Barefoot Goes to Church

“Did you get a letter … from the Bishop?” my mother asked casually over coffee a couple of months back.

I looked at her for a full 30 seconds in silence.

“I get a lot of letters from old people”, I told her (only half-jokingly).

“I think he wants to book you for a speaking gig — for the clergy. But I want you to know that I haven’t committed you to anything” she said (and I believe her — my mother is a good Christian woman, and she wouldn’t lie).

Still, in her world, the Bishop is kind of like my Buffett. He’s a big deal. Even so, I gently explained to her that my days as a travelling seminar speaker are now over, and as a result I wouldn’t be able to do the gig.

The Barefoot Commandments

So this week I … walked into a church in Bendigo to do my presentation for the faithful.

(I decided it’d be wise to keep in good with the big boss … after all, she is my mum).

I was there to answer their specific financial questions. However, I first wanted to give them some context: explain to them who I was, and what I was about — because my worldview affects the advice that I give.

I also decided it would be fun to structure my speech around the Ten Commandments — which I called the Barefoot Commandments — and I whittled them down to three, because, well, that’s what the kids do these days.

(Cue nervous laughter from the congregation.)

So, as I prepare to pass the plate around, let me give you my Barefoot Commandments:

1. Seek Safety and Security

Standing in front of my burnt-out home following a savage bushfire was a good test on what matters.

To my surprise, I worked out that I honestly didn’t care about my stuff (and I proved it by not replacing a lot of it). Yes, that sounds like a story from Chicken Soup for the Soul, but it’s true. Instead, what mattered in that moment was that I was able to turn to my family and say “I’ve got this”.

And over the next couple of years we not only rebuilt our home, but rebuilt our family life. I did the unthinkable — I quit prime time television, and turned down almost every opportunity that involved travel. Today I spend my time on the farm with my wife and two sons.

Your net worth isn’t the same as your self-worth.

Everyone wants to get wealthy, but in the process, some give up their safety and security. Case in point, you’d be surprised at the number of $300,000-a-year executives who are rushed, stressed, and chained to their salary — but justify it all by saying “I’m doing it for my kids” (who they hardly see).

The best part is that safety and security are achievable for pretty much everyone who has a full-time job. If you’re living in a home you can afford (rented or owned), spending less than you earn and have some Mojo (my word for savings) tucked away, you’ve all but eliminated the biggest cause of family break-ups.

Feeling in control of your life — and being in control of your time — is true wealth.

2. Keep It Simple

I get a lot of hate mail these days, and most of it is from people criticising me for being too simple.

(Guilty as charged).

Yet let me explain why I’m so simple. These days I’m fortunate enough to be classified (in they eyes of the law) as a ‘sophisticated investor’. This basically allows me to invest in all sorts of weird and wonderful investments that smaller investors aren’t allowed to access.

I get to drink off the investment top shelf!

However, what I’ve learned from the experience is this: anyone who makes things overly complicated is usually trying to sell you something. And generally it’s rubbish.

Case in point: Warren Buffett famously laid down a ten-year million dollar investment bet against Wall Street exclusive hedge fund managers — and cleaned their investment clocks with a dirt cheap no-frills index fund your grandmother could invest in.

Besides, what sort of weirdo wakes up wanting to make things more complex?

Life is busy enough, and I’m still getting my head around programming the dishwasher. If you make managing your money too complicated you won’t stick with it — especially if you have a partner who isn’t as money-focussed as you. There’s power in keeping things simple, and focussing on one thing at a time that builds more safety and security in your life.

3. No One Cares More About Your Money than You

I’ve written this column for over a decade, and I’ve made a lot of enemies in the finance industry. Yet the truth is, I know of no other industry that makes so much money from the complacency and ignorance of their customers.

Let’s take one example:

Bank-owned super funds have, on average, underperformed not-for-profit industry super funds by more than 2 per cent over the past decade. The difference basically comes down to the fees.

A study by Industry Super Funds (using SuperRatings data), found that over a 19-year period your balance would be 5 per cent higher if it was in a low cost industry fund. It doesn’t sound like much, but it’s potentially tens of thousands of dollars (or more) that you don’t get to spend in retirement.

When it comes to your family’s financial future — and their safety and security — no one cares more about your money than you do.

Amen.

Tread Your Own Path!

