Here’s my No B.S breakdown of what you need to know – and focus on – from last night’s federal budget.

Next Tuesday night at 7.30pm sharp I want you to do me a favour: turn off your television.

Sure it’s tempting to watch the latest battle between a couple of amateurs singing for their spot. Let’s face it, the Acting Treasurer doesn’t stand a chance of getting the nod from Delta and the other judges.

That’s why I’m starting my own tradition this Budget night: while Wayne warbles for 30 minutes, I want you to spend this time working through three simple steps that I promise will put you in complete control throughout the ongoing financial crisis.

A big claim I know, Mister Speaker, but here goes.

1. Stop the Shuffle

If you’re like most people, your money lives in a share house called ‘online banking’ – there’s a transaction account, a savings account, a home loan, a line of credit and some credit cards.

And every payday you shuffle money around the screen: some into your home loan, some into your credit card for a bit of breathing room, and some into your savings account for daily expenses.

There are a couple of serious problems with ‘the shuffle’.

First, the banks are very good at marketing debt, so they make it incredibly easy to use your home loan like an ATM (after all, they’re all just numbers on the screen – and they all look the same).

Second, all this shuffling means your financial future will be tied up in the value of your home – and I’m firmly convinced that will be a wealth trap over the next decade or so.

(There are plenty of people who call themselves ‘millionaires’ because of the value of their homes. But in order to get the million bucks they’d have to sell, and then they’d be homeless millionaires.)

To stop the shuffle you need to crush the convenience of online banking, while at the same time making the process of saving completely automatic. It’s called getting some Mojo.

2. Go Mojo

This month I want you to go to another institution (i.e. not your regular bank) and set up a high-interest online bank account that doesn’t have a card attached to it. Inconvenient? You betcha. But it’s a great way to stop the shuffle.

Then set up a direct debit from your everyday account for a set amount every time you get paid. How much? Ten per cent of your pay is good (for a commonsense reality check on where your money is going, check out my 60-20-20 plan at barefootinvestor.com).

I call this my Mojo account, and I’ve had it for the best part of a decade. Having an increasing amount of money set aside in case of a financial catastrophe will give you a spring in your step – a strong sense of having your own monetary Mojo.

It’ll make you feel in control, but it won’t make you wealthy. That’s where the final step comes in.

3. Get a little richer every day

Most people don’t get a little richer every day. Instead they get caught up in ‘lifestyle inflation’ – upgrading cars, houses and holidays when more money comes in.

Shuffle, shuffle, shuffle.

If they invest at all, they tend to put all their savings into the share market and then freak out when it falls, and end up selling at a loss.

Let’s turn that on its head. See, we’re conditioned to think that investing is something people with slightly greying hair do in one hit at a suburban AMP office.

But the truth is that real wealth is built over decades. You can literally become a little richer every day when you understand that your most important asset is the difference between what you earn and what you burn.

So as well as opening a Mojo account, open up an online brokerage account. Then take whatever’s left over from your daily essentials and split it between the two. And it doesn’t really matter if it’s $50 or $5,000 that’s left over, so long as you (a) make a commitment to keep it the same (or more) as you earn more money, and (b) you take that money and compound it. If you do, you’ll be well on your way.

Am I boring you?

I’ve given you the tools, but to make it real let me tell you my personal investing strategy. Truth be told, it’s kind of boring (it’s more Bert Newton than Matt Newton).

I have a monthly direct debit into my growing Mojo account. In the past I’ve advised only having a few months of Mojo for emergencies – but I kept going for a decade now, and last year I took a significant slab of my Mojo and paid down my mortgage. So don’t limit yourself. Cash is king.

And I have my share trading account, where around 10 per cent of my paypacket goes. Because I have my Mojo as my investment fire escape, I can honestly say that share market drops don’t really bother me – it’s not money that I’ll need in the next 10 years.

But that said, I’m highly conservative. I hate losing money more than almost anything else, and that’s why I’ll only invest in established (boring) businesses that have strong balance sheets, a history of paying growing dividends, and the pricing power to pass on any cost increases to consumers.

And when their share prices go down, I buy more. These companies, like Woolworths, Coca-Cola and Domino’s (but not the banks) are not only extremely safe because of their boring dividend payments, but they have the ability to compound my wealth over time.

On Budget night there’s always a lot of discussion on the winners and losers. But let’s be honest: Wayne’s words won’t make a cracker of difference to your long-term wealth. Putting in place this simple plan will.

Tread Your Own Path!



