Bouncing Back from Bankruptcy

Hi Scott,

I’m 42 years old old and I feel I have one shot left. I'm just three months away from my bankruptcy being removed from my credit file -- a failed relationship, and a failed business, behind me. I now have $50k saved. I earn about $145k and have had a great secure job for the last three years. So I am at a crossroads. Who will give me a loan? What is the best way to get my financial future back on track?Thanks

Gary

Gary,

Fella, you don’t have just one shot left -- you’re not even at the halfway mark! Instead, think of your experience like you’ve graduated from the university of hard knocks. And yes, you’ll find plenty of lenders who’ll lend you loot, but that shouldn’t be your focus -- that’s what got you in trouble in the first place.

You’re earning good money, almost $150k a year, so you’ll be fine as long as you stick with the program. What’s the program? Keep the $50,000 for emergencies in a Mojo account. Boost your super by salary sacrificing an extra 6.5 per cent of your pay (an extra $628 a month). Buy a modest home you can afford, with a 20 per cent deposit. Pay it off quickly. You can’t not win with this plan.

Scott

I’m probably going to die (soon).

Hi Barefoot,

I’m facing a dilemma: whether to retire now or to keep grinding. I am 66 and my husband is 68 -- he retired some years ago -- and we have about $1 million in superannuation. Our home is worth around $450,000, no mortgage, but the house is pretty run down and needs some major renovation work. I had a mild heart attack six years ago. Although I do try to look after my health, I cannot change my DNA. My mother died of heart attack at age 68, but my father lived to 87. What would you do?

Pam

Hi Pam,

If you want to work out the odds of when you’ll meet your maker, fill out the (free) in-depth questionnaire at www.mylongevity.com.au. It’s similar to what actuaries at insurance companies use.

Whatever the website spits out at you, I wouldn’t advise betting on living until you’re 68. That’s only two years away -- though it would certainly make your financial planning much easier, and a lot more fun!

I’d plan on living until you’re 100. The worst thing that could happen is that you die early, with too much money. Either way, you’ve already saved up enough money to enjoy a comfortable retirement -- around $65,000 a year (indexed to inflation), which should last you until 100 (if you live that long!). If you want to be really conservative, you could work a few more years to pay for the renovations. But I’d say you’re sitting pretty.

Scott

So, we have $160,000 of Credit Card Debt

Hi Scott,

Love reading your column each week, and this has taken me way too long to write to you. My husband and I earn $147,000 between us and have got into serious debt over the years through bad business decisions and other reasons. We have our own home with a mortgage of $346,000, and two investments properties -- on one of them we owe more than what it is worth now, and the other we could sell outright (valued $150,000). We have credit card debt of $160,000 and two personal loans of $70,000. What should we do?

Thank you

Denise

Hi Denise,

Most people who write to me need a little plastic surgery with their credit cards -- you need a total brain transplant! You’ve got $230,000 in personal debts, so you’re essentially tied to the railway tracks while the train thunders down the hill. It’s now or never.

I’d sell the investment property, but make sure you allow for any capital gains tax (CGT). Use it to pay off the bulk of your credit cards. Then I’d lodge a hardship variation for each of your remaining debts -- aim to negotiate a freeze on your repayments for six months. Use that six months to work three jobs so you can come out of the blocks with a fighting chance. Toot! Toot!

Scott

Your Stuff is Just Common Sense!

Dear Mr Barefoot,

Your stuff is just plain common sense. How stupid do you think we are? Ringing the bank for an interest rate cut is hardly rocket science. There’s no magic secret, no code to crack. Congratulations on convincing us all that you had the secrets for so long -- but I’m done now.

Justin

Justin,

After writing this column for over a decade, I’ve been waiting for this day to come. I knew that someone would catch on, and you my friend, have cracked my code. My advice doesn’t change. People ask me a million different questions, but I tell it straight -- what works and what doesn’t. Still, I have tens of thousands of people who’ve followed my basic, commonsense advice who are now living wealthier and happier lives because of it. Maybe that’s my secret?

Scott

Are We Going to Be Okay?

Hi Scott,

I am feeling a bit overwhelmed. My partner and I are both 30 and have a combined income of $140k. We owe $690k on our home, which is worth $860K. We also owe $350k on an investment which is worth $470k. We owe $20,000 in personal loans, own both our cars and have about $20,000 in savings. We are getting married next year at a cost of $40,000 and then want a baby. Scott, I’m nervous. I’m worried about losing my partner’s income ($50k) and feel we could be in trouble. I feel we have done okay at our age, or am I dreaming?

Mark

Mark don’t tell me about your freaking problems… tell your wife-to-be.

Seriously, that’s at the heart of every good relationship -- especially when it comes to finances -- honest communication. Tell her you’re freaked out about how you’ll pay for everything -- the marriage, the mortgage and the midgets. Then sit down together and work out how to tackle it as a team.

Understand that there is no correlation to how much you spend on your wedding and how long it lasts. I got married three years ago, and it was one of the best (and scariest) days of my life. What made it awesome was the people, the music … and the booze. We had it in our backyard, with a mate as our photographer. We spent more than we thought (everyone does), but we paid for it in cash. So should you. The best thing you could do for your marriage is to build up to three months of Mojo as a financial backstop: $40,000 should do it...

Scott

Time to Go to MyBudget?

Hey Scott,

My wife and I are in a bit of a financial mess that we can’t seem to get on top of. With a $300k mortgage, a $15k car loan and $10k in credit card debt, I can’t see how we’ll ever get on top. I keep seeing the ads for MyBudget and I’m wondering if that’s the answer for us? What do you think? Worth a visit?

Matt

Hi Matt,

Stop looking for fairy princesses waving magic financial wands. Managing your money is the old 80/20 rule: the biggest barrier to you getting on top of your money isn’t a lack of knowledge, it’s developing the necessary habits that will stop you spending money you don’t have, and valuing saving over stuff. If that doesn’t click, no amount of high-priced handholding from MyBudget or anyone else is going to help: they’ll just drive you deeper in debt with their fees.

Scott

Dealing with the Ultimate Risk

Hi Scott,

I am 63 and not presently working. About two years ago I inherited some money. I purchased a property for $700,000 and invested $500,000 in commodities shares through Macquarie. I draw $3,500 monthly as an income. I was a bit disappointed when last financial year my investment only earned 3.25 per cent. How do you suggest I might look to increase that return? Last thing I need is to run out of money!

Thanks

Christine

Hi Christine,

You’ve actually done quite well given the commodities index has slumped to its lowest levels since 1999. But why on earth would you invest all your eggs in the one sector? You’ve got coal for brains! Seriously, I’d suggest you need to diversify and have a good holding in cash (enough for at least three years’ expenses) and have a broadly diversified share portfolio with a good holding in both local and international shares.

Scott

What's Mine is Mine

Hi Scott,

My partner and I are building a house, my first and his second. He made a $100,000 profit from his first house. The house we are currently building will cost $450,000. We have both saved up enough money for the 20 per cent deposit. However, we both keep separate bank accounts, and have only one shared account for the loan repayments. My partner is inclined to keep the $100,000 profit in his account for himself because he finds it unfair that I can’t match that amount. Should I be worried?

