Many people feel helpless when it comes to managing their money. They’re consumed by debt or worry that they'll never be financially secure.
In The Barefoot Investor, Scott Pape offers guidance and a 10-step plan for how to manage your money so that you eliminate debt and build wealth. Though the plan is written for an Australian audience, the basic principles are universally applicable. Pape estimates that in just one year of following the steps in this book, you’ll have your finances in order, and in six years, you’ll have some financial wins under your belt.
For the next five weeks, schedule one night per week as a date night with your spouse to work toward financial improvement. If you’re single, work with a family member or friend or go it alone. For each date, go out to eat at a restaurant—don’t worry about the cost because the steps you’re taking will save you thousands of dollars over time. After the first five weeks, select just one night per month for date night.
On this first date night, you’ll open new bank accounts that allow you to avoid banking fees and start directing money toward five different purposes:
You’ll learn more about the purpose of each of these accounts in Step 2.
On this date, you’ll ensure you’re regularly directing money into a “super” account (Australia’s retirement savings plan) or an equivalent U.S. employer-sponsored plan that isn’t skimming off a large percentage of your deposits.
The Australian government encourages saving for retirement by having employers divert 9.5 percent of an employee’s wages toward their super account. Employees are typically offered a specific super account when they’re hired; U.S. employers offer similar retirement savings plans such as 401(k)s. But if you’re like most employees, you probably haven’t read the fine print—however, you should because you may be losing significant money to fees.
Opt for a low-cost super or similar retirement savings account. For example, an account that charges 0.02 percent annually versus 1 percent annually can save Australians $226,484 (AUD) over 30 years.
Investigate the annual fee on super(s) by googling the name of the super and “PDS,” or “Product Disclosure Statement.” If you’re being charged more than 0.85 percent per year, choose another super to invest in.
On this date, you’ll scrutinize your insurance choices and take action to support your financial well-being and your family’s.
Here are two pieces of advice to follow when choosing and managing insurance:
Australians can purchase insurance for income protection, life, and disability through their super fund. Parents with young children should aim to insure 10 to 12 times their annual income. In Australia, you can do this by calling your super fund and asking for three pieces of information:
In this step, you’ll learn the purpose of each bank account you created in Step 1 and what to do on Date Night #4: Direct money from your take-home pay into each account. Pape calls this the “serviette” or napkin plan because it’s simple enough to write on a paper napkin you might encounter on the date.
Under the napkin plan, you’ll put money from your take-home pay into three main categories:
This category consists of money that you’ll spend on a daily basis, as well as savings you’ll put away for longer-term purchases. Each month, you’ll have your take-home pay deposited to your Day-to-Day account. Then, you’ll redirect some of it into your other accounts.
In general, spend no more than 60 percent of your take-home pay on essentials, like bills, shelter, food, transportation, and insurance. This will leave you 40 percent to put toward other purposes.
Here’s how it’ll work—set up your Day-to-Day account to automatically direct:
This category consists of your long-term savings: your money for your super, as well as any investments you own, like rental properties or shares. In Steps 6 and 9, you’ll learn more about how to manage this category of savings.
Backstop is a bank account that holds money separately from the Blow and Grow categories. It is also its own spending category (like Blow and Grow). In Step 1, you created your Backstop account and deposited $2,000 in it, but if you didn’t, find some creative ways to get that money in there, like working overtime or selling some belongings.
In Step 3, you’ll learn how to systematically eliminate your debts, freeing yourself to spend on other things.
Having debt can take an emotional toll. You might feel as though you’ll never be good with money, and climbing out of debt can feel impossible. To regain self-esteem and financial security, Pape advocates systematically paying off your debts and getting rid of your credit cards.
Follow these steps to pay off your debts one by one:
To fill each of your spending buckets—Blow, Grow, and Backstop—quickly, work to increase your income. In this step, you’ll learn three strategies to approach this.
Acing your performance review could help you get a raise by showing you have the skills to achieve results. To ace your performance review, take on work you haven’t done before and deliver on it. Set goals for yourself for the next year and ask your bosses for their input at the review session. At your next review, ask for a raise or a promotion into a higher-paid role, aiming for a raise of $5,000 per year.
Consider changing careers to do something you’re more passionate about. It takes time to build the skills necessary to change careers or become self-employed as a contractor or freelancer. Here are some tips:
Buying a home is one of the best investments you can make, despite fluctuations in pricing and shifts in the economy. In this step, you’ll learn how to escape common home-buying mistakes and save for a 20 percent downpayment in as little as 20 months.
Beware of these common mistakes when preparing to buy a home:
In Step 3, you used your Fire account to rid yourself of debts. Now, you’ll use the money you continue to direct there to save for a home.
Ideally, you’re aiming for a 20 percent downpayment so you won’t have to pay for lender’s mortgage insurance, or LMI, which protects the lender against your defaulting. (Shortform note: This is called private mortgage insurance, or PMI, in the U.S.)