How a Single Mother Made $17,000 in 7 days

I’m not proud of what I did this week.I used my position in the media to blackmail a man.(And it worked.)What follows is the true story of how I made a single mother $17,000 in 24 hours.Let’s begin ...Pop!That’s the sound my brain made when I read the following email from a worried single mum:

Dear Scott,

I am an anxious 46-year-old single mum, raising two boys on $50,000 a year.

I have credit card debts of $17,000. The reason is that I invested in a wealth creation course but have not seen nothing from it yet. I am upset with my decision because I had no debts before that time!

However, I am expecting a gift of $12,000 and I should pay off the cards. But I have zero savings and want some security through having cash in the bank.

What to do?

Leah

I know what you’re thinking, dear reader — the same thing that was going through my noggin:

How the hell does a single mum wind up paying some wealth guru seventeen grand?

So I called up Leah and asked her that very question:

“Look, I’ve been a single mum for 10 years. I’ve been renting all that time. I guess I just wanted a better life for my boys”, she said.

Last week the corporate cops, ASIC, announced they will be sending undercover operatives to pursue property spruikers and identify shonky practices within self-managed super funds (SMSFs).

Well, boys, Leah’s gone undercover for you.

In August 2015 Leah attended a free wealth creation seminar at the urging of a friend.

But the seminar was just a sales pitch.

“When I first arrived, my defences were definitely up — it felt like a cult.”

Yet over the course of the next three hours Leah was sucked in as the guru bragged about how wealthy he was, and explained that most people are J.O.B. (Just Over Broke). And that led to his pitch: sign up for a $3,000 multi-day seminar and learn the secrets that the rich are keeping from you.

Problem: Leah didn’t have $3,000.

Solution: They offered her a deal — come up with $500 now and pay off the rest at $40 a week.

But the course was just a sales pitch.

When she attended the multi-day course, the spruiker spoke about the value of credit cards.

“He advised us to get multiple credit cards with multiple banks … so when opportunity strikes you’re ready to invest and take action.”

Strewth!

Now here’s the interesting thing: just before signing up for the course, Leah had proudly paid off her credit card. However, in the communal confines of a multi-day seminar where everyone was getting excited, Leah applied for credit cards with NAB, ANZ and Westpac — total limit $17,000.

Next, he spoke about the benefits of opening an SMSF. And on cue he introduced an accountant to the room who offered to set one up — at $2,800 a pop.

“They explained that an SMSF is like a bank you can use to fund your property deals … and that we could invest our SMSF money into property deals with his associate. I only had $42,000 in an industry fund, so I thought, what the hell, and signed up for an SMSF.”

The spruiker then brought out his big guns, selling $50,000 ‘mentoring packages’. Leah didn’t take the bait. But as part of her course she’d qualified for a one-on-one ‘mentoring session’ with the spruiker a few months later.

But the mentoring session was just a sales pitch.

“I went in saying to myself there is absolutely no way that I will sign up to anything”, said Leah.

“He sat there in front of me with all the financial details I’d provided in the previous course. He said I was like a windscreen wiper (furiously working, but never getting anywhere) and that I needed to take action … by doing his course.”

After an hour-and-a-half of hard-core sales pressure, Leah buckled.

But how would she pay for the course?

“He looked at me and said: you’re a single mother, you don’t have any money … so we need to find another way.”

Remember those credit cards the spruiker advised Leah to open so she’d be “ready when opportunity strikes”?

Well, hot-diggity-dang, that opportunity had just struck!

The spruiker said he would give her a $5,000 discount if she signed up for his $21,000 course “NOW!”

Then he pointed to her financials and said “put it on the Westpac card”.

“It was a full-on sales pitch. I walked out of there feeling totally defeated.”

“So”, I asked, “he used high pressure sales tactics to get you to hand over the money, huh?”

“Yeah”, said Leah glumly.

“Well, let’s give him a taste of his own medicine.”

Barefoot Turns the Tables

I called up the organisation and (eventually) spoke to the head wealth guru (spruiker).

Spruiker: “I love the Barefoot Investor!”

Barefoot: “You follow my column?”

Spruiker: “Yes!”

Barefoot: “Awesome! Because next week’s article is about a wealth creation guru who pressured Leah, a broke single mother, into buying his $17,000 course … on her credit card.”

Spruiker: “…”

Barefoot: “Look, I have a very special deal for you today … but only if you act within the next 24 hours.”