Photo: http://www.flickr.com/photos/monkeyc/94729648/

Earlier this year Amazon.com launched a price-check phone app that allows shoppers to scan a barcode in a shop to see if it’s cheaper online (well, on Amazon to be precise). It caused a hell of an uproar in America, because it was seen as a direct attack on ‘Mom and Pop’ retailers, which of course is exactly what it was.

Now it’s our turn.

According to reports in the press this week, Amazon is looking to set up shop in Australia – or, more accurately, to build a huge warehouse distribution center here. After all, Amazon is already selling millions of dollars of handy stuff to Australians – like the Original Roadkill Cookbook (10 reviews) and the Mangroomer Do-it-yourself Electric Backhair Shaver (477 reviews).

The press reports quoted a Sydney accountant who’s been a director of the otherwise dormant holding company Amazon Corporate Services for the past 12 years: “There’s been a change in direction. I sense it’s going to be big.”

Damn right it will be, and for three reasons:

1. It’s great news for shoppers

When I became an Amazon customer in 1999 the company was a barely profitable online bookseller.

Today they’ve transformed themselves into the world’s shopping mall. Last year the company took $US48 billion through its tills, selling books (and even more e-books), fashion, electronics, home and garden gear, furniture and groceries – even car parts! Half of these sales come from countries outside the US, hence the proposed expansion here.

Now you’d have to think that the Australian distribution centre will only have a narrow range of biggest sellers to start off with. But I’m sure they can ramp things up in the future and compete head on with every leading segment of retailing – not just books.

2. It’s bad news for retailers

After years of beating up on small retailers, our largest shopkeepers, like Harvey Norman, David Jones, Myer and JB Hi-Fi, are about to get a taste of their own medicine. For years they’ve played the geographic game, squeezing out competitors by snapping up the best retail spots and then screwing both suppliers and customers.

Internet shopping (and a strong Aussie dollar) is killing that model, but the one sticking point is that the savings you score from buying overseas are mostly lost when you factor in shipping costs.

The main benefit of Amazon having a local distribution centre is that they should be able to offer same day (or next day) cut-price, and sometimes free, delivery to Australian customers, like they do in the US. That’s a game-changer because the shopping experience on Amazon is far better than anything on offer from our local retailers.

Not only do they have incredibly cheap prices and a massive range, I actually trust the millions of online customer reviews more than I trust the bogan salesman in a Harvey Norman polyester shirt trying to cop a commission in a suburban shopping mall.

Best of all, Amazon knows what I like – in fact each time I go there they set up the shop just for me. I see no cleaning utensils, homewares or fashion of any description. My shop is wall-to-wall finance books. Heaven.

They can do it because they’ve tracked everything I’ve bought for the past 13 years (and even the stuff I’ve picked up off the virtual shelf and had a closer look at) and now only offer me stuff based on my preferences.

In America about 10 per cent (and growing) of retail purchases are made on the internet. It’s half that here. The reason is that our biggest retailers haven’t devoted much time or money to selling stuff via the net (case in point: David Jones generates about 1 per cent of its sales online).

Just like our local television networks, our retailers have mistakenly believed that their competitors were each other. But if the press reports are true, they’re about to encounter a ferocious new competitor.

Bear that in mind when you review your share portfolio, especially if it contains JB Hi-Fi, David Jones, Myer, Premier Investments or Harvey Norman. These are no longer set-and-forget investments.

3. It’s terrible news for jobs

My family are proud small business retailers. We employ workers with great people skills but not much formal education. People like this are the backbone of the entire retail industry.

As a small retailer we look after our customers. And we make a decent profit – but it’s an increasingly tough game.

I have this argument with my old man all the time. No, traditional retailing won’t dive off a cliff next year just because Amazon is reportedly setting up shop. Yet these are long-term trends, and moving quickly.

What we’re seeing right now are the early stages of a hollowing-out of one of our largest employment sectors. Retail keeps millions of people in jobs, allowing them to pay bills and meet mortgage repayments.

But traditional shopkeeping is increasingly being taken over by customer-centric, data-driven businesses with huge economies of scale that are as much logistical operations as they are retailers. And these businesses require much fewer staff.

You see it in the supermarkets that have been pushing into online delivery, train station grocery pickup points, and self-service checkouts (which I refuse to use, no matter how long the checkout chick, or checkout bro, line is). And you see it at Amazon, which will generate tens of millions of dollars in sales when they set up shop here, without employing a single sales assistant.

Tread Your Own Path!

I was reviewing a manuscript for an author friend of mine when I came across his definition of wealth:
 “Your family home paid off (no debt), and $2 million in investments.”



He said that some people fool themselves into thinking they’re millionaires because of the value of their home, but he argued (quite rightly) that in order to access the money they’d have to sell up, and they’d be homeless millionaires. True.