Here are the steps:
1. Calculate how long it will take you to save for a downpayment. If you’ve followed the steps, you’re already directing 20 percent of your monthly income toward your Fire account.
Assuming you and your partner each earn the average wage for Australia ($83,445 gross per person) your take-home pay is $5,250 per person, or $10,500 per month together. If you set aside 20 percent of your income toward saving for a home, you’ll have enough for a $100,000 downpayment in four years.
But it’s possible to save a downpayment faster if you save more. For example, if you live off of one person’s wages and put the other person’s wages toward a downpayment, you could save nearly a $100,000 deposit in just 19 months.
2. Devise additional ways to save. Try cutting your rent expenses by living somewhere cheaper, or earn extra income through freelancing, as discussed in Step 4.
3. When it’s time to buy, aim for a home where the monthly payment is less than 30 percent of your take-home pay. Any more, and you run the risk it will be hard to pay off.
At this point, you’ve gotten rid of your debt and bought a home. Now, you’ll learn how to boost savings for retirement, as well as strategies to invest in stocks and bonds. Without your debts weighing on you, you can now afford to boost your contribution to your super. This money will come from your pre-tax earnings from your employer.
In Australia, as previously explained, the government mandates saving for retirement by requiring employers to divert 9.5 percent of each employee’s pay toward their super fund, but this isn’t sufficient to retire on. The cost of living keeps rising due to inflation, so you’ll need more money to cover the cost of basic expenses in the future. For example, a loaf of bread will cost more when you’re 90 than it does now.
In Australia, call your super to direct more of your income there, boosting your savings rate to 15 percent. There are three approaches, depending on your income situation:
(Shortform note: In U.S. employer-sponsored plans, you can set or adjust your contribution rate by logging in to the plan’s website. Some employers will match your contribution up to a certain amount.)
Investing in shares (stocks) is one of the simplest ways to let your money grow for you with little management. The stock market and superannuations (retirement plans) use compound interest—in which your investments earn interest that you then reinvest—to grow your wealth. One of the hardest parts of investing is starting, but compound interest makes it worth it.
Australians have two options when it comes to investing in shares:
(Shortform note: In the U.S., you can invest in the stock market through your 401(k) or a similar retirement account. If your employer offers the account, you can direct your pre-tax earnings there. Otherwise, you’ll have to use after-tax money.)
In Steps 7 and 8, you’ll do two things: Save up three times your monthly living expenses and pay off your monthly mortgage early.
You put $2,000 in your Backstop account in Step 1. Follow these steps to save three months of living expenses:
Due to interest payments, you’ll pay more than the cost of your home over the lifetime of your loan. To limit how much interest you pay over the life of your mortgage, work to pay down your loan faster. Besides saving on interest, you’ll be able to direct the money that was going toward your mortgage elsewhere.
Follow these two steps to pay off your mortgage faster:
As you approach retirement, you’ll want enough money to retire comfortably, and you may also want to give back to your community in a meaningful way.
The Australian government estimates that people need the following amount of money per year to be able to retire comfortably:
Here’s how to reach these figures:
1. Own your home. Your mortgage will be completely paid off and you won’t have any debts.
2. Save enough money in super:
In Australia, when you retire, you’ll be expected to withdraw 5 percent of your super per year, or $12,500 for couples, to start. This amount will increase slightly as you age because the government doesn’t want you hoarding your money.
The previous figures also represent the maximum amount you’re allowed to have in assets— excluding a paid-off home—to qualify for the highest annual government pension, which is:
3. Continue working. Just working a day or so per week is plenty to bring in some extra cash. Plus, studies indicate that retirees who continue doing some kind of work have better mental health than their non-working counterparts.
But you don’t need to earn nearly that much to be comfortable. For couples, if each of you only worked one day per week, you’d earn about $300 combined per day of work, for a total of $15,600 per year.
In Australia, if you follow these three steps, you’ll have roughly this amount per year of your retirement:
That’s about $3,400 more a year than the government recommends for a comfortable retirement.
Many people feel helpless when it comes to managing their money. They’re consumed by debt or worry that they'll never be financially secure.
In The Barefoot Investor, Scott Pape offers 10 steps to manage your money so that you eliminate debt and build wealth. (Shortform note: This book was written for an Australian audience, but some tips are universally applicable. This summary includes comparisons to the U.S. where possible.)
Pape’s process is similar to planting a vegetable garden. First, you’ll plant the seeds for your financial future. Then, you’ll cultivate the plants and make adjustments to help your plants (your finances) grow big and strong. Finally, you’ll reap the rewards (your investments), which will become bigger over time, helping you to provide for yourself and those you care about.
The basic 10 steps are:
1. Plan a date night once a week for five weeks, then once per month. You’ll use these to regularly manage your finances.
