, however, on average their share price has been trading at around a 4 per cent premium to the index with a 0.13 per cent management fee. This means that if you purchase the ASX200 through AFIC, you will on average pay 4 per cent more than the index is worth. In comparison, the iShares ASX200 ETF trades at par to the index, with a 0.09% management fee. Students should research the differences between LICs and ETFs as well as the various types available to make an informed decision.
Additionally, there is a lack of information on stockbrokers. There is a range of online brokerage apps, some of which probably cost more than your monthly food budget. Choosing the correct one based on your investing frequency and preferences can save you a lot of money in the long run, especially taking into account that those foregone fees can be invested instead. A list of online brokers for casual investors, sorted by price, can be found on Canstar’s database3.
Key takeaways:
-The book provides excellent, simple strategies on how to manage your income so you have enough to save up for moving out or buying your own car whilst also having enough for a summer road trip. How much money should be set aside for each purpose should be adjusted based on personal circumstance.
-For those without a finance or economic background, the investment advice given is easy to follow and provides a solid foundation for how to build a stock portfolio without a lot of effort. Nonetheless, more research should be done on the options available.
-The book is also jam packed with useful nuggets of information which many people are not aware of but can save them thousands of dollars in the future – comprehensive vs combined health insurance, government super co-contributions, lenders mortgage insurance, the first home super saver scheme (and the best type of pillow, supposedly).
-If there is one thing students should take away from this book, it is the importance of thinking about superannuation now. The difference between doing nothing and making slight adjustments can be between retiring comfortably, cashed up boomer style, or going back to holidaying mid-year Rotto style.
Whilst some advice is too general to be applied to students, and some sections will require additional research, <i>The Barefoot Investor</i> is a great way to get your (bare)foot in the door of financial security.
Lana Pavlovic is a finance student who would one day like to know what Wall Street actually is.
This article is general in nature and does not provide any specific advice.
1: https://blog.stockspot.com.au/compare-lic-vs-etf/ (this is evidence for ETFs returning higher (on average) than LICs
2: Barefoot Blueprint: Portfolio Report 2019 (not sure how to cite this, this is where I got the info of (most) LICs targeting higher dividend yielding stocks)
3: https://www.canstar.com.au/compare/online-share-trading/