Lynda

Hi Lynda,

Honey, he’s keeping his options open. That’s what’s happening. He hasn’t put a ring on your finger, so right now, financially, you’re like a friend with benefits. If you were my sister, I’d suggest that before you enter into a major financial transaction with this bloke you have ‘the talk’.

Questions to ask him are: what’s your long-term plan? Are we buying the house as tenants in common, or in joint names? Should we have a cohabitation agreement? Are you planning on marrying me and having babies? That sort of stuff.

Scott

Life Would Be a Dream?

Hi Scott, 

I am curious as to the tax situation if someone wins the new ‘Set For Life’ Lotto, and no, I haven’t won it. Because you are paid monthly instead of in the usual lump sum, would it be classed as income and therefore taxable?

Bron

Hi Bron,

No, it will be completely tax free. That’s because gambling winnings are classified by the Tax Office as a “windfall gain or a prize”, because they’re earned without any skill.

I hate Lotto for the same reason I hate credit cards: they’re a tax on low income earners who can’t do maths. The chance of picking up the Set for Life first prize is 1 in 38,608,020.

Yet what’s interesting about this new lotto game isn’t the odds — they’re always terrible — but the way it’s marketed. On the official Set For Life website, it says: “Everyone’s heard stories of people that won the lottery and it ruined their life, it happens to some in a matter of months who confess to being worse off after they purchased that life changing ticket than they were before.”

Wowsers.

In other words, “you’ll only blow a multi-million-dollar payday, so we’ll hold on to the money for you, and dish it out over 20 years”. (And if you don’t see what the catch with this, you’re probably Lotto’s ideal customer.)

Someone who understands money would say: “Actually, just give me the $4.8 million today, and I’ll invest it in shares, and in 20 years it’ll be worth $22 million.”
On second thoughts, no they wouldn’t. Smart people don’t play the Lotto. Set For Life is for losers. Same dodgy odds, different spin. They’re just framing it for stupid people.

Scott

How to save $83,913 on your home loan

Picture this: You walk up to your car and notice you’ve copped a parking ticket.

Bastards!

You swipe the ticket off your windshield and almost fall over. A $500 fine!

WTF?!

If you’re like most people, it’d give you the Kevin Rudds for the rest of the day. It might even cause you to bang off an angry email to the council and try and get out of it (or threaten not to pay it).

However, when your friendly Westpac banker decides to hike your home loan upwards of $500 a year — every year — you simply shrug your shoulders and cop it.

What are you going to do? They’re bastards. Right?

Actually, when you look beyond the screaming bank-bashing headlines and view the issue like an adult, Westpac’s hike makes sense.

After all, the Australian economy needs strong, profitable banks. Thankfully, we’ve got some of the strongest and most profitable in the world.

But we’ve also got some of the greediest banks in the world.

In the last 12 months the Big Four have pumped out around $30 billion in profits. They’ve achieved this record-breaking haul by doling out a record amount of debt, to the point that Aussie households are some of the most heavily indebted on the planet.

So, as a precaution, the government regulators are forcing the banks to put aside more capital for when the downturn comes. As they should.

Faced with this, the banks had a choice: they could either take their lumps and reduce their record profits … or shake down their customers for more money.

Shake, shake, shake.

Really, it was a no-brainer for Westpac (and the other three, who will surely follow suit and raise their rates). The bank has clearly done its numbers, and they’re convinced you’ll cop it on the chin.

The truth is, it’s much easier to bitch than it is to switch.

So let’s talk about that.

Westpac’s current standard variable rate sits at 5.68 per cent.

(Bear in mind that the only ‘standard’ thing about a standard variable rate is that no-one actually pays it. Think of it like the price scribbled on the windscreen in a used car yard: it’s marked up so it can be marked down.) So it’s more likely the average Westpac customer is paying around 4.78 per cent.

Now, it costs your bank about $1,000 in marketing costs to replace you (and about six times that amount if you come via a mortgage broker they pay kickbacks to).

That’s your negotiating power right there.

Now here’s how to use it.

On your way home from work tonight, ring Westpac (it works for every other bank too) and say this:

“I’m mad as hell with you guys. I’ve decided to move my business over to UBank, where they’re offering me a variable rate at 3.99 per cent. I know they don’t have an offset account, but I’m happy with that. I’ve completed the online application, so can you please tell me what steps I have to do to move across my mortgage?”

This is a bluff, of course.

Yet the bank’s sales team have strict targets (backed by incentives) that they have to meet — one of which is retaining profitable customers by giving them discounts to keep their business (hey, there’s always a chance of flogging you some insurance later, right?). Over the years I’ve had plenty of readers do this exact negotiation on the way home from work, and in almost every case they’ve reported back that they’ve saved themselves a huge amount of money.

So let’s talk about what it could mean for you: if you were to move from your $500,000 mortgage to NAB’s Jetstar-styled bank brand UBank (which I have absolutely no association with), you’d save yourself $83,913 in interest over the life of the loan. Bugger the parking ticket — that’s enough of a saving to buy you a brand spanking new Mazda 3, with 20 years’ worth of free petrol and parking!

But you won’t do it, will you?

Tread Your Own Path!

Reminder: I first wrote about this years ago and highlighted the low fees. Today there are better bank accounts on offer. How do I know? Because my readers constantly email me about them! So before you do anything, google the best accounts on offer now.

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The Riddle of the Next Rate Cut

The Reserve Bank is almost certain to cut rates once in the next 12 months.

Why?

Because they want to push down the Aussie dollar to help us be more competitive on the world stage (and obviously to mess with all the teenagers buying Taylor Swift merch from the US).

So if I look at my (cloudy) crystal ball, I can foresee the banks following Westpac’s lead, and raising rates in the next few weeks — just in time to pass on some of the Reserve Bank’s cut. In other words, just because the Reserve Bank may deliver a rate cut — that doesn’t mean it’s going to end up in your pocket.

So I know what you’re thinking: if the banks are increasing their rates, is now a good time to fix the home loan?

No.

Well, unless you’re on the absolute bones of your backside, in which case you should fix, and pray.

For everyone else, with rates at historical lows, you should treat today as a once-in-a-lifetime opportunity to pay down a huge amount of debt. And you limit your repayment options when you fix your rate. So stay variable, preferably with a low-cost home loan under 4 per cent.

A Letter to My Second-Born

You’re seven hours old.

As I sit here beside your crib, typing ever-so-quietly, sneaking a look every so often at your squished-up face (hey, it’s been a rough day), I can’t get over that you’re just so … new. Baby, you’ve got something that everyone wants a lot more of.

Time.

You see, most people run out of time.

I see it every day in my job: I try and convince young people about just how powerful their lives could be (they don’t believe me). I spend the rest of my day trying to help older people who are desperately trying to make up for lost time. They’re racing against the clock.

Yet here’s the thing: if you have time, you don’t have to race. You don’t need to nervously check stock prices every day. You don’t have financial pressure. You don’t need the stock market to “do something”. You don’t get suckered into get-rich-quick schemes. You don’t freak out when the market crashes.

You can make time work for you.

And, as your dad, it’s my job to show you how to do it.