2. Create your “napkin” plan. Write out your basic financial plan on the back of a napkin to keep it simple.
3. Get rid of debt. Pay off all of your outstanding debts.
4. Increase your income. Bring home additional money to put toward your financial goals.
5. Save up to buy a home. Learn why saving for a home is an important step for your financial future and save for a downpayment.
6. Cultivate your long-term investments. Make a plan for investing in your financial future through stocks.
7-8. Increase your financial security. Grow savings you can use in case of an emergency and pay off your monthly mortgage early.
9-10. Plan for retirement and plan your legacy. Learn how you’ll earn enough to thrive in retirement, and plan how you’ll contribute your time and resources to the world.
(Shortform note: We’ve added an extra step: Step 4, Increase your income. Increasing your income is mentioned in the book in between Step 3 (Get rid of debt) and Step 4 (Save up to buy a home) because earning additional money can help you save and work toward your financial goals faster.)
When it comes to finances, there are two types of people: groundhogs and alpacas. Groundhogs shy away from the work it takes to make real change in their lives, looking for shortcuts or quick fixes.
Alpacas act purposefully to get what they need and protect their assets, putting in the hard work it takes to see results. The author, who works part-time as a farmer and owned two alpacas, witnessed this behavior in action when his two alpacas protected his flock of sheep from authorities trying to round them up after a brush fire. The author calls this the alpaca attitude.
You’ll want to cultivate an alpaca attitude to take control of your finances. To do so, address the insecurities and excuses you harbor about money. Here are some examples:
By cultivating an alpaca attitude and following each of the book’s steps in turn, you’ll set yourself up for financial success.
In this step, you’ll learn how to set aside time to regularly discuss your finances and why regularly discussing them is important. Then, you’ll learn what you’ll do on the first three dates.
For the next five weeks, schedule one night per week as a date night with your spouse to work toward financial improvement. Working through the steps as a couple helps you ensure you can provide for your family, and when you work together, you both feel invested.
If you’re single, consider finding a family member or someone else who wants to work on their finances to do these steps with you. Though this is helpful for staying motivated, going it alone is also an option.
For each date, go out to eat at a restaurant—don’t worry about the cost because the steps you’re taking will save you thousands of dollars over time.
After the first five weeks and implementing the initial steps, select just one night per month for this date night. It’s helpful to do the same night of the month each time, like the first Thursday.
You may be tempted to simply complete these steps without treating yourself to a date. But there are two compelling reasons to go the date route instead:
On this first date night, you’ll open five new bank accounts that allow you to avoid banking fees and start directing money toward five important purposes:
The purpose of these accounts will be discussed later. For now, you’ll learn how to open them and what to consider with each account.
Besides helping you organize your income and spending, opening new accounts will save you money on banking fees.There are many reasons you might currently be banking with a high-cost bank without realizing it—for instance, you might have an account at the same place that your parents did, or you might have received a bank account with your home loan.
But there’s good reason to switch: Switching to banks with no fees can save you thousands of dollars over the course of your lifetime. The average Australian household pays $489 per year in bank fees, some of the highest in the world.
1. Set up two checking accounts with banks that offer online interfaces and don’t charge fees, including for ATM transactions. Pape recommends ING Orange Everyday Debit Cards, available in Australia. The only caveat is that you’ll need to deposit $1,000 into one of the accounts each month.
Nickname one account “Day-to-Day” and the other “Treat.” You’ll learn how to use these in Step 2.
If you’re doing this with a spouse, you’ll share these accounts, with each of you having your own debit card. Pape and his wife have an agreement that they’re each allowed to spend up to $400 on anything they want from these accounts without asking the other for permission. They have to discuss spending anything above that amount.
2. Set up two high-interest savings accounts. Pape recommends using ING Savings Maximizers, which you can connect to your ING debit accounts. Label one “Happy” and one “Fire.”
3. Set up an account at a separate bank that you won’t be tempted to use, called your “Backstop” account. Pape recommends UBank USaver, a savings account in Australia with a high interest rate. Deposit $2,000 in it to start with. In Step 6, you’ll work to save three months of living expenses in this account.
Ideally, you’ll never have to touch the money in your Backstop account, but it’ll be there if you need it in an emergency or need money to fall back on. For example, if you lose your job and need time to find a new one, you can use the money in this account.
In Australia, employers divert 9.5 percent of an employee’s pre-tax income into a retirement account known as a “superannuation,” or “super” for short, to help employees save for retirement. Employees can also pay voluntarily into this system and can increase their contribution rate. (Shortform note: In the U.S., employers may offer a 401(k) savings plan for employees, but employee participation is voluntary. However, U.S. employers divert 6.2 percent of an employee’s pre-tax income to Social Security and pay another 6.2 percent of the employee’s pre-tax income toward their Social Security. This money will be available to the person during retirement.)
It’s important to save for retirement so that you have enough money to live on once you’re no longer working full time. On this date, you’ll ensure you’re directing your money into a super account that isn’t skimming off a large percentage of your deposits.