I’ve never thought about wealth as a specific number. After all, there’s no ‘who wants to be a millionaire’ celebration when your bank account reaches a million bucks in cash (although if you borrow a million, one of the banks will assign you a private banker and give you a free polo shirt).



For me there are two factors that determine how quickly you become wealthy – and neither has anything to do with how much money you have right now, or how much you make.



The first factor that is what your brain tells you it needs to be happy. Most of the millionaires I meet are not financially content. Most never will be. They tell themselves they’ll be happy when they have more stuff, be it a boat, a home, or a car. Then the cycle repeats.



Yet the easiest way to feel wealthy (and safe and secure) is to get rid of your debts and have some savings. Spending money on experiences (travel, nice dinners, education) will make you happy.



The second factor is your ability to focus. We live in a world of almost unlimited choice – which for many people translates into unlimited inertia.



If I were to boil down the wisdom of my grandfather, the wealthiest person I know (in character at least), it comes down to having a few ‘no matter whats’ in life and sticking to them through thick and thin.

Here are mine:

“No matter what, I pay my way”

A shopkeeper once told me that my grandfather was the first bloke to pay his bills – he could be counted on. That stuck with me. It was through him that I learned that being a person of your word matters a whole lot more than your bank balance.

Quite often wealth gurus contact me in search of publicity. Most follow the same story: they were bankrupt, hit a low, bounced back and struck it rich (trading, property spruiking, Amway), and they’re now on a mission to help others.

Barefoot: “That’s inspiring stuff. So now you’re rich, you obviously went back and paid all your creditors back, right?”

Guru: “Well, not exactly.”

“No matter what, I won’t have consumer credit”

The banks are much better at marketing debt than I am at managing it. They do it for a living and make billions of dollars in profits. I’m no match for their game, so after a few failed attempts I made a vow to never borrow money other than for a property – no matter what.

This week I applied for a travel money card at my local bank and was told there was a $15 ‘fee’, which could be waived if I had a gold credit card.

Barefoot: “I don’t have any credit cards.”

Banker: “Well, you could get one, and just not use it, and get the fee waived …”

Barefoot: “No way. And you’re in breach of the Consumer Credit Code” (admittedly, a total bluff).

They waived the fee.

“No matter what, I’ll keep investing”

Seemingly, there’s every reason in the world not to invest right now: the trillion Euro debt fix is quickly unravelling, commodities prices are falling because of lower growth, there are concerns that China is running out of steam, and a huge bout of inflation could whack us all between the eyes. You’d be hard pressed to find any good news about the short-term future.

But history shows this is exactly the type of market when successful investors make the most money, and when professional fund managers miss a golden opportunity.

Five years ago, when the market was 40 per cent higher than it is today, the very same professionals who are now so gloomy were buying shares with their ears pinned back. At some stage – probably when prices are much, much higher – they’ll be buying again.

Complexity Kills Contentment

If you watch too much television, or listen to the Federal Opposition, you probably think we’re living through genuinely tough times. We’re not – not even close. We’re comparatively the richest place on the planet. Even our poorest are relatively rich, as they have access to financial support and free medical care.

For all these reasons people place far too much importance on external events − what the Reserve Bank does, what political party gets elected, what the economy does next. In truth, none of that matters very much at all – though they do provide plenty of ways to procrastinate.

Thankfully there’s a simple solution – which is why it works – and why it’s stood the test of time. What are your ‘no matter whats’?

Tread Your Own Path!



Photo: http://www.flickr.com/photos/joost-ijmuiden/5511220039/

New research published this week on the Property Spectator website finds…

First-home buyer confidence rises but buyers misinformed about deposit requirements

“Researcher Alan Shields says it is worrying that more than a third of potential first-home buyers still plan to save at least a 20% deposit.

“This, Shields says, is not necessary because lenders are offering loans with loan-to-valuation ratios of up to 95% provided borrowers take out lenders mortgage insurance (LMI).”

“They have been saving for four years with a false goal in mind”, Shields says.

Let’s be clear. Shields’ and his company RFi are not independent. They were paid for comment by an outfit called Genworth. Who are they? Well – surprise, surprise – they happen to be Australia’s largest provider of lenders mortgage insurance.

LMI provides insurance for banks (paid for by the borrower) and it costs thousands of dollars. And it’s a total waste of money – almost as much as paying a glorified PR agency to pump out rubbish research.

Tread Your Own Path!



Photo: http://www.flickr.com/photos/sbh/4112182289/sizes/m/in/photostream/

While the Easter bunny is dropping off chocolate eggs this weekend, I’m focusing on your nest eggs. Here are five fat-free questions that hit my inbox in the first quarter of this year – and my straight talking answers to them:



How Do I Maximise My Benefits?