Spruiker: “Huh?”

Barefoot: “Listen to me very, very carefully. If you give Leah a full refund — today — I won’t mention your name or your company’s name in the article I’m writing.”

Spruiker: “But … you see …”

Barefoot: “Look, I’m on deadline for the newspaper. If you want this, you need to commit. NOW!”

Spruiker: “I’ll transfer her the money today.”

The Ultimate Opportunity

“What I’ve done is embarrassing”, said Leah, “but I am not a naive person. I’ve always been good with money. Being a single mum, I have to be. I have to run a tight ship.”

I don’t doubt her for a second, but everyone is vulnerable to emotional manipulation. Even spruikers, which is how we got her money back.

But I wanted her to go a few steps further. After all, the only reason she started this nightmare in the first place was to provide a better life for her boys — and why the hell shouldn’t she?

So I gave her a copy of my book, The Barefoot Investor, and paid $1,000 out of my own pocket to shut down her SMSF and help her roll her super back to a low-cost industry fund.

The other day Leah texted me to say her credit cards were now paid in full. Of course the spruiker would say she’ll miss an opportunity. I say she’s just landed the ultimate opportunity — total control of her family’s finances.

Tread Your Own Path!

Johnny Depp Did a Bad, Bad Thing

Grab some popcorn. Dim the lights. Settle back in your easy chair.

Today we’re going to watch one of the world’s top actors, Johnny Depp, in his most challenging role yet.

The story starts in 2010 when Depp reportedly walked off the set of the movie Black Mass when the producers tried to slash his paypacket from the standard $20 million to $10 million.

At the time, everyone thought he was a Hollywood megastar sticking to his guns, driving a hard bargain.

Turns out, though, he may have just needed the dough.

See, Johnny is currently suing his former managers (TMG), alleging they lost him tens of millions of dollars.

In fact, Johnny claims that he only realised he was facing financial ruin when TMG advised him to sell a large piece of property to pay his debts.

But this is Hollywood, so the drama is being played out before the courts: TMG are counter-suing, alleging that Johnny’s real problem was that he was spending like a drunken pirate … to the tune of $2 million a month.

How do you burn through so much coin?

Well, Johnny spent $3 million blasting Hunter S. Thompson’s ashes out of a cannon, he spent $400,000 chartering a private jet to save his handbag dogs (Pistol and Boo) from Barnaby ‘I’ll Kill Yer Dogs’ Joyce, and he spent $300,000 a month on wages for his 40-person entourage. And that’s just the start.

In their submission to the court, Johnny’s managers sounded like me answering one of my Q&As:

“Depp, and Depp alone, is fully responsible for any financial turmoil he finds himself in today. He has refused to live within his means, despite the best efforts of TMG and the repeated warnings about his financial condition from TMG and his other advisors.”

They continued:

“Depp often responded by rebuking and cursing his managers for issuing such warnings and advice, while increasing his extravagant lifestyle and spending, and demanding that his managers find some way to pay for it all.”

Okay, let’s pause the movie.

What did Johnny do wrong?

One thing, obviously, is that he spent more than he earned. It doesn’t matter whether your income is $20 million a year or $20,000: if you overspend you’ll end up pretty much the same way — being forced to dress up like a pirate to entertain kids.

Arrr!

Yet Johnny’s real failing was his decision to outsource control of his money to someone else.

(Seriously, it’s as if he’s never read a celebrity biography … Johnny, it always ends the same — the manager rips them off, bro! The Beatles. The Rolling Stones. Freddie Mercury. Charlie and his Chocolate Factory. The list goes on.)

That’s a lesson for you and me, too.

You should never, ever pass over full control of your money to anyone.

Not to your financial advisor, not to your accountant, not even to your husband, your wife, or a trusted friend.

You should always know exactly where your money is, and be able to explain clearly why it’s there.

I worked with an AFL star who told me about a small business that someone had advised him to invest in.

“Why are you doing this?” I asked.

“Money just isn’t my thing”, he shrugged.

“Well, you betta make it your thing”, I told him.

Thankfully, some big stars get it.

In a recent interview, Australian Open winner Serena Williams said that early in her career she made a decision that she wouldn’t become another statistic: “I’m an athlete and I’m black, and a lot of black athletes go broke.”

So she went to see the richest black woman she knew — Oprah — and asked her for money advice.