Employers often offer a specific super account when an employee is hired; 90 percent of Australians take the super that they’re given, and may have multiple super accounts corresponding to different jobs they’ve held. If they’ve never examined the fees on their super(s), they’re likely losing precious money.
Australians can avoid losing money to fees by choosing a low-cost super account instead. For example, an account that charges 0.02 percent annually versus 1 percent annually will save $226,484 AUD over 30 years.
Investigate the annual fee on your retirement fund by googling the name of the fund. In Australia, search for the “PDS,” or “Product Disclosure Statement.” If you’re being charged more than 0.85 percent per year, choose another super or retirement account to invest in.
For Australians, Pape recommends choosing “Hostplus Index Balanced Fund” for a super account. It charges 6 cents for every $100 invested, and a $78 annual fee.
(Shortform note: Low-cost, passively managed index funds are a helpful, more cost-effective investment option for U.S. investors and eventual retirees, too.)
Life comes with losses, such as losing a job or becoming disabled. Having insurance helps protect you from the financial costs of these losses. However, finding appropriate insurance can be tricky. Here are some common insurance pitfalls:
On this date, you’ll scrutinize your insurance choices and take action to support your and your family’s financial well-being.
Here are two pieces of advice to follow when choosing and managing insurance:
Now, we’ll look at some specific types of insurance.
Australia’s health care system is so robust that you may not need private insurance. If you’re under the age of 31 or earn less than $91,000 as a single person or $180,000 as a couple, the country’s health system will cover your medical expenses for free.
If you earn above these thresholds, you’ll have to pay a special tax for medical services. To avoid paying this tax, pay for private insurance instead, which is the same cost, but gives you access to private medical providers. You’ll also want to go with private insurance if you want to avoid waiting for care in the public system or want to choose your own doctor.
Here are four tips for choosing private insurance in Australia:
Ninety-four percent of Australian families have no insurance to protect them if an income earner can no longer work. This leaves families vulnerable, as they will have to make do with less income in the event of accidents or other life-changing events.
Pape recommends that parents with young children aim to insure 10 to 12 times their annual income.
Australians can purchase insurance for income protection, life, and disability through their super fund. Call your super fund and asking for three pieces of information:
(Shortform note: U.S. employers may provide some types of insurance to employees. Be sure you understand what your employer offers and supplement it if necessary.)
Decide whether you should keep insurance coverage.
Make a list of the different kinds of insurance you have and what you pay annually.
Pick one type of insurance. Would not having this insurance cause you financial hardship if what it’s insuring was damaged? Why or why not?
Based on your answer, discuss whether you should keep, modify, or get rid of this insurance. Go through each type of insurance this way.
In this step, you’ll learn the purpose of each bank account you created in Step 1, as well as how to direct money from your take-home pay into each of these accounts.
Pape calls Step 2 the “serviette” or napkin plan because it’s simple enough to write on a paper napkin you might encounter on the date.
Creating a plan is the key to actually saving money. The simpler the plan, the easier it is to adhere to because when you don’t have to think as hard or make choices, saving becomes automatic.
Enter the “napkin” plan. Under this plan, you’ll put money from your take-home pay into three main categories:
This category consists of money that you’ll spend on a daily basis, as well as savings you’ll put away for longer-term purchases. Each month, your take-home pay will be deposited in your Day-to-Day account (In Australia, one of your two ING Everyday Orange accounts). Then, you’ll redirect some of it into your other accounts.
In general, aim to spend only 60 percent of your take-home pay on essentials, like bills, shelter, food, transportation, and insurance. This will leave you 40 percent to put toward other purposes.
Here’s how it’ll work—each time you’re paid, have your Day-to-Day account automatically direct:
You’ll use your Treat account (your other ING Everyday Orange account) for treating yourself regularly to whatever you like to buy. Maybe it’s pumpkin spice lattes, or new clothes.
Since it’s a debit account, it comes with its own card. Write Treat on it with a Sharpie so that you can tell it apart from your Day-to-Day spending card. Remember: Once you’ve used up your Treat dollars for the month, you’re not allowed to dip into other accounts for that purpose. You’ll have to wait until next month.
The money directed to your Happy account (a savings account) allows you to save for bigger expenses that you can’t buy with one paycheck, like a vacation. In other words, you’re saving to make a larger-than-normal purchase that brings happiness to your life.
Depending on what you’re saving for, you may want to increase or decrease the percentage you direct toward this account. For example, if you’re saving for a $1,200 plane ticket to Tokyo, and you want to buy it in three months, you’ll need to put $400 dollars in your Happy account for three months to reach that goal. If you normally only put $300 per month toward this account, you’ll have to modify your other monthly expenses. For example, you could divert a smaller portion of your take-home pay into your Treat account, putting the remainder in your Happy account instead.
You’ll use the money in this account to deal with “financial fires.” Financial fires are anything you want to concentrate a good chunk of money on paying for, such as eliminating credit card debt or student loans. It could also include larger expenses than you’d normally save for in your Happy account, such as a downpayment on a home.