My husband works in IT and earns $125,000 per year. I work part time three days a week in a small consulting firm but take the bulk of my income (around $30,000) cash in hand, which allows us to still claim childcare benefits. I’ve been offered another job for $45,000, but would have to pay tax on this. What would you do?

Jane*, Ringwood, VIC

You’re a thief.

I really dislike paying my taxes – so much so that I spend good amounts of money doing everything I can to legally minimise the amount I pay out – but I still pay them. And it’s not because I think either side spends it wisely (they don’t). It’s because I can’t buy back my integrity.

You may think you’re winning by cheating and getting some government benefits, but you’re not. Successful people don’t have your situational ethics.

The Gillard Government is trying to cover a $40 billion black hole in the budget, which means that middle-class welfare will be on the chopping block – and about time too. The idea that a household on $160,000 should get a government handout is ridiculous. People need to harden up and stop looking to Canberra to solve their problems – they’ve got enough of their own.



Pennies from Heaven a Curse?

I’m about to receive a large inheritance from a friend of the family. It’s around $350,000. My friends are all really envious (in a good way), but to be honest it’s stressing me out. I have a $400,000 mortgage (I only bought three years ago) and I have an old car I want to replace. I have no children or dependents. What would you advise I do?

Rebecca*, Perth, WA

It’s a good thing to be fearful of coming into so much money. I’ve seen sudden wealth ruin people – especially when it’s unearned.

That’s why I often advise people in your situation to take some money off the top for a nice holiday, and lock the rest of it away in a fixed-interest account for 12 months. It helps people get used to having the dough, and in many cases stops you from whittling the money down in the first year – often on dumb plans you’ll later regret.

The other thing I advise is that it’s really important to honour the person who gave you the money. Now your family friend was obviously good with money, because broke people don’t have $350,000 to give away to family friends. So honour their memory.

Build up your Mojo account so you have three months of living expenses set aside. Add a bit to super. Upgrade your car, but never buy a car that’s more than half your annual income. And use the rest of the money to pay down the bulk of your mortgage. That’s one thing you won’t regret doing.



Is it Good That My Kid’s a Dollarmite?

My son Jackson is eight years old and I really want to teach him about money. At his school he has a student ‘Dollarmite’ account with the Commonwealth Bank which has a website and other stuff, but do you have any additional info?

Tina*, Adelaide, SA

The Commonwealth Bank (CBA) has a long, proud history of teaching kids about money (or at least that’s what they say in their TV ads).

I was once a Dollarmite. So were many of my friends (and some of them are still CBA customers because of it). While they have decent education material, the fact is the CBA’s multimillion-dollar youth financial education initiative falls under the bank’s marketing department.

Generally the CBA program teaches kids to save up and spend (and eventually they arm them with CBA credit cards and the like to transact with). But kids don’t need to be taught to be consumers (we can leave that to the TV ads within cartoons) – they need to learn the basic behavioral building blocks of wealth: the value of working for a buck, the importance of saving, and the power of spending wisely.

And you’d be amazed at how many 38-year-olds meet who haven’t bedded down these behaviours.

So the best way I know to teach kids is with the totally unsophisticated ‘three jam jar’ approach, where each jar gets labelled with one of the following: Saving, Spending, Giving.

Ask your son to do additional work around the house (other than his family chores), and if he does it well, pay him with coins. (Using real money, rather than bank accounts, is important because kids see less and less actual money these days and therefore it’s losing its meaning: it went from cash, to plastic, to virtual money.)

Then show him to allocate the money into the three jars – and help him save, spend and give. Remember, pocket money is simply a tool for financial education. Do it right and he won’t be living in your spare room in 20 years.



Help Me Win a Fight With My Wife!

My wife and I have had a running debate for a while and we’d like you to be the referee. Is it better for us to use the money we have left over at the end of the month paying down our home loan, or should we park it in our mortgage offset account?

Andrew*, Balmain, NSW

You don’t win fights with your wife – you just admit you were wrong and move on.

The Barefoot plan is to have your emergency money set aside in your Mojo account, a separate, high-interest online savings account. (How much you save there depends on how big an emergency you plan on never having.)

Theoretically it makes more sense to save that money in your mortgage offset account (which lowers the amount of interest you pay on your outstanding home loan) because, unlike bank interest, you don’t have to pay tax on it.

The problem for most people is that it’s often too tempting to take the money from the offset account and spend it on something. I’ve seen that happen more than I’ve seen it work. Something more important (and seductive) always comes up than ‘paying down the debt’.