So, I’m going to give you a bunch of money, a fancy car, and a Lear jet.

I’m joking! (Look how well that turned out for Justin Bieber.) My old man didn’t give me a silver spoon, and you won’t get one from me either. Instead, I’m going to give you a couple of life lessons that’ll boost your self-worth (and your net worth).

The Joy of Hard Work

Every week for over a decade, I’ve written this newspaper column.

They pay me the same money whether I bash something out in an hour, or a day.

Last week I ended up spending two days researching, interviewing and writing a column about how money can trap women into staying in violent relationships. I put my heart and soul into those 987 words.

And it paid off. That article was shared by thousands of people. But, more importantly, I received some incredibly personal, heartwarming, even tragic emails from women who needed to hear that message of hope: that they weren’t alone. That something could be done for them and their kids.

There’s a special joy in hard work. In doing a good job and delivering on your promises.

The Miracle of Compound Interest

Now, let’s talk about the simplest and safest way to create your fortune: compound interest.

As you’ll learn, there are many, many things your old man can’t do (Mum will fill you in later). But the one thing I have in my favour is the ability to steadfastly stick to a plan.

I don’t just know compound interest works — I’ve lived it.

And you can too.

With enough time, you can’t help but build enormous wealth. The truth is, your greatest investment weapon isn’t a high IQ, a knack for numbers, or fancy letters after your name: it’s time. And the sooner you start, the better. Take a look at this chart (see box), which tells the story of you and your mate.

Let’s say that at age 15 you start working on the family farm.

(You’ll get your own paddock, a ram and a ewe — sex education and financial literacy all rolled into one).

You work incredibly hard, scrape together $5,000 a year and invest it in a basic share fund. You reinvest your dividends for the next 10 years. Along the way you earn a nominal 10 per cent (for the past 30 years shares have actually returned 10.8 per cent a year … but not in a straight line).

And then you stop.

Your mate doesn’t start as early as you. He waits until he gets a real job — at age 25 — before he starts investing. Like you, he puts in $5,000 a year, but unlike you, he doesn’t stop. He keeps on investing every year until he’s 60 years old.

All up, you put in $50,000. He puts in $180,000.

So you’d think he’d have more than you, right?

Wrong. Even though you’ve only put in less than one-third the money, you end up with over 50 per cent more! (You get $2,709,000 — he gets $1,645,000).

That’s the power of compound interest. That’s the power of time.

This isn’t a new thing. It’s not hit and miss. It works every single time, and it’s the safest and surest way to become incredibly wealthy. So why don’t more people do it?

Well, because it’s kinda … boring.

Most people don’t even do the $5,000.

(People will ALWAYS find a reason to play it safe and do nothing. Those people will ALWAYS be broke).

Those who do invest will often check their returns after three years, feel they’re getting nowhere, and decide to ‘diversify’ into a Honda Jazz, a trip to Bali and an iPhone 98.

(The reality is that most people learn about compound interest in reverse — by buying stuff they don’t need, with money they don’t have, to impress people they don’t care about. Yet debt robs them of their financial independence. Debt makes things more expensive. Ultimately, debt is slavery).

Hardly anyone makes it to the seventh year, which is when the compounding snowball really starts.

Yet if you can stick with it, that’s when your life changes. The money starts pouring in gushes. That’s when you’ll crack the time code. And that’s when you can truly ‘tread your own path’.

Happy Birthday!

P.S And just think for a moment, what the returns would be if you didn’t stop at 25!

Tread Your Own Path!

How to buy a near new car at 60% off

Forty years ago, in a dusty car yard in Mildura, my father kicked the tyres of a Ford Falcon.

With his mutton-chop sideburns, flares, and Dennis Lillee-inspired bodyshirt, he cut a dashing figure as he strode around the lot, sizing up the vehicles.

He had two choices: Ford or Holden. (Yet really there was no choice — like his footy team, the decision was made at birth, and defended in the schoolyard).

“I’ll take the Falcon”, he said, shaking the hand of the dealer. It was time to upgrade: he’d recently got married and would soon be starting a family. So he was careful to ensure that his Falcon had the latest must-have safety feature: seat belts.

The car was as big as an inner-city studio apartment, and was finished in a gaudy gold which mimicked my mum’s tan at the time (hey, it was the 70s). It also came with metal ashtrays in the front and the back (for the kids?), and a little driver’s triangular vent which allowed him to have a fag without having to wind down the window. Bless.

But here’s the really interesting thing: a new Falcon today is actually more affordable that when my old man bought his (based on the number of weeks it would take the average wage earner, then and now, to buy one).

In fact cars are arguably the cheapest they’ve ever been.

Pffft.

Cheapest, schmeapest. I’m the Barefoot Investor, and I want it even cheaper.

So this week I’ve done the numbers and come up with a strategy that will show you how you can drive around in a near-new car that’s still under warranty, for next to nothing.

Yet before I do, let me explain how the car industry really works.

How Car Dealers Make their Money

The truth is that dealers make bugger all when they sell a brand new car. Let me give you an example:

In 1998, a brand new Falcon XR6 sold for $43,990 (with one lonely airbag).

In today’s dollars it would cost $70,590, according to the RBA’s inflation calculator.

However, you can buy a 2015 XR6 for just $35,990.

And here’s the thing, not only is it (relatively speaking) half the price, but it comes loaded with a reversing camera, six airbags, electronic stability control, a driver fatigue warning system, and front and back parking sensors. And if you crash, the car will autodial ‘000’ and feed the emergency services your GPS location.

It’s a bit tough for car dealers, though. I spoke recently to Josh Dowling, editor of Carsguide.com.au, who told me that, when there’s a sale (and when is it ever not?), the average Hyundai dealer makes just $450 profit on one of Australia’s top-selling cars, the i30. “They can’t even afford to throw in floormats or they’ll lose money”, says Josh.

So how do they make their money?

Two ways.

Firstly, it’s been said that Ford makes more money from providing car finance than it does from actual car sales. Secondly, the big profit margin for most dealers comes from parts and servicing. In fact, this can generate more than half of their profits.

That explains why, when I bought my second-hand Toyota, the dealer programmed the scheduled servicing straight into my GPS.

Fair dinkum, every three months, my satnav says: “It’s time for a service. Call Jessie at Kyneton Toyota: 03 5421 0210.”

And, like a nasty little rash, the longer I ignore it, the worse it gets. After a while my Toyota starts beeping and flashing at me: “Go to your dealer NOW” (and bring your credit card). Talk about Herbie Goes Bananas! (Or maybe KITT if you’re a Gen X, Siri if you’re Gen Y, or Uber if you’re a millennial).

How to Get That New Car Smell (Without Paying Through the Nose)

Back to that great deal I was telling you about.

There’s an old saying in the business: the biggest car accidents occur on the showroom floor. So this week I worked with Redbook (the leading car info and pricing site in Australia) to come up with a plan that will save you thousands of dollars and ensure you’re always driving around in a car that’s under warranty and is chock-full of the latest gadgets.

Let’s roll the numbers:

A brand new 2014 Falcon XR6 would have cost you $35,990.