Throughout this book, you’ll learn where to direct this money in different stages of your life.
This category consists of your long-term savings: your money for your super, as well as any investments you own, like rental properties or shares. In Steps 6 and 9, you’ll learn more about how to manage this category of savings.
Backstop is an account that holds money separately from the Blow and Grow category. It is both its own spending category (like Blow and Grow) as well as a separate bank account. In Step 1, you should have deposited $2,000, but if you haven’t yet done so, find some creative ways to get that money in there, like working overtime or selling some belongings.
Because your Backstop money is at another bank, it should feel mostly off-limits, unless you need it in an emergency, like getting laid off from your job.
To visualize your spending and savings plan, follow these steps:
Check whether you’re following the 60 percent rule for spending.
Calculate 60 percent of your take-home pay.
Calculate how much your essentials—food, shelter, bills—cost per month. Is this lower or higher than 60 percent of your take-home pay?
List other things you spend money on regularly, like newspaper subscriptions or Netflix.
Do you think these expenses should be part of your regular expenses or your Treat expenses? Why?
List some strategies you could employ to lower these non-essential expenses.
Being in debt makes it difficult to spend your money the way you’d like to. Learning how to pay down debt will free you to save money for things you’d rather spend money on.
In Step 3, you’ll learn how to systematically eliminate your debts (except your mortgage, which will be discussed in Step 4).
To understand your debts, it’s important to understand how you learned about money growing up. How your parents handled money can affect how you handle money. For example, if your parents spent more than they could afford using credit cards, you may have acquired the same habit. Or, you may have witnessed this behavior and learned to spend within your means.
In addition to lessons learned from parents, Australian children learn about money through school—Commonwealth Bank’s School Banking Program visits schools to teach students about money, and with their parents’ permission, sets them up with a bank account. Eventually, the bank offers all account holders a credit card on their 18th birthday.
You may not have learned about the risks of having a credit card from your parents, and banks won’t teach you, either, because they make money by collecting interest on debt. Today, the average Australian has $4,200 in credit card debt.
Having debt can take an emotional toll. You might feel as though you’ll never be good with money, and climbing out of debt can feel impossible. To rebuild your self-esteem and financial security, Pape advocates paying off your debts and getting rid of your credit cards.
Follow these steps to pay off your debts one by one:
1. List your debts. Use a table like this one to list your debts from smallest to greatest.
| Debt | Total | Interest Rate | Minimum Monthly Payment |
| Total: |
2. Renegotiate your interest rates. Tell your bank that you’re considering transferring your credit balance to another bank that will charge you no fees for 18 months. Ask them to renegotiate your interest rate and waive your annual fee. This is the best course of action for most people because it helps you avoid spending on a new card. However, if you really can pay down this debt in 18 months, and avoid spending on a new card, consider switching to a bank with this type of transfer program.
3. Get rid of your credit cards. Cut them up and post a photo on Barefoot Investor’s Facebook page.
4. Pay off your debts one at a time, starting with the smallest. Use the money from your Fire account to pay off this debt as quickly as possible, while making the minimum payments on your other debts. Though you won’t likely pay off the debt with the highest interest rate first, once you’ve paid off one debt, you’ll gain confidence and feel motivated to pay off the others.
5. When you pay off a debt, celebrate. Pape suggests burning your credit card bills with a lighter. Apply the amount you were paying on the now paid-off debt toward paying down your next-highest debt.
6. Repeat until you’ve paid off all of your debts.
Despite the negative aspects of credit cards, you still may think you have good reasons for using one. Here are some common excuses people have for keeping credit cards:
Helping Mom Pay Off Her Debt: Lauren Marks’s Story
Like other Australian children, when Lauren Marks turned 18, she received an offer for a credit card with a $500 limit. She accepted, and the bank regularly increased her limit until the card was maxed out. She went to college and racked up $10,000 in debt. She didn't tell many people about her debt because she felt ashamed.
Then, Marks read The Barefoot Investor and transferred her credit card balance to a zero- interest-for-12-months plan. In that time, she paid off all of her debt. When she shared her victory with her mom, her mom told her that she, too, had thousands of dollars in credit card debt. Following the book’s steps, her mom made a plan to pay it off, and when she did, they celebrated together. Debt-free, her mom started saving money into her Backstop account. When she was diagnosed with thyroid cancer, she could afford to pay $15,000 to have surgery at a private hospital within two weeks, rather than waiting four months for care through the public health system.
Climbing Out of Debt: Leanne Russell’s Story
Growing up in a rough part of Sydney, Leanne Russell thought that debt was a fact of life—everyone she knew struggled with it. When she was 23, she already had a $5,000 maxed out credit card and a car loan that she borrowed against, which grew from $22,000 to $35,000.