If you have your Mojo fully stocked, and you’re paying back more on your mortgage than the minimum repayments, I’d look at beginning to build a portfolio of bluechip shares, and use any salary increases or bonuses you get along the way to make lump sum payments against your home loan.



Should I Get a Prenup?

I’ve followed your articles for years, and I credit you with getting me into the position I’m in now: I own my home and am working towards having it paid off in about five years, I’ve got a healthy Mojo account, and I’ve also got a tidy share portfolio in Woolworths, Metcash and the Australian Foundation Investment Company (AFIC).

So I’m pretty well set up, and I’m getting married next year and I wanted to know your thoughts on prenuptial agreements. Whenever I try to bring it up with my fiancée (quite a few times) she changes the subject. What are your thoughts?

Rick*, Melbourne, VIC

My grandfather used to say, “if you’re in for a penny, you’re in for a pound” – and that about sums up your situation, I’d say.

Now I used to be in favour of prenuptial agreements when I was younger. Well, at least I was until I actually had to talk to a woman about signing a legally binding document to protect ‘my’ assets.

It didn’t go well.

And even if it had, it wouldn’t have mattered anyway. I’ve come to realise prenups aren’t worth the paper they’re written on (for the following reasons):

If you’re worried your bride is the type to put in for a bill if you bust up, you really should’ve thought about that before you bended your knee. (And if I’ve learned anything from watching years of Home and Away, there’s still have plenty of time to back out – right up until you say “I do”).

And if you bust up after you have a kid, you’re going to have to divvy up at least half your dough anyway (and probably more, depending on how good her lawyer is).

Prenups do have a place – like if, say, Gina Rinehart was getting remarried – but for you a more pragmatic approach is to stop seeing the money as ‘yours’ and ‘hers’. You’re starting a life together – it’s you two against the world – so go all in. If you’re not in it together from the start, it’ll end up costing you big time. I guarantee it.

Happy Easter to you and your family.

Tread Your Own Path!

*Names changed. Well not really, only Jane’s and only because I called her a thief.



Photo: http://www.flickr.com/photos/thomashawk/2671536366/

This column is going to come back and bite me.

You see, right now my mum is reading this; she’s a proud country woman with simple goals … all she wants is for me to get married and have kids. A few years ago she’d make gentle comments as we’d pass a jeweller: “That’s a nice ring.” Today, she’s just plain pushy: “What’s wrong with you? Why aren’t you married?”

It gets worse. Now she even has the Australian Bureau of Statistics (ABS) in her corner. This week they released a report that showed that I’m now (slightly) over the median age at which Aussie men get married (31.4).

Interestingly, Relationships Australia found that the number one deal-breaker for couples is money (okay and monogamy, but mainly money). So, regardless of whether you’ve made your mum happy yet or not, here is some financial advice for navigating your nuptials.

I’ve broken it down into three age groups: young couples ‘living in sin’, couples in the Triple M phase (Marriage, Mortgage, Midgets), and older couples in the home stretch. For each group I’ll point out both the D’oh! moments (things to avoid) and the Do! moments (things you should do).

Let’s get into it.

Living in Sin

According to the ABS report there are twice as many people living in de facto relationships than in 1992. One in five 20 to 29-year-olds is officially ‘living in sin’, as my grandmother would put it. What are the D’oh! and Do! moments for this group?

D’oh! Don’t score an STD (sexually transmitted debt). Thankfully there’s a simple solution for this: never, ever loan money to anyone – especially someone you’re sharing fluids (but not a ring) with. No excuses. No caveats. No co-signing.

Do! Most couples happily share the day-to-day expenses, but they keep their long-term money decisions separate. And that makes sense, since you’re really just roommates with benefits.

Yet as a card-carrying member of the CPA (Commitment Phobia Anonymous), I’m going to let you in on a trade secret: if a bloke is living with you, he’s already made up his mind. So either think about pushing for a ring (or at least a verbal commitment) or consider pushing him to the kerb. Until you do you’re in a financial holding pattern – and time is money.

Marriage, Mortgage and Midgets

Couples are staying together longer – the average couple now says ‘I don’t’ after 8.8 years (compared to 7.5 in 1990). But even still, one of the big factors of family breakups is financial stress – young couples trying to achieve in five years what their parents did in twenty. My advice for this group?

D’oh! The goal of every family is to provide financial security for their kids, which is why two of the biggest players in this space use emotional pictures of children in their mass market advertising to flog their dud deals to families.

The Australian Scholarships Group (ASG) charges ridiculously high fees and has nasty penalties on their education savings plans. Defence Housing Australia (DHA) flogs overpriced investment properties to parents and slugs them 16.5 per cent a year to ‘manage’ them. Steer clear of both of these companies.