Today, one year later, you can pick one up, in very good condition with 15,000 kilometres on the clock, for just $24,250 (a saving of $11,740).

It will still have two years to go on the manufacturer’s warranty and, just as importantly, fixed price servicing ($270 in the first year and $365 in the second year), which can save you a packet.

If you then drive the XR6 for another two years, and sell it at the end of the new car warranty, you’ll be able to sell it for $19,600, according to Redbook.

“Cars lose a massive amount of money in their first year, and then level off for the next couple”, Ross Booth, the global manager of Redbook, tells me.

So let’s recap: for the past two years you’ve driven around a nearly new car, enjoying the faint whiff of a new car smell and all the latest safety bells and whistles. It’s still covered by the manufacturer’s warranty, and (unlike a second-hand thirsty Merc) the servicing is just $635 for the two years (excluding tyres). So it’s cost you a total of $5,285, or $2,642 a year.

Like my dad, I understand the pull of a safe family car. The awesome thing is that in 2015 there’s never been a cheaper time to own one.

Tread Your Own Path!

What I Learned From Being A Dad

My wife has spent the past few weeks being poked, prodded and prepped as she gets ready to give birth to what looks like a bowling ball.

What did the doctor tell me to do?

Don’t forget to keep the tank full.

Don’t have too many beers at the footy this weekend in case you need to drive her to the hospital.

Don’t stress her out.

Cue the canned laughter. It’s like I’m on the set of Everybody Loves Raymond. Or maybe I’m like a doughnut-dunking Homer Simpson…you know, the stereotypical bumbling buffoon of a dad.

It’s not just Hollywood that pushes this parental propaganda. For decades, developmental psychologists have largely dismissed fathers as being irrelevant. (If this were the 70s I probably wouldn’t be allowed in the birth suite).

Yet dads are important, and this Father’s Day I want to acknowledge the hard work they do.

Most DIKs (Dads I Know) pride themselves on being the provider for their family. They haul their tired arse out of bed in the dark, and get going to work. They return home after dark, often to a series of full-scale catastrophes (the toy truck has run out of batteries, there’s a rebellion against eating vegies, the dishwasher hasn’t been stacked properly). They flop into bed, then wake up a few hours later with a snotty-nosed kid elbowing them in the face.

Then they back it up, and do it all over again.

There’s no time to press pause and ‘find themselves’. Not that it matters. Most DIKs have already found their purpose: looking after their family. It’s their job. It’s their duty. And besides, spending time with their kids pays huge, life-changing dividends. The truth is that your kid doesn’t care about the make of your car, the location of your house, or the size of your pay packet. They just want you around.

Case in point: My dad isn’t an educated man – but he wanted me to be one. That’s why every Sunday morning we’d sit down and watch Terry McCrann on Business Sunday, and then read the business pages…that I now write for.

I was lucky enough to grow up in a small business family, so I remember my dad always being around, or more to the point, I was always around him. Today, my son Louie runs around the Barefoot Investor office, and our farm. Even though he’s just a little boy, I’m intentionally showing him the joy of work, and giving him the confidence that he can do stuff (and stuff he does).

“We’ve got a job to do!” he says excitedly.

At which point chooks go flying. Betty the sheepdog gets manhandled. And we invariably end up puttering around the paddock in the exact replica of his prized plastic toy John Deere tractor. (Coincidence? … sure).

Fathers matter a whole lot, and they touch every aspect of their kids’ lives — by giving them confidence.

So today I’m doing a shoutout to all the dads. It’s a hard and often underappreciated job that you do.

By being a good dad, you’re having a huge impact on the world. Just you wait and see.

Tread Your Own Path!

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The Ultimate Father’s Day Present

We’ve now replaced everything we lost when our house burnt to the ground.

Well, almost everything.

You see my wife’s father died a few years before I met her. And in the fire we lost some of the last remaining photos of him, the letters he’d written, and the paintings he cherished.

How does my wife explain who her father was to me?

How does she explain who grandpa was to our son?

Her physical reminders are now lost in the ashes.

So if you’re lucky enough to have your father still with you, here’s how you can give him the ultimate Father’s Day present. Today, whip out your phone, hit ‘record’, and ask your dad the following questions:

1. How did you meet Mum?

2. What advice can you share with me about money, life and happiness?

3. What does being a dad mean to you?

4. What are you most proud of?

5. How would you like to be remembered?

This is not for Facebook or Snapchat. It’s for you and your family’s legacy. One day, it’s all you’ll have left of him. And you’ll treasure it.

Today, I’m going to explain how you can make a lot of money

Were you “greedy when other people were fearful” (as Warren Buffett would say) when the market tanked this week?

If you managed to scoop up some bargains you were no doubt patting yourself on the back for the rest of the week as Wall Street staged one of its strongest one-day rallies … ever.

Winning like Warren, right?

Maybe. However, if you look at the value of the US share market by the size of the economy (the indicator that Buffett calls “probably the single best measure of the stock market at any one time”), it’s at almost twice the long-term average.

In other words, if Buffett and history are our guide, those ‘cheap’ shares you bought this week are still bloody expensive. Yet that shouldn’t be a surprise when you look at what’s happened over the past decade …

To ward off a worldwide economic cardiac arrest, the US Federal Reserve created three trillion dollars out of thin air and injected it directly into the banking system. Then they dropped rates to emergency levels — zero per cent — and left them there for seven years.

Now the US economy is looking stronger, the patient will soon have to be weaned off the drugs — by increasing interest rates. And when that happens, it’ll likely be brutal for investors.

That’s a complete guess on my part, of course, because the truth is that the world’s central bankers are currently conducting a financial experiment that they’ve modelled on an untested academic theory. And just like my back-of-the-shelter-sheds science experiment with a Mentos and a Coke, it could all go horribly wrong.

Scared? Good.

But you needn’t worry. Let me show how you can make money, regardless of what the market does.

From Walpeup to Wall Street

Let me tell you about my Uncle Bob, who’s a farmer in the Mallee town of Walpeup. His family has been farming the same hostile patch of dirt since settlement.

A few years ago Bob began painstakingly restoring the original homestead that his father lived in as a boy. Bob showed me the fully restored shack when I was last back home.

“What’s this?” I asked, pointing to a hole in the ground.

“That’s a makeshift cellar …”

“Your dad drank wine?”, I asked.

“No. That’s where they buried the meat … to keep it cool. Remember, there was no electricity.”

Walpeup is thirty clicks from the small town of Ouyen. Today, a 20-minute air-conditioned drive, but in Bob’s dad’s day it was a death sentence if you were unlucky enough to be bitten by a snake. There were no cars, and therefore no roads. Just a horse and a buggy, and hours of trudging along a track. (And even if you made it to the hospital, what could they do?)

Still, as Bob was explaining all this, I was having my own problems. I was trying to take a selfie at the shack and upload it to Facey, but the network was a total friggin’ disaster … seriously I was struggling to get even two bars on my iPhone! Two generations on, my biggest problem was that my phone couldn’t connect fast enough to a satellite somewhere so I could temporarily negate my narcissism.

There’s the rub: you don’t get a true understanding of just how amazing life is right now — just how far we’ve come in such a relatively short period of time — unless you have your own Uncle Bob or unless you’re a lifelong, long-term investor.