After buying Pape’s book, she felt determined to only spend what she could afford and rid herself of debt. Working systematically, she paid off both her personal loan and her credit card. Afterward, she directed extra money she earned toward her Backstop account, saving $30,000. Having money saved makes her feel secure that she can survive emergencies and support her son.
Think about where your beliefs about money came from.
Make a list of the different places or people you’ve learned about money from.
Select one source. What did you learn from it?
How do you use this advice today?
Given what you’ve learned so far in this book, do you still consider this sound advice? Why or why not?
To fill each of your spending buckets—Blow, Grow, and Backstop—work to increase your income as quickly as possible. In this step, you’ll learn some strategies to do so.
Acing your performance review could help you get a raise by showing you have the skills to achieve results. It could also help you move into roles that pay more. The best-paying roles tend to involve managing people or selling products.
To ace your performance review, take on work you haven’t done before and deliver on it. Here’s how:
Getting promoted or getting a raise are great ways to earn income, but they aren’t possible for everyone. You might not feel invested in your company, or even in the type of work you’re doing. Instead, consider changing careers to do something that you’re more passionate about.
It takes time to build the skills necessary to change careers or become self-employed as a contractor or freelancer. Here are some tips:
Freelancing is a great way to earn extra money. There are two ways to do this:
No matter which strategy or combination of strategies you choose, doing this will take hard work. You have to be willing to put in the time to see results.
For example, Pape wanted to start a financial advising business, but he didn’t have the writing skills he needed to advise people. For years, he worked 80-hour weeks to practice the skills he needed to shift careers.
Recovering from Divorce: Matt Ledger’s Story
Matt Ledger got a divorce when he was 54, leaving him with few savings. What little he had left, he put toward helping his daughter finish her last two years of school, which left him with even fewer savings. He also didn’t own a home or have much money saved in super, despite being just a few years away from retirement age.
Ledger wanted to earn more money so that he could save more. He realized that his job as a real estate agent brought inconsistent income, and he decided to go back to driving road trains. In just a year, he saved $5,700, put $15,000 in Backstop, increased his super contribution, and built a small house. He’s on track to putting $35,000 in savings, $75,000 in Backstop, and having $1 million in super in just five years.
Develop a plan to increase your income.
What do you like about your current job?
What do you dislike about your job?
Considering your answers, which strategy for increasing your income appeals to you most? (Will you ace your performance review, transition to a new career, or freelance?) Why?
Write down the first three steps you need to take to pursue your chosen strategy.
Buying a home is one of the best investments you can make, despite fluctuations in pricing and shifts in the economy. It’s like a long-term savings plan—not only do you save money, but any increase in value won’t be taxable until you decide to sell.
In this step, you’ll learn how to save for a 20 percent down payment on a home in as little as 19 months. First, you’ll learn how to avoid common home buying mistakes.
Renting often costs less than owning a home due to a lack of maintenance costs, but renters often don’t put the difference into savings. Instead, while you rent, use the money that you would put toward maintenance to save for a down payment.
A housing bubble occurs when the prices of homes exceed their real value. Australia is currently in one of the longest-lived housing bubbles in history, though recently, prices appear to be coming down.
Regardless of what the market does, working to buy a home is worth the effort. You can’t control when the bubble will burst, but you can control your income and your savings. Once you’ve saved enough (discussed later in this step), buying makes sense. Plus, Australia has some of the lowest interest rates in the world, so if you buy within your means, you have more than a good chance of paying off that debt.
Buying more house than you can afford hampers your ability to pay it off in the long run. This can happen for several reasons:
To avoid these pitfalls, do the following:
Some people think they can buy a less costly home and use the equity they build to buy a more expensive, long-term property later. In reality, this doesn’t often work because the initial costs of buying a home are so great that it can take longer to recover than the time you’re planning to live in the house. Instead, plan to buy a home that you’ll live in long term, and consider investing in additional property later.
You might think it’s impossible to own a home because the cost of living in your ideal place of residence is too great. For example, an apartment near your city’s trendy shopping district will likely cost more than one on the outskirts.
Consider an alternative: living in a place where you can afford a home, even if it’s not exactly where you’d envisioned. For example, in Melbourne, the price of apartments has become very reasonable in recent years because there are many available. Or, consider living within commuting distance of a city where it’s often cheaper to purchase a home.
In Step 3, you used your Fire account to rid yourself of debts. Now, you’ll use the money you direct there to save for a home.
Ideally, you’re aiming for a 20 percent deposit so you won’t have to pay for lender’s mortgage insurance, or LMI. (Shortform note: In the U.S., this is called private mortgage insurance, or PMI). Mortgage insurance has nothing to do with protecting your investment—it’s for the bank’s peace of mind in case you default on your mortgage. There’s really no good reason to pay it and by saving enough of a down payment, you won’t have to.
Here are the steps:
1. Calculate how long it will take you to save for a down payment. If you’ve followed the steps, you’re already directing 20 percent of your monthly income toward your Fire account.