Do! My old man says ‘happy wife, happy life’ like he’s some sort of Confucius of country Victoria. Then again he’s been married over 40 years, so he must know something. Perhaps it was that, even in the seventies, Mum made him pay her a wage for housekeeping. Smart move. The biggest bust-ups I encounter are from full-time mums who lose their income and have to beg like a teenager for a $50 note.

The Home Stretch

The ABS report found that the median age of divorce is 44 for men and 41 for women. (The average age of an internet dater is apparently 48, so does that mean it takes women seven years to succumb to RSVP.com?) Sidestep divorce and you’re on your way to safe and sensible package tours to exotic places … like Dubbo. Here’s what to watch out for:

D’oh! Other than trying to avoid divorce, of course, you should be mindful of not making other people rich. Most ‘retail’ investments are really wealth-creation vehicles for the fund manager and the advisor (who make their money regardless of whether you do or not). You get the scraps.

Do! Money (or lack thereof) is consistently rated as the biggest worry. You’d think then that more people would sit down and think about three very important numbers: 1) how much you want to earn each year; 2) how much you want to have in savings and investments; and 3) how much you want to retire with.

(For example, “I want to earn at least $100,000 a year. I want $30,000 in savings in my Mojo account. And I want to retire with $895,000 in super, which will provide me and the missus with a comfy $50,000 a year to live on.”)

And, no, thinking about these numbers won’t make you magically meet them (unless you’re Wayne Swan). But if you’re heading out on a long trip, it’s a smart idea to think about where you want to end up – regardless of whether you’re on a motorbike, driving a station wagon, or towing a caravan.

Good Advice, Bad Advice, Who Knows?

That beacon of good news, the Reserve Bank, released a report this week which gave the residents of the wealthiest nation on earth another reason to worry: we’re losing money.

And it’s not exactly pocket change. The average Aussie household has had more than $70,000 wiped off the value of its assets since the start of the Global Financial Crisis. And the Reserve Bank boffins’ research suggests it’s speeding up – last year alone we lost $40,000.

I know what you’re thinking: “Maybe I should see a financial advisor.”

Not so fast. An ASIC report into the quality of financial advice this week showed that most consumers apparently can’t tell the difference between good and bad financial advice. Nice work if you can get it (imagine how happy hairdressers would be in this situation!).

ASIC commissioner Peter Kell said it’s not surprising people have trouble, because the “people who thoroughly understand personal finance are less likely to need a financial planner”. Touché.

Okay, so I guess you’re now thinking: “If I’m losing dough, maybe I should get out of the share market and go to cash.” One of the sharpest dudes in superannuation, Jeremy Cooper, suggested the same thing this week. But history and logic aren’t on his side.

According to research compiled by ratings agency Morningstar, a dollar invested in Aussie stocks in the year 1900 would be worth $2,475 in today’s dollars (well, as long as you reinvested the dividends). The same dollar invested in cash would have grown to only $5.80 in today’s dollars – or, in true economic terms, not even enough for a Big Mac Meal.

Tread Your Own Path!



Photo: http://www.flickr.com/photos/mightyboybrian/3855969495/

This week I spoke with Tony Delroy about how important it is to have a good financial advisor, and how many people under 35 will never be able to afford a home.

Let me know your thoughts.

Scott



Click here to listen or download the ABC Radio Interview

I’ve been debating whether I should tell you this story for about a month. It involves a family friend who will almost certainly pick that I’m writing about them, and it contains some hard truths that most people won’t like…

Proud as Punch

A friend of my father’s dropped by the other day to have a chat. He was ‘proud as punch’ that his son and daughter-in-law had settled on their first home – a $750,000 two-bedroom house in a blue-ribbon Melbourne suburb.

Anyone who knows me well knows that I can’t help myself. I asked a few more questions.

He explained that the couple had saved $50,000 and both parents had helped them out with the out-of-pocket expenses, so their mortgage is $700,000. They are both in corporate marketing and earn around $80,000 a pop.

One upside of being on the wrong side of 30 is that I’ve learned to show more tact, so I smiled, bit my lip, and began formulating this column in my head. Besides, who was I to rain on his parade? After all, he lived in the same suburb where his kid had bought and he’d seen his family home skyrocket in value in the last 20 years.

An Agreement Till Death

The word ‘mortgage’ comes from Old French and roughly translates as ‘an agreement till death’ – and that’s exactly what this couple have entered into. Here’s the hard truth: these kids are unlikely to ever pay off their $700,000 mortgage. There aren’t many people who have the ability to pay off that much debt.