Here’s what Oprah told her:

“You sign every cheque. Never let anyone sign any cheques.”

Tread Your Own Path!

The Power of a Simple Plan

A couple of years ago my wife dragged me along to the opening of an art exhibition.

Dutifully, I stood there with a glass of bubbly in one hand and a quizzical look in the other. I felt as out of place as a sober dude on a dancefloor.

Worse, out of the corner of my eye I noticed a woman -- and what I assumed was her teenage son -- gawking at me.I caught the kid’s eye and he approached me.

“You’re the Barefoot Investor, right?”

“Yes”, I replied.He looked back over to his mother and nodded.

“Would you mind if my mum came over and spoke to you? She doesn’t want to bother you, but ...”

“Sure, I’m happy to help”, I smiled.

This happens to me quite a bit. I’m like Kim Kardashian, only people don’t want to take a selfie with me -- they just want advice on what to do with their Self Managed Super Fund.

She was a well-dressed woman in her 40s. She approached me nervously with a smile on her face, but as she got closer I saw tears in her eyes.

Then she said ...

“Two years ago I lost my husband. I was left with young kids. I didn’t know what to do. I was alone and I was really scared. I wrote to you one night, thinking you must get thousands of letters, and not expecting a reply.

But you did reply. And you gave me the advice I needed. You don’t know how much I needed to hear it at that point in my life. You can’t imagine how much you helped me”, she said with tears running down her cheeks.

So what amazing advice did I give her that produced such an emotional reaction?Nothing.

That’s right. I (basically) told her to do nothing.

She’d just received a very large life insurance payout and was overwhelmed with what to do. That’s totally normal behaviour by the way. It’s called the ‘paradox of choice’ -- an unlimited number of choices makes the decision process harder, not easier.

And her grief only compounded her indecision.The advice I gave her simply allowed her to release the pressure value.

I told her to pay off her mortgage (she was adamant that she wanted to stay in the family home), take her kids on a holiday, keep enough money on hand so she didn’t have to worry or work full time for the next year, and then lock the rest of the money up in a 12-month term deposit. That way she could spend the next 12 months grieving and caring for her kids.

In other words, keep it simple. And that’s good advice for you too. Let me explain.

We Don’t Know When We’re Getting Bad Advice

A major study conducted earlier in the year by the University of Sydney found that most Australians are unable to tell the difference between good and bad financial advice.

The researchers produced videos of a number of advisors -- some providing good advice and others providing bad financial advice. The videos were then shown to groups of people who were asked to identify which of the advisors they would trust.

The research found that trust in the advisors was easily manipulated. “We were able to show that if an advisor gave good advice on an easy topic (like paying off a credit card) that this formed a good impression in the mind of the client, so they continued to trust that advisor even when they gave them bad advice down the track”, said Professor Susan Thorp who led the study.We saw this in action this week.

The latest financial planning scandal reported by ASIC -- and there’s been a long line of them -- revealed that almost 200,000 clients have collectively paid for $178 million worth of ‘advice’ that they never actually received. In other words, those 200,000 people were so bamboozled with bulldust that they didn’t even know what they were being charged for.

Keep it Simple

So if the average person can’t tell whether they’re receiving bad advice, what’s the solution?

You should do what the widow did.

When you are presented with advice you do a gut check.

The simple plan of eliminating her debts and focussing on her family gave her an enormous sense of relief, a feeling of control over her life and best of all -- it was one she could understand.Here’s the rub: when you’re making a bad financial decision you almost never feel any of this.

If you don’t understand something -- or you are a bit hazy on the detail -- you should keep asking questions until the fog clears. Over the years I learned that whenever someone tries to makes things appear complicated it generally means they’re trying to sell you something.

I’ve helped thousands of people with their money over the past fifteen years, and the one overriding lesson is the power in keeping things simple.

You’ll never go wrong if you follow this advice:

First, saving is the bedrock of all true wealth and security.

Second, debt always adds risk. It always makes your life more complicated. If you can avoid it you should.

Third, the only thing you can control with your investments is the fees you pay. A wealth of research proves that the more your wealth manager takes the less you make.

And the final clincher is this: no one cares more about your money and your family than you do.

Tread Your Own Path!

So a Little Old Lady Sent Me a $50 Note...

I opened the handwritten letter and a $50 note fell out.

No, it wasn’t a letter from my grandmother. But it was written by someone’s grandmother.