Assuming you and your partner each earn the average wage for Australia ($83,445 gross per person) your take-home pay is $5,250 per person, or $10,500 per month together. If you set aside 20 percent of your income toward saving for a home, you’ll have enough for a $100,000 down payment in four years.
But it’s possible to save enough faster if you save more. For example, if you live on one person’s wages and put the other person’s wages toward a down payment, you could save nearly a $100,000 deposit in just 19 months.
2. Devise additional ways to save. Here are some options:
3. When it’s time to buy, aim for a home where the monthly payment will be less than 30 percent of your take-home pay. Any more, and you run the risk it will be hard to pay off. In addition to the list price, look at what homes have sold for in the neighborhood to get a sense of how much the home could ultimately sell for.
4. Consider the following when choosing a mortgage and mortgage lender:
Make a plan to save for a home.
Look back at your napkin plan from Step 2. What percentage of your income did you decide to put toward your Fire account each month? What was the dollar amount?
Using your monthly contribution to your Fire account, calculate how long it would take you to save for a $100,000 downpayment.
Does the above feel like a reasonable timeline for you? Why or why not?
Discuss one or two things you could do to bring in additional income to reach your goal sooner.
At this point, you’ve gotten rid of your debt and bought a home. Now, you’ll learn how to boost savings for retirement, as well as strategies to invest in stocks and bonds.
Without your debts weighing on you, you can now afford to boost your contribution to your super. In Australia, as previously explained, the government mandates saving for retirement by requiring Australian employers to divert 9.5 percent of each employee’s pay toward their super fund—but this isn’t sufficient for employees to retire on. The average Australian runs out of retirement savings 13 years before they die.
The cost of living keeps rising due to inflation, so you’ll need more money to cover the cost of basic expenses in the future. For example, a loaf of bread will cost more when you’re 90 than it does now. You should contribute 15 percent to your retirement plan (Australians should boost the mandatory 9.5 percent by putting in an additional 5.5 percent) to ensure you have enough to retire. Though it will decrease your monthly take-home pay, it’s worth it in the long run.
In Australia, call your super to direct more of your income there. Choose one of these approaches, depending on your income situation:
(Shortform note: In U.S. employer-sponsored plans, you can often set or adjust your contribution rate by logging in to the plan’s website. Some employers will match your contribution up to a certain amount.)
Investing in shares (stocks) is one of the simplest ways to let your money grow for you with little management. The stock market and superannuations (retirement plans) use compound interest—when your investments earn interest that you then reinvest—to grow your wealth. Some funds will automatically reinvest your dividends, or the twice-yearly payments your fund makes.
One of the hardest parts of investing is starting, but it’s worth it in the long run due to compound interest. The sooner you start, the more you’ll earn, as this chart based on an 8 percent annual return shows.
| Invest → | $0/month | $100/month | $500/month | $1,000/month |
| In 5 years, you’ll have: | 0 | $7,040 | $35,200 | $70,399 |
| In 10 years, you’ll have: | 0 | $17,384 | $86,919 | $173,839 |
| In 25 years, you’ll have: | 0 | $87,727 | $438,636 | $877,271 |
Australians have two options to invest in shares:
(Shortform note: Apply this advice to your 401(k) or other retirement accounts. If you opt into your employer’s retirement program and you invest in it, you’ll use pre-tax dollars. If you invest in an outside account, you’ll use after-tax money.)
Growing Wealth: April Mac’s Story
April Mac wasn’t in debt, but she didn’t have much money either—she consistently spent all of her money and didn’t think she and her husband could build long-term wealth. After her sister encouraged her to sign up for Pape’s online resources, she made and met a number of financial goals:
Saved $16,000 in shares
Paid $30,000 off their mortgage and saved another $30,000 for home improvements
Saved money for emergencies into her Backstop account
Took her family on several vacations
Mac thinks she isn’t special and hopes her story inspires other ordinary people to get their finances in order.
Many Australian parents struggle to pay for their children’s educational expenses. Saving for children’s education can help them pay for school, invest in homes of their own, and more.
There are two main options for investing for your children or grandchildren:
As you learned in Step 1, creating an Backstop account with a different banking institution allows you to save money that you can use in an emergency but that isn’t readily accessible to you most of the time. In Steps 7 and 8, you’ll greatly increase that amount by saving up three times your monthly living expenses. Also, you’ll pay off your monthly mortgage early.
These steps will provide you with further financial security by helping you save plenty of money for an emergency and freeing up some of your earnings to be paid toward other expenses or savings.
Research shows that having savings is a stronger predictor of happiness than how much money someone earns. Building up the money in your Backstop account will provide financial security to you and your family. For example, if a relative gets sick and you need to travel to see them, or your car breaks down and you need to get it fixed, the money in this account can help you cover the cost without having to dig into your other accounts.