This is a financial trainwreck, and the locomotive is just about to leave the station. So let’s take a look a little down the track:

Their current monthly repayments are around $4,700 a month, while their current monthly take-home is around $10,300. Given they only have two of the Triple Ms (Marriage and Mortgage), things are tight but doable.

But when the Midgets arrive, all bets are off.

Even factoring in Prime Minister Abbott’s overly generous parental scheme, the wheels fall off this equation pretty quick – and they stay off for at least 20 years. Two incomes become at best one-and-a-half, and the dough now needs to stretch to accommodate three people.

Kids tend to multiply, as does the cost of raising them: as soon as childcare costs free up, school fees start. So half of mum’s wage generally gets eaten up in costs. Which leaves dad’s wage. After he’s paid his taxes he brings home around $62,000 a year, and their home loan costs them $56,400 a year. Credit cards anyone?

That’s the reason I advise people to have a 20 percent deposit, and not to buy a home that’s more than five times their annual income, factoring in the income disruption of a family. Therefore this couple should have bought something closer to $500,000 (or less).

Lie to Me, Please

Maybe I’m being a little harsh. The fact is that most people don’t pay off their mortgages. Instead they wait for their home to increase in price, which lessens the heartburn of home ownership – providing they don’t borrow more.

(Having said that, I know plenty of people who bought a home for $150,000 twenty years ago but still have a $150,000 mortgage on it even though it’s worth $500,000 today. That’s a perfect case of compounding in reverse.)

According to figures released this week from research house RP Data, 6.4 percent of homes were worth less than their purchase price, which accounted for 27 percent of people who bought a home in the last two years are underwater – otherwise referred to as negative equity. Yet the researchers were at pains to point out that this figure shrinks to only about 1 percent if you hold for 10 years.

There are two reasons for this: one, you slowly start to work off the mortgage (but perhaps increase the credit cards as a result), or two, the value of the home increases. But what if property, which most economists agree is overvalued between 20 and 50 percent, either falls slightly or stays flat over the next 10 years?

Well, I can’t predict where property prices are going, but I can predict that in 10 years the couple in question will have shovelled $525,000 into their mortgage, and I can also predict their outstanding debt will still be $600,000.

If I were in this situation I’d sell. There are thousands of people right now living in ‘dream homes’ that are really nightmares. But it doesn’t have to be that way.

How to Live in Your Dream Property Today

This week a journalist from a sister publication called me about a new angle on how young people could live in their dream property – today. It’s a catchy headline that would capture attention.

Journalist: “The strategy is that you rent your multi-million-dollar, inner-city dream property and buy an investment property in Western Sydney.”

Barefoot: “You’ve been talking to bull-dust property artists again, haven’t you?”

Okay, my argument isn’t that this doesn’t work on paper. It does. It almost always makes better financial sense to rent a million-dollar place than own it – but it’s still a big drain on your cash flow. And investing in housing makes better financial sense than living in it, if for no other reason than you have a tenant and you can write off your losses. But families live in homes, not in paper.

Ice hockey legend Wayne Gretsky explains that he has been so successful because he always ‘skates to the puck’. It’s a similar situation with money. If you want to own a home, buy a home. If you want financial security, invest in good-quality shares (which over time will give a better return than residential property). Forget being fancy, and focus.

A pastor once commented to me that “most young couples spend the first five years of their marriage trying to achieve what their parents did in 20″. Straight out of the gates they double down on the dream home, the nice furniture, and a huge debt that will severely limit their lifestyle.

Now I’m a massive fan of owning your family home outright. But it should be a 20-year plan. You buy a small unit when you’re married, you sell it when you have kids, and you use the dough to buy a home in a place that probably serves Nescafe instead of lattes. And eventually, and probably a lot sooner than you think, you get to live in the same suburb as your parents. God forbid!

Tread Your Own Path!

Photo: http://www.flickr.com/photos/h-k-d/2864168894/

I received an email from Alexandra this week:

“I had a bad feeling about him from the start.”

She wasn’t about to sleep with him. After all, she was (more or less) happily married. But she and her husband did the next best (or worst) thing – they entrusted a financial advisor with their life savings.

You probably know at least one person who’s been fleeced financially. But Alexandra wasn’t dealing with a conman: the guy worked for a well-known financial institution, he charged fees for his service (instead of commissions), and he had a picture of his kids on his desk.

Meeting an advisor is kind of like going on a blind date – in both cases there’s a slim chance you’ll hand over your life savings. Problem was, the advice Alexandra received from him would have seen her retire with a hundred thousand dollars less than she otherwise would have. And she paid him handsomely for the privilege.