Wharton finance professor Jeremy Siegel worked out that one US dollar invested in the stock market back in 1802 would have grown to $930,550 by 2014. Staggering. In that time we went from horses and buggies to walking on the moon (and that phone in your pocket has more power than the one that sent Apollo XI into space).

Yet throughout that time there have been plenty of very sensible reasons not to be an investor: recessions, depressions, two world wars, plagues that have wiped out millions of people … the Backstreet Boys.

Okay, so maybe 212 years is a little too long term.

So what about if you’d invested $10,000 in 1980? It would have grown to be worth roughly $370,000 today (and be paying you roughly $18,500 a year in dividends).

Again, throughout this time there have been plenty of pundits suggesting you ‘sell and stay away’: the 1987 Crash (now that was a real crash, where 23 per cent of the market’s value was wiped out in a single day), the Tech Wreck, the ‘Asian Contagion’, the Global Financial Crisis … and Justin Bieber.

Really, the stock market is a barometer of our standard of living. The two go hand in hand — though it’s difficult to see the progress happening if you’re checking your portfolio on a daily (or even yearly) basis.

How to Boost Your Returns (Even When the Market Tanks)

Okay so, that’s the big picture.

What can you do today?

Well, obviously it depends on your age.

If you’re young, besides stapling this column to your computer, you should make your investing automatic: set aside a regular amount of money each month and invest it, whether markets are going up, down or sideways. With this strategy, you’ll buy more shares when the market is low, and less when it’s high. Simple.

If you’re heading towards retirement you should aim to have five years of living expenses in cash and fixed-interest deposits. This will enable you to ride out the next downturn, which on the balance of probabilities, is likely to come sooner rather than later.

Regardless of your age, you need to ensure that you aren’t getting ripped off.

Paying more than 1 per cent of your nest egg to a fund manager is cra-cra, and not in a good way. The biggest beneficiaries of the long-term compounding returns are money managers — collectively they rip $21 billion out in fees each year, despite repeated studies showing the majority of them fail to add any value.

And it’s an equal opportunity rort. Proportionally, retirees pay most of the fees (because their balance is highest), while young people are a gravy train for decades to come. Lowering your costs is one concrete thing you can do to automatically boost your returns, today.

Tread Your Own Path!

How to turn $1 into $930,550

Faults in the Vault

Peter was in strife with his wife.

I knew this because she emailed me for advice using the headline ‘My Husband Is an Idiot’.

A few years ago, Peter, in his mid-forties, opened a Self Managed Super Fund (SMSF) with his wife, and invested the lot in gold. Today they’ve lost about $35,000, and his wife — a nurse, who dutifully transferred out of a low-cost industry fund — is livid.

So I called them up, and managed to speak to them together.

This week the gold price touched six year lows. Peter, however, was having none of it: “The US Federal Reserve is printing too many dollars. The entire financial system is one giant Ponzi scheme, built on the back of fiat [paper] money. When it collapses, people will revert back to the one true store of wealth: gold.”

“He subscribes to this stupid email newsletter that talks endlessly about impending economic Armageddon …”, says his wife.

“… and they correctly picked the Global Financial Crisis”, Peter interjects.

Being the marital umpire, I gave Peter a penalty: a quick search of the interwebs suggested that his newsletter gurus had been warning about a crash for years (and, just like a busted clock, they were bound to be right — eventually).

Should You Buy Gold?

When you see a gold bar in person, it’s easy to see why it’s transfixed people throughout time — and I’ve seen more gold in the flesh than most people.

In 2012, I travelled 24 metres below the streets of Manhattan and eyeballed what is reportedly the world’s largest storehouse of gold: the New York Federal Reserve’s vault — home to 530,000 gold bars.

Throughout history in times of economic upheaval, gold has been the storehouse of wealth

… yet the truth is, it’s also been a terrible investment.

Famed Wharton finance Professor Jeremy Siegel keeps long-term (inflation-adjusted) returns of various asset classes, dating all the way back to January 1802.

He found that if you put one US dollar under your bed in 1802, it’s purchasing power would have been eroded to just 5 cents by December 2013.

What about if you’d invested that dollar in gold?

The Professor says it would be worth $3.21 today.

What if you’d invested that dollar into the share market?

It would have compounded to a staggering $930,550.

It makes sense when you think about it. Other than looking pretty, gold doesn’t actually produce anything. You can’t rent it out, and it pays no dividend. There is no compounding.

The only way you can make money is by getting someone to pay more for it than you did.Stocks, on the other hand, are a collection of the businesses that compete to sell us our Model T Fords, our iPhones and our Big Macs. And over the past 200 years, it’s been a wildly successful ride: we’ve gone from horses and carts, to flying through the air, to walking on the moon.

In his book Abundance, Peter Diamandis reveals that in the past century the average lifespan has doubled, while the average income has tripled. At the same time, food is 10 times cheaper, electricity is 20 times cheaper, transport is 100 times cheaper, and communications are 1,000 times cheaper.

And Moore’s law — that computing power doubles every 18 months — is bringing us advancements like a supercomputer in our pockets (connected to billions of people), 3-D printing (which makes violins and blood vessels), and cars that drive themselves. And remember, this has all happened against a backdrop of world wars, recessions, depressions, and Right Said Fred.

I don’t know about you, but I get the feeling that this is truly an exciting time to be alive.

How to Go For Gold

The bottom line is that you really don’t want to sit on the sidelines as society advances: as Siegal’s research shows, over the very (very) long-term, there’s a fortune to be made. —

How?

Well, not by trying pick the next Facebook, Google or Apple.

History shows that it’s very difficult to pick game-changing businesses out of the gates.

Besides, some of the most innovative companies that push humanity forward aren’t the best investments — case in point, the airline industry.

Yet there is a cheap, simple no-brainer way to ride the coming revolution: just buy a low-cost, tax-efficient index fund that tracks the 500 largest companies in America — otherwise known as the S&P 500.

As new businesses emerge and grow in value, they’re added to the portfolio (read: Facebook), in the same way that as existing stocks drop off (read: Kodak), they’re deleted.

A few years ago, Warren Buffett (who famously views gold as a ‘stupid investment’), announced in his will that, on his death, 90 per cent of his wealth is to be invested in an S&P 500 index fund for his wife.

Happy wife, happy life, Peter.

Tread Your Own Path!

Here’s what to do if you’re just starting out

Let me tell you about one of the best letters I’ve received this year.

(Actually, it was a Facebook post — not even my grandmother writes letters these days.)

It was from a young bloke in his twenties. He’d uploaded a photo of himself sitting in a hospital chair, holding his brand new baby.

He looked absolutely terrified.

It has a good ending though. Despite the fact that he probably hadn’t yet worked out which way a nappy went on, he was confident about his family’s financial future, thanks to the advice he’d gleaned from being a Barefooter

That got me thinking — there’s a lot of young people in his shoes. So why not devote an entire column them? Let’s do it.

