The Only Money Guide You'll Ever Need
Animated Video Summary by the Swedish Investor
Key Takeaways
Most people doubt their own ability to handle money. In The Barefoot Investor, Scott Pape explains why this is silly, and why handling your personal finances in a sound manner can have a huge positive impact on your own life as well as those around you.
1. Plant Your Tree
So, how does one best handle his personal finances? One of the best illustrations I’ve heard is presented in this book: You plant a tree. Or well .. more specifically – an apple tree.
Planting the tree is a huge decision in the right direction. Give yourself a pat on the back! But it’s obviously not a short-term fix. No one in their right mind plants an apple tree one day only to come back a week later and be like: “Where are my bloody apples?!”
No. Neither do you pull up the samplings and try to put them in another part of your garden where it seems like it might be sunnier. And you don’t get desperate and buy the program from that “grow-trees-quick dude” that you’ve seen on the ads on YouTube. You just trust that the tree will grow.
As long as you nurture it, consistently adding fertilizers and water, you trust the process and that you eventually will have a full grown tree. A year or so down the road, you might see some of the first apples. They are small and sour at this stage – not really what you expected from an apple tree, but that doesn’t make you lose confidence in the process.
So you keep adding fertilizers and water. And you keep the bloody deer away from your tree! After that initial struggle you even forget about the tree for a while and just get on with your life. Eventually that tree has grown deep and thick roots, with strong branches and delicious apples. Enough to feed your whole family!
And when your days have come to an end, your grandkids, and even their kids can enjoy apples of that magnificent tree. Okay, I’m not really a botanist. I have no clue if apple trees can become that old! But you get the idea. Personal finance is the same: Plant the seeds of wealth, trust in the process, and enjoy life-changing harvest.
2. Three Common Excuses
Usually there’s a resistance against planting that first seed though. “I’ll never have apples. I’m just not smart enough with plants!”
The most common excuses against starting the journey towards financial freedom are: Not being smart enough, A low salary, Being old. Let’s shut these three down.
1. No one is born smart with money. This is a skill, a skill that can be taught! Also, it has more to do with behavior and control rather than brains.
2. It’s not about what you earn. It’s about what you save. Remember the age-old wisdom from George Clayton’s “The Richest Man in Babylon” that: “What each of us calls our necessary expenses, will always grow to equal our income – unless we protest to the contrary.”
3. You’re never too old. Please stop for a second and tell me when you expect to die. Now subtract your current age from that number. You have many years to go. It is NOT too late.
3. The 9 Barefoot Steps
Here are the nine barefoot steps towards financial freedom:
1. Schedule a monthly barefoot date night Once every month, have a talk to your significant other or yourself about your finances.
2. Set up your buckets Distribute your income into three separate buckets. This strategy replaces boring old budgets.
3. Domino your debts Get debt-free by starting to pay off your debts one by one. Start with the smallest ones – we need some quick wins.
4. Buy your home everyone dreams to own and have a home of their own.
5. Increase your “Super” to 15% Increase your retirement savings to 15% of your pre-tax income.
6. Boost your “Mojo” to three months Boost your emergency fund to a level where you can support yourself and your family with it for three months. You haven’t really reached FU money yet, but you are getting there.
7. Get the banker off your back Whereas step number three gets you debt-free from those smaller debts, this is where you aim for the big one – your mortgage. After this, you’re finally free from bankers and interest payments!
8. Nail your retirement number Google “retirement calculator” plus the name of your country and enter your details.
9. Leave a legacy Remember what I said earlier about the grandkids being able to enjoy those apples?
4. Schedule a Monthly Barefoot Date Night
Setting up bank accounts?? Redirecting my retirement savings?? Sorting out my insurance?? BORING!! Having the “money talk” – with or without a partner – is essential, and doing so while enjoying a nice meal enhances the experience.
The barefoot investor suggests that you should start out weekly and with the pre-made menus. Later, you can change to monthly and you may improvise and choose your own topics. But here are the suggested menus for the first three date nights:
First night Entree: Apply for to everyday transaction accounts without fees. Call them “daily expenses” and “splurge.” Apply also for two online savings accounts with decent interest rates. Call them “smile” and “fire extinguisher”.
Main course: Apply for an online savings account from a different bank. Call it “mojo”.
Second night Entree: Google PDS plus the name of the fund or funds that your retirement savings are currently being invested into. Open the document. Scroll down to the section called fees and charges.
Main course: If your current fund or funds are charging you more than 0.85% in total yearly fees, switch to a cheaper one.
Third night Entree: Do you live in a country where you need private health insurance, then remember to choose an option with a higher excess. Higher excess means lower annual premiums. Also, be sure to call your insurance company once every year and tell them that “I’m kind of thinking about switching …” “Can we do something here?”. That way you’ll save a lot of money through reduced fees.
Main course: Insure against your house burning down, serious car accidents, traveling overseas and getting sick and being unable to work. If you have kids, you also want to insure against death. Save money by applying the same two strategies as mentioned for private health insurance.
5. Set Up Your Buckets
For most people, budgets don’t work. They’re like extreme diets. No one is ever able to stick to them! This is where the three buckets strategy comes into play.
You put your money on autopilot and never have to worry about budgeting again. So what is this three bucket strategy? Basically, it’s all about distributing the water from your income tap in a strategic manner. You want a blow, a grow and a Mojo bucket.
The Mojo bucket is fairly simple. You need some backup if you’re getting a visit from an unexpected Black Swan. Therefore, fill this one up as soon as possible with $2,000. Work overtime, sell stuff on eBay, become a Uber driver, etc …
The grow bucket is also fairly simple. “If you want to stay poor – focus on spending your money. If you want to become wealthy – focus on saving and investing your money.” This bucket will get you a little bit wealthier every day. Make sure that you save at least 9.5 percent of your pre-tax income for retirement. Use a low-cost fund.
The blow bucket is a bit more complicated as it consists of three additional buckets in itself and also quite a bit of leakage. A bucket within a bucket …? Yes, or no, actually, there are three buckets within a bucket. The blow bucket is about spending more money on the things that you enjoy and less on useless activities and “stuff.”
- After you’ve set aside money for your mojo and grow buckets – 60% of your income should be dedicated to your daily expenses. This represents the leakage in the bucket. You can’t really survive without spend this amount.
- Next: Automatically transfer 10% of the money going into this bucket to the splurge account mentioned before. Spend this money on anything that makes you feel good – furniture from Ikea, music on Spotify, clothes from H&M …
- After that, another 10% goes into your smile account. This is money that you save for the big stuff: an exotic vacation … a new car …
- Finally, we have the remaining 20%. Which should automatically be transferred from your monthly salary into your fire extinguisher account. Typically, people have a lot of fires to put out when they start this journey. You need to clip those credit cards, earn a deposit for buying your own home, and pay off your mortgage. Luckily, the fire extinguisher was created for this sole purpose.