You put $2,000 in this account in Step 1. Follow these steps to save three months of living expenses:
Due to interest payments, you’ll pay more than the cost of your home over the lifetime of your loan. To limit how much interest you pay over the life of your mortgage, work to pay it off faster. Besides saving on interest, you’ll be able to direct the money that was going toward your mortgage elsewhere.
The first step is ensuring you don’t get sucked into constantly upgrading your home and remaining perpetually in debt.
Many people yearn to buy things that they think will bring them great enjoyment. When people do this with houses, no house is ever good enough. People may buy one house, and then buy and move to another, and then another, thinking that they’ll land in the perfect home and perfect neighborhood someday. They may take on more debt than they can afford, which can cause stress because money becomes tight and they have to carefully consider every spending opportunity. They may think this is simply the reality of homeownership and wealth-building.
But this isn’t everyone’s reality. People who successfully build wealth tend to save money, invest in the share market, avoid buying things they can’t afford, and live in modest neighborhoods rather than affluent suburbs. Instead of constantly pining for the next thing and taking on debts you can’t afford, following the steps in this book will position you to buy a home within your means and, ideally, feel satisfied enough to stay there instead of chasing the next best thing.
Follow these two steps to pay off your mortgage faster:
Dream Home: Mark Gittins’s Story
Mark Gittins knew he wanted to live in a home adjacent to a golf course, but in his 20s, he had a poor credit rating and little savings to invest in a home. After he married, he and his wife, Donna, were able to save enough money to buy land for a home adjacent to a golf course. To finance the home building, they took a modest mortgage of $300,000, and worked to keep building costs low. Then, by putting as much money as they could toward the payments, they were able to pay off the home in under nine years.
As you live your life, you may wonder about two things:
By following steps of this program, you’re already ahead in preparing for retirement. In Step 9, you'll learn:
Then, in Step 10, you’ll consider how you’d like to give back to the world in a meaningful way.
The Australian government estimates that its citizens need the following amount of money each year of retirement to be able to live comfortably:
Here are the steps to reach those figures:
1. Own your home. When your mortgage is completely paid off and you have no debts, you can direct your money toward other expenses.
2. Save enough money in super:
In Australia, when you retire, you’re required to withdraw 5 percent of your super per year, or $12,500 for couples, to start. This amount increases slightly as you age because the government doesn’t want you hoarding your money.
These previous figures represent the maximum amount you’re allowed to have in assets—excluding a paid-off home—to qualify for the highest annual pension, which is:
(Shortform note: Australian pensions are similar to Social Security in the U.S., except how much an individual receives depends on assets rather than on earnings in their lifetime.)
However, it’s okay if you have more assets than this and don’t qualify for the largest pension. If you follow the book’s steps, before you turn 50, you’ll have a plan in place so that you won’t need to rely on a pension.
3. Continue working. Just working a day or so per week is plenty to bring in some extra cash. Plus, studies indicate that retirees who continue doing some kind of work have better mental health than their non-working counterparts.
The Australian government provides a special perk to encourage you to continue working once you retire—you can earn up to a certain amount without paying income tax:
But you don’t need to earn nearly that much to be comfortable. For a couple, if each of you only worked one day per week, you’d earn about $300 per couple per day of work, for a total of $15,600 per year.
If you follow these three steps, you’ll have roughly this amount per year of your retirement:
That’s about $3,400 more than the government recommends for a comfortable retirement.
In Step 7, you saved three months’ worth of living expenses. But as you approach retirement, you’ll want a bigger safety net. Saving up years’ worth of living expenses will give you financial security once you retire in case the market goes south or other unexpected expenses pop up. You’ll work to save three to five years of living expenses. Australians can do this by moving the money from their Backstop account into their super.
Three years before you’re planning to retire, follow these steps to save up:
Though finances can be challenging to understand and manage, Pape doesn’t recommend using a personal financial planner. Financial planners generally skim a fixed percent of your assets, no matter how much money you have. This is unfair because you’re being charged more for the same service as someone with less in assets.
If you need financial advice, look to lower-cost options based on your specific needs. Here are some common options:
The passing of a family member is a stressful experience. The family will likely have many tasks at hand, like planning a memorial and following the will of the deceased. Leaving a folder for your loved ones with helpful resources about your life and finances will spare them some of the stress.
Create a folder that includes:
Store the folder in a safe deposit box rather than at home. That way, it’s not at risk of getting damaged in an accident.
When you’re gone, people aren’t going to remember you for the material things you had or the money you made (and beyond $70,000 per year, a higher income won’t make you happier, either). People will remember you for your contribution to the world around you. Deciding how you want to give back will help you cultivate a sense of purpose in your life, which is part of where true happiness comes from.
Create a plan for how you’ll give back to the world. Some examples of giving back include:
Think about causes you care about and develop a plan to give back.
Describe one or two ways you’d like to contribute to the world.
What appeals to you about contributing to the world in this way?
Select one of the contributions. Describe the initial three steps you’d need to take to begin contributing to the world in this way.