Love Me Two Times

Hello Barefoot Investor,

My 12-year-old son has recently lost his father and come into just over 200k. I have to invest the money in trust for him, and I am looking at turning this into a lot more by the time he is 18. As interest rates are low and the stock market is volatile, I am considering purchasing a block of land and changing the title to his name when he is 18. Would land or property give him the best return, or should I consider another source of investment?

Kind regards, his mum

Hey Mum,

Let’s back up a bit before I get into the investment meat and potatoes.

This money is as much about you as it is about your son. You’re a single parent now, so you’re operating without the financial safety net. The best (financial) thing you can do for your son is to learn about money yourself — starting with where to invest the $200k.

Trust me, you don’t want to sink the money into a block of land. You won’t get any income from it, and the maintenance costs will be a drain on his funds over the years.

Instead, I’d like to see you put the money into an insurance bond. Don’t get confused with the lingo — an insurance bond is more like a standard managed share fund, but with some very attractive features.

First, your son can hold it in his name, and be taxed at 30 cents in the dollar, rather than being hit with kids’ penalty tax of 66 cents in the dollar. Second, you can nominate a transfer age, and not pay any capital gains tax (CGT) after ten years.

That’s all great, but here’s your biggest risk: giving your son the dough when he turns 18. I’ve repeatedly seen the damage that sudden, unearned wealth does to a young people who don’t have the maturity to handle it. (And that includes many young AFL footballers I’ve advised).

If you put the $200k into a bond and choose a growth option, it could be worth around $300k in six years’ time (in today’s dollars, adjusted for inflation). Though let’s be honest, it could also be worth a lot less if there’s a crash in the next few years.

That’s why I’d suggest you stretch it out for 13 years. Give him the money when he’s 25, at which time he might well have around $500,000 (again, in today’s dollars — tax free).

My entire life changed when my old man sat me on his knee and taught me about shares. Just because your son’s father has passed, it doesn’t mean he can’t have the same impact.

Too Many Conflicts

Hi Scott,

I’m a long-time follower of yours and a big fan. The wife and I have moved in with the in-laws to save for our first home, but we have a huge $35k debt. We plan to save half our income and pay the loan as much as possible, but inside I feel it’s pointless saving with that amount of debt (with interest). Should we go all guns on the debt and then start to save?

Thanks, Rory

Hey Rory,

Yes, attack the debt first and start saving for your home with a clean slate. It’s the easiest way to make 18 per cent on your money, tax-free.

It sounds like you could be in for a long innings. That being the case, I’d really think through the prospect of living with your out-laws. And when I say ‘think through’ I really mean that I reckon you’re completely nuts.

I wouldn’t want to live under another man’s roof — too many conflicts. You’re a married man. If you want to save extra money, do it by working two (or three) jobs — but keep your independence.

Tread Your Own Path!

Checking your insurance (and other useful tips from my experiences this week)

NOTE: While much of the information below is still relevant, there’s a more recent version of this post which you can find here.

After losing our home to the Victorian bush fires, I have spent a huge amount of time this week sitting at my desk sorting through my own financial situation.

And with a calculator already in hand, I decided it was a good time to turn my attention to fighting the financial fires that often pop-up in my Barefoot mailbag:

Were you insured?

Dear Scott,

For years my wife and I read your column religiously each week.

We were heartbroken for you when we learned that you lost not only your home, but also all your possessions.

I trust given that you’re the Barefoot Investor, that you had adequate insurance?

Sincerely, Margo and Gary.

Hi guys,

Yes, we were insured.

Being the sort of Barefoot bloke that I am, a few weeks before the fire I upgraded our insurance to include big stuff like my wife’s wedding ring.

Still, it’s generally only when your home goes up in flames that you stop and realise how much stuff you accumulate over the years – and how expensive all that stuff is.

If we had to replace everything we had, I’m quite confident that we’d come up short. That’s okay, because we don’t plan on replacing a lot of it – and we have a very well-stocked Mojo account exactly for these situations.

People have asked me what they can do for us, and here is it: over the weekend, grab yourself your favourite beverage. Then, slowly walk around your home, from room to room, and in your head – quickly, and roughly – add up everything you see (open your cupboards too): books, toothbrushes, televisions – the entire enchilada.

Then call your insurance company and make sure you’re covered for roughly that amount. While you’re on the phone check what the sum value your home is insured for as well. Until last weekend, I never thought it would happen to us either.

The Two-Fingered Salute

Hi Scott,

I’m about two months away from paying out a part 9 debt agreement, and having it removed from my credit file.

I am 33, I have no debts, I have no defaults on my credit file and I earn around $40,000 a year in a permanent part-time job that I have been in for 15 months.

I want to apply for a $5000 personal loan. I do not own any assets of value. Will my application be declined and what do I need to do to improved chances or am I destined to always pay for having an act of bankruptcy on my file?

Cheers, Brenda.

Hi Brenda,

Well done for fighting your way out of debt. The only problem is that you still sound like a debt-drunk: you may have successfully completed the 12-steps – but you’re still craving.

Here’s the truth: you don’t need personal credit from a bank (or anyone else).

Up until relatively recently, people survived just fine without credit cards, car loans or a David Jones card. Personal credit is a relatively modern invention, and one that makes the bank and retailers billions (which is why you’ll have no problem getting a $5000 loan).

Brenda, it’s time to give these bastards the two-finger salute. After all, you’ve played their game and lost. Now it’s time to win. Make a vow to never, ever, touch a credit card or personal loan again.

Go forward confidently with cash in your back pocket, and you’ll never feel vulnerable again.

Own your own ATM?

Hi Scott,

I recently read about an investment where you own your own ATM. Basically you pay for an ATM and they pay the running fees and guarantee you a minimum 20% return each year for the ten year contract length.

There’s always a catch. So far the main issue I see is that you have to sell the ATM back to them for 10% of the original cost at the end of the contract.

I believe if you look at what you end up with and what you began with it equates to an annual return of approximately 7.5% not 20%, however that’s still a decent return. What do you think?

Cheers, Tommy

Hey Tommy,

Thank you for sending this through, I’m in need of a good laugh, and your question did the trick!

First off, anyone who takes out an ad that promises punters 20% returns have about as much integrity as a Craig Thomson work expenses form.

Really it’s a dead giveaway that slimy salespeople are involved – and, as you correctly discovered, ‘what the headline giveth, the fine print taketh away’.

Second, the (bogus) 20% return is guaranteed – but by who? A guarantee is only as good as the group behind it – just ask the Port Adelaide AFL footy club.

A few years ago their major sponsor was a mob called My ATM. Their business involved taking out ads that promised punters 20% returns if they stumped up $14,000 to buy their ATMs (sound familiar?).

They went bust, reportedly owing the club $350,000 in unpaid sponsorship.

My husband will soon be laid off, what should we do?

Hi Scott,

My hubby works at Alcoa’s Port Henry plant and will lose his job as part of the operation’s closure by the end of the year.

We’re a one-income family with two kids and were wondering how do we deal with the payout? We have no mortgage and would appreciate any advice you have.

Thanks, Lisa.

Hi Lisa,

There are three things I want you to do.

First, make sure you have six months of family living expenses in a high interest online account. Because you’re husband is receiving a payout, he won’t automatically be able to register for Newstart.