Winning through Intimidation

Financial advisors (much like doctors and lawyers) have their own specific language that, unless they take the time to explain it, can be almost impossible to understand.
It’s especially intimidating because they use this babble to recommend major life decisions.

Some professionals (but by no means all) are verbal bullies ? like the one Alexandra met. But instead of calling it for what it was, she went along with it. Why? “Because I’m just a housewife – I don’t know anything about money.”

Never allow yourself to be verbally bullied – instead turn it back on them.

Why Dumb People are Sometimes the Smartest

One of our biggest fears is looking dumb in front of others – and the dodgiest financial salespeople use that fear to exploit us. But some of the smartest and wealthiest people I know spend most of their time looking dumb.

Rebecca is in her late 20s and works in social media, a fast-paced, ever-changing industry. That means spending plenty of time in boardrooms with various floggers dropping tech-acronyms.

“I’m sorry but I don’t understand what you’re talking about”, she’ll politely say.

It stops them dead in their tracks. Throughout her career she’s said this hundreds of times, and often to very important people. But rather than seeing it as a weakness, her colleagues now look to her as a leader (they don’t have the guts to look so silly). Six years ago when she nodded and smiled she was earning about $60,000. Today she earns three times that.

One of the wealthiest investors I know does something similar. Whenever he’s looking at a deal he’ll apologise to the other party and say, “You’ll have to take it slowly with me, I’m kind of simple”.

This achieves two aims in the negotiating process: 1) the salesperson drops their guard because they believe they’re dealing with an idiot, and 2) it allows my mate to keep asking dumb questions till he’s worked out how stupid the salesperson is. Only then will he cut a deal.

Don’t Take Advice from Idiots

Most people don’t have a (government-regulated) financial advisor. Instead they get their financial advice from all sorts of weird and wonderful places: their brother-in-law Darryl, their accountant when they file their tax, or a real estate agent wanting to make a sale.

But regardless of who you’re talking to, keep these three things in mind:

1) Always trust your gut

You have to feel in your bones that the person giving you the advice has your best interest at heart. And most of the time that’s not the case – Darryl may be looking to pump up his ego, the agent is probably just trying to make a sale, and the accountant could just be making small talk. If you get a bad vibe from someone, and feel they’re trying to intimidate you in any way, walk away.

2) It all comes back to common sense

Over the years I’ve worked hard to make the Barefoot Investor lessons simple to understand and easy to execute. I’ve modelled myself on two old blokes: Warren Buffett, who speaks clearly, often explaining things in stories; and my grandfather, who was a caring country bloke as honest as the day is long. And the thing both of them would agree on is that if something sounds too good to be true, it is.

3) You are smarter than you think

Alexandra is a smart, successful woman with all the skills to confidently manage her own money. All she needed was someone to explain things to her in normal language. But she lost confidence because she didn’t understand the bull-dust bingo (see below) that was thrown her way. Don’t let it happen to you!

Bull-Dust Bingo

If you’ve spent any time in the company of a financial flogger you may have heard them use the following terms. Here’s what they really mean:

Mezzanine debt: Sounds much more impressive than what it is: high-risk, unsecured financing that goes to builders the banks won’t touch.

Debenture bonds: High-interest-paying fixed-interest investments, often loaned to property developers, that are not covered by government guarantee if things go wrong.

Asset-based fees: Commissions by another name. Refuse to pay them to your financial advisor. Instead, there should be a set (dollar-based) fee for the advice you receive. Why should you pay more for the same advice than another client just because you have more money invested?

Capital protected funds: These funds sound safe, given that they protect your capital. But they also limit your upside while gouging you with fees. You may preserve your capital, but inflation will end up eating you alive.

Tax minimisation schemes: Avoiding tax is a national pastime, which is why there are plenty of tax minimisation schemes. But history shows that all that many of these dud deals give investors is future deductions for capital losses (after they lose their dough).

Rental guarantee on investment properties: Whenever a property is being sold with a rental guarantee (as in “guaranteed 7% return for three years”), it means they’re flogging overpriced properties to unsophisticated investors, or that they’ve factored in the rental guarantee into the selling price, or both.

Negative gearing: This involves borrowing and losing money each year in the hope that the property will eventually increase in value. It’s a socially acceptable way of saying “I’m losing money”.

Nominal return: A $30,000 portfolio over 20 years should grow to about $250,000 (that’s the nominal return). But inflation will cost you $100,000 in purchasing power over that time, which leaves you with a real return (‘inflation adjusted’) of $150,000.

Tread Your Own Path!

Photo:http://www.flickr.com/photos/expressmonorail/4601302443/