Second, grab him a copy of the book, Who moved my cheese?. It’s a cheesy title, but a quick read. Losing your job can really hit you between the eyes – especially when you’re the main breadwinner.

His golden handshake will get a slight shakedown from Canberra. Part of his payout he gets at the end of the year will be tax free ($9246 as a base, and then $4624 for each year he’s worked at the company), and the rest will be taxed at his marginal rate, like any other earned income.

Depending on how long he’s worked at the company, it could result in a big tax bill. So the third and final thing I want you to do, is look at chipping some money into super (just watch your $25,000 limit).

And finally on a personal note, I’d like to thank all the lovely, loyal readers who have taken the time to send me hundreds of supportive emails, bottles of wine, and a mountain of clothes for my baby son – who I’m pretty sure has a bigger wardrobe today than he had last week.

Tread you own path, thanks for your support and have a great and safe weekend.

Help! I’m paying too much tax!

Hi Scott,

My husband and I both work as senior marketing executives and we are lucky to be earning a combined $350,000 income. I know it sounds good, but we live in Sydney, and have a $780,000 mortgage. Our biggest expense is the tax we pay!

I have been reading a rival financial advisor, who always seems to suggest that people borrow to invest in shares, though I’ve noticed that’s not something you recommend. Can you help us pay less tax?

Best,

Heather.

Hi Heather,

The world’s smallest violin is playing for you right now. You’re biggest expense isn’t tax – you’re a citizen of this country – and therefore unless you want to live in Zimbabwe, you’re legally obliged to pay tax based on your assessable income.

The truth is there’s a limit to what you can do to save on tax – especially when you’re an employee. The most obvious strategy is for you to both max out your superannuation contributions.

If I were you I’d focus on knocking out your mortgage as quickly as possible, and then look to invest your cash flow – in good quality businesses.

Finally, smart, wealthy people have make dumb costly decisions all in the name of saving money on tax.

So watch out for anyone touting tax ‘solutions’ that will see you spend a dollar just to get less than half of it back.

Property versus Shares

Despite Australians being among the biggest share investors in the world, I know that the thought of putting your money into the market scares the pants off many of you.

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“I’m going to sell my apartment”, announced my girlfriend.

She may as well have been asking me to pass the butter, she was so cool, calm and collected – like a female Donald Trump (but with much, much more hair).

Her rationale?

She’d bought the apartment as a young single woman a few years ago. Thanks to the property boom she’ll trouser close to a hundred grand, and she hated the hassle of being a landlord.

Besides, she now lives in sin with me and my golden retriever – and by all accounts we’re pretty decent landlords.

Simple right?

Enter the parental peanut gallery: “Why would you want to sell – there’s nothing safer than bricks and mortar!” And: “You do know that Alan Kohler was on the ABC news last night saying that property had done better than shares!”

I knew where this was going: I was the ‘big bad shares guy’ who had convinced this smart, independent woman to sell her hard-won asset, and in a slowing market no less. Though it wasn’t true, I was chuffed that both sets of parents believed I held such sway over my girlfriend.

Shares vs Property

The shares vs property debate is one of those mortal battles – Ford vs Holden, Melbourne vs Sydney, Kochie vs Karl. Each has its diehards with their own set of statistics that prove that one is a better bet than the other.

Both arguments are pushed by vested interests: money managers rake in billions a year by taking a tiny slither of your investment and making it theirs (via asset-based fees), and there’s an entire industry of agents, banks, politicians and retailers that feed off a strong property market.

Share spruikers maintain that owning a business is more profitable than owning the shop (which explains why most banks don’t own the physical branches). Property pushers promote everyday millionaire landlords who’ve gotten rich by simply buying and holding homes.

But before we roll up your sleeves for some financial fisticuffs, let’s take a look at a report from ANZ Bank this week that pours cold water on both sides of the battle.

Property Wins

The ANZ report, Asset Returns: Past, Present and Future found that the highest returns over the past 24 years came from owning your own home.

The report suggested that on average owning a home generated an annual return of 12 per cent, even with costs and taxes factored in. Homes trumped both investment properties at 9.6 per cent and shares at 8.9 per cent.

No surprises there – I’ve always argued that owning your own home is the ultimate investment – but I wasn’t so sure about their calculations, especially when it comes to the tax breaks investments receive. So I called up one of the authors of the report, the head of property research for ANZ, Paul Braddick, for a chat.

He was refreshingly frank.

Barefoot: “Your report found that owning your own home comes out in front financially. Is this because you can sell it without being hit with capital gains tax?”

Braddick: “Well, that and the deregulation of the finance industry, which has facilitated a growth in prices.”

Barefoot: “Err … is that banker-speak for ‘over the last 20 years we’ve allowed homeowners to borrow a lot more dough?’”

Braddick: “Well, yes.”

What has fuelled housing priced over the last 20-plus years is a halving of interest rates – from around 14 per cent to 7 per cent. So while the cost of debt was falling, the bankers’ enthusiasm to lend increased.

The big winners were the Baby Boomers, who elbowed young first homebuyers out of the way at auctions, using the equity in their homes like an ATM machine. But there’s only one problem – for many Boomers the machine’s starting to run out of cash.

Shares Win

So while the ANZ report sung the praises of property over the last two decades, it’s not so hopeful for the coming decade. In fact it forecasts that shares are going to be the asset class to invest in over the next 10 years.

Despite Australians being among the biggest share investors in the world, I know that the thought of putting your money into the market scares the pants off many of you.

Each night when you get off work (and often in your lunch break) you can see exactly how much your share portfolio is worth. Sometimes that’s a pleasant experience – though not lately.

But it’s really no different than if you auctioned your home every single day – you’d be amazed at the differing daily prices, but wouldn’t be too fussed if you weren’t planning on selling that day.

Having easy access to your money is a good thing: you can’t sell off your second bedroom if you want to go to Bali at Christmas, but with shares you can – plus it’ll cost you the price of a pizza (in brokerage fees) and the dough will be in your bank account within a few days.

But what about the tax benefits of property?

While negative gearing is a socially acceptable way of saying ‘I’m losing money’, the tax breaks for both property and shares are, when all is said and done, equally generous, and for that matter equally ridiculous. (How we could have two government tax reviews yet still favour borrowing and speculating over getting out of bed and working is a testament to the power of politics.)

You Win

The ANZ report reinforces that owning your own home is a bloody good idea (so long as your can comfortably afford it and you aggressively work on paying down your mortgage).

But it also shows that it pays not to have all your eggs in the one basket. Besides sprucing up your super, it’s a smart strategy to start a small share portfolio – if for no other reason than to get your head around being a part owner of a successful business.

Or at least that’s what I’m telling my newly cashed up girlfriend.

Tread Your Own Path!

Protect Your Most Important Assets: Your Family

Your income is your most powerful financial asset. That’s why you should consider income protection to cover you if you can’t work for a while…

NOTE: While much of the information below is still relevant, there’s a more recent version of this post which you can find here.

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“How dare you!”

An angry caller on my radio show was chewing me out for some bad advice I’d given to the previous caller – a housewife in her mid-fifties who didn’t know how much her husband earned, how much debt they were in, or how much money they had in savings.

So what was my ‘bad advice’?

Well, I suggested she sit down with her husband and have him paint their complete financial picture. I explained that it was important because (a) odds are she’ll outlive him, (b) marriage is a team effort, and (c) they’re both jointly and severally liable for their obligations.

Caller: “The only thing you’re liable to do is give that poor chap a heart attack! Who are you to be filling his wife’s head with those questions – you’re putting their marriage in danger!”

Barefoot: “Nope. That’s what the husband is doing by treating his wife like a monetary mushroom (kept in the dark and fed fertilizer). And if you’re sticking up for him, you’re no better than Fred Flintstone expecting Wilma to come running when he rings a bell.”

Man Up

Generally speaking, men and women are wired differently when it comes to money. Men are more prone to risk-taking, whereas women value security. So it may sound horribly old fashioned, but I believe it’s a bloke’s job to man up and provide that sense of security for his partner.

Don’t misunderstand me. I didn’t say he has to be the breadwinner (I’ve got as much respect as the next bloke for happy-handbag-holder Tim Mathieson).

That’s not the issue. The real danger this poor woman faces is the same as for 95 per cent of Aussie families: she would be financially stuffed if her partner didn’t make it home from work tonight.

This is an uncomfortable subject. That’s why it’s been on my ‘backburner’ of column ideas for at least 12 months. But over the past couple of weeks I’ve been studying crisis financial counseling – and one of the most shocking things I’ve learned is that widows aren’t always little old ladies with blue hair. They come in all shapes, sizes and ages.

So it’s time that I man up and give you a simple, step-by-step guide to protecting your most important assets.

Have the Chat

Grab a piece of paper and draw a line down the middle. On one side write down what you own, and on the other what you owe.

Together, discuss the following questions:

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The Three Questions

Question 1

If one of you weren’t able to work for a couple of months, how would you continue to pay your debts and other living expenses?

Question 2

What would happen if one of you didn’t make it home from work tonight?

Question 3

How would you look after the kids?

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Don’t bury your head in the sand. The bean counters tell us that, before you before you turn 65, there’s a one in three chance you’ll need to be off work for three months because of an illness or injury. And, tragically, every single day 18 Aussie families lose a parent, according to the Lifewise/NATSEM Underinsurance Report. That’s why you need insurance.

Make the Call

Now don’t mistake me for a sleazy insurance salesman, but there’s a simple (financial) solution to these tough questions, and I’m going to show you how you can pay for it without opening your wallet. And all with one telephone call.

I’m guessing you’ve already got your basic insurances covered. If you’ve got a house, you need home insurance. If you’ve got a car, you need car insurance. If you’re Jennifer Lopez, you need butt insurance. And if you’ve got a body, you need health insurance.

Now for the advanced level.

Your income is your most powerful financial asset. That’s why you can get income protection to cover you if you can’t work for a while (although it generally won’t cover you if you become unemployed – that’s what the dole’s for).

Next you should look at the aptly named total permanent disability (TPD) insurance. This will give you a lump sum payout to pay off the mortgage or hospital expenses if you incur a disability that prevents you from ever working again.

And finally you should look at life cover, which really should be called death cover, because you only get it if you croak (well, your family gets it actually – that’s the idea).

Now go back to your piece of paper. You generally need enough life cover to pay off all your debts, and provide another income at least until the kids are off your hands. That’s why both parents need to be adequately insured (rule of thumb: get coverage for 10 times your current annual salary), because the surviving partner will need to take time off work to raise the kids.

The good news is that in most cases you can buy these three insurance policies by making a simple phone call your superannuation provider. (On doing so you may find that you’re already covered for at least life cover and TPD, but in most cases not enough.)

The advantage of buying your insurance through your super fund is that you’re paying with pre-tax dollars, and your fund can get a better rate than you can. You may want to want to add a few extra shekels to your super to cover the extra insurance, but I reckon it’s worth it.

(Oh, and another trick to reducing your insurance costs is to have a strong savings strategy in place. That way you can increase your waiting period, e.g. 90 days rather than 30, for when you can claim, and this can significantly lower your premium.)

However — and this is important — you should always seek independent financial advice before acting, especially when it comes to insurance. This is one area where it’s worth paying for it to be done right. 

It’ll never happen to me!

One of the most annoying things in my life is that I look no different to that strapping young lad who won the Bendigo Fun Run in 1992. I haven’t aged a day – well, in my eyes anyway.

My receding hairline and protruding potbelly would say otherwise. Fact is, we’re all getting older and the one thing that I will be honest about is the need to look after my most important assets.

Whether you’re Wilma, Fred, Barney or Betty, carving out an hour of your own time to do the same will show that you’re an emotionally intelligent person who’s willing to look after the ones you love.

Tread Your Own Path!

Pay Off the House or Invest in Shares?

One of the most commonly asked questions I get is whether to pay off the house or invest in shares. Here is my advice.

Dear Barefoot,I’m 38, married, with two kids. We bought our home six years ago and owe about $330,000 on it, and it’s worth around $475,000. I’ve just got a promotion at work, so I was thinking I’d like to invest in either some shares or maybe even an investment property to save on tax. Although my wife isn’t too keen, we thought we’d ask you. What’s your advice?

Tim, Sydney

Hi Tim,

I get this questions a lot – and mostly from men.

Making money motivates most blokes, whereas most women are driven by security (which explains why a former scammer once told me his golden rule for manipulating people was ‘don’t pitch the bitch’).

Women therefore tend to be much more levelheaded, and prefer to have a good handle on their most important asset – the family home – before chasing other investments.

How do you get around this?

Well, you could bust out a whiteboard and explain to your wife that shares historically outperform all other asset classes, and that a conservatively geared share portfolio (which I have built throughout my working life), or perhaps even an investment property would be an asset base worth diversifying into over the long term.

But life doesn’t happen on charts.

If you’re paying 7.5 per cent on your home loan, you’ll need to generate a better return than that to make it worth your while. Yes, there are tax benefits from negatively gearing, but you should never invest solely for tax benefits. And you need to keep your eye on the after-tax return – 7.5 per cent (guaranteed) is hard to come by – especially in residential property. (That’s why I’m a big fan of fully franked, dividend paying, shares).

Here’s what I’d do:

First, I’d talk to your wife and get her opinion (happy wife, happy life).

Second, I’d make sure I had at least three months of living expenses stashed away in a high-interest online savings account or a mortgage offset account. Why so much? Well, we are truly lucky to live in the best country on earth and we pay a hefty price for it. Research out this week from The Economist shows Australia is one of the most expensive places to live. Having some Mojo money is a smart strategy for sound sleep – and isn’t that money’s greatest gift?

Third, I would absolutely invest some of your bonus (after you’ve whacked a bit off your mortgage), by salary sacrificing a set amount into a low-cost superannuation fund that has a portfolio of quality Australian and international shares. Your super contributions are taxed at just 15 per cent, as are your earnings, and capital gains are taxed at 10 per cent (just watch your contribution caps).

Paying down your debts, building up your super, and having a buffer for tough times makes such good sense that it’s exactly how I manage my own money – and I’m not even married (yet).

Tread Your Own Path!

Scott

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