Truth is, I get a lot of snail-mail from old folks who read my column.

Often they include money to pay me for my time … because they’re old-school, and they don’t expect to get something for nothing (though I always send the money back).

They also do it because they’re afraid and they need some advice.

As you read what happened next, think about an elderly person in your life that you could help.

The Frozen Fund

Barefoot: “Hello! It’s Scott Pape ... the Barefoot Investor... from the newspaper.”

Mrs Jones: “I don’t want to buy anything!”

Barefoot: “Mrs Jones, you are mistaking me for an Indian telephone scammer. You wrote me a letter… about your money.”Mrs Jones: “Oh, yes!”

Seriously, most of my calls to elderly readers begin this way.Along with the $50 note, Mrs Jones (not her real name) sent me a copy of her latest statement from her financial advisor. It showed that she had 38,000 units in the ANZ OnePath Income Trust, with a dollar value of “zero”.

What happened?

She had no idea. That’s why she wrote to me.

It turns out, at the height of the GFC, when the government made the decision to guarantee bank deposits, most income funds, including Mrs Jones’s ANZ fund, were hit with a stampede of investors wanting to get their money out.

So the managers ‘froze’ the fund -- and stopped their investors from taking their money out so they didn’t have to liquidate their fund at firesale prices.

But here’s a key point: while the ANZ fund managers took the drastic, emergency action of freezing their fund ... they did not freeze their fees. Which, according to a spokesperson from the ANZ bank, amounted to 1.75 per cent a year… which includes the trailing commissions paid to the financial planners who put their clients into the fund.

Lock the money up -- slowly drip it out over years -- and continue flogging them with fees … Kerching!

Getting her money back

Now you may be wondering, dear reader, how long these guys can get away with such behaviour.

Well, eight years, and a whole lot of worry later, the last of poor old Mrs Jones’ frozen fund is still … err … thawing.

Drip. Drip. Drip.

I contacted ANZ on Mrs Jones behalf, and was told that the bank “made the decision to stop charging fees on the fund last year”. Which strangely -- coincided with 95 per cent of the fund (eventually) being paid out.

They also assured me that they’d put their best people on “making sure Mrs Jones receives her final 5 per cent, pronto”. (And that -- strangely -- coincided with a phone call from me.)

Mrs Jones and Me

So I called her back:

Barefoot: “Good news, Mrs Jones, I’m told you’ll get the last of your money.”

Mrs Jones: “That’s a relief. I wasn’t sure whether I was right or wrong.”

Barefoot: “Well, you were definitely in the right, and they were definitely in the wrong.”

Mrs Jones: “I knew you’d be able to do it”.

Barefoot: “Why?”

Mrs Jones: “Because you’re from the Mallee, like me!”

Barefoot: “Thanks Mrs Jones … and I’ll be sending you back your $50”.

Mrs Jones: “Well, when you’re next in town, be sure to knock on my door and we’ll have a cup of tea. And I’ll make you some scones”.

Deal!

Tread your own path!

How to Make a Budget

Next week is the budget … and you know what that means?

Not much.Just a bunch of middle-aged white guys trying to put lipstick on a pig.

Here’s the truth that you won’t hear on Tuesday night: we’re paying for our government groceries on our nation’s credit card.It’s true.

Wayne Swan inherited a $21 billion surplus in 2006; six years later we had a $48 billion deficit. The boom is now long gone, but Sco-Mo (like Smok’n Joe before him) has continued to fall into the same trap. It’s a bit like the out-of-work miner who recently emailed me saying: “I’m broke -- should I sell my jetski to pay off my credit card?”

Me, I don’t do budgets (government or personal).

However, I do have a good handle on my numbers, and how much it costs to run my house of representatives. Keep reading and you will too.

Think of this article like the sealed section of Dolly magazine.

“Is my bank balance supposed to look like this?”

“Does everyone really spend this much?”

“Am I normal?”

Well, let’s rip it open and take a look.

‘You Inc’: 60 per cent of your income

How much does it cost you to keep the lights running and the kids from drinking out of the dog’s bowl?

Well, a good yardstick is you’ll be allocating 60 per cent of your after-tax household income to food, shelter and Netflix. In other words, all the things you need to live safely in the suburbs.

Here are some rough percentages based on an average household income:

• Housing: 30%

• Utilities (power, gas, water, broadband, phones): 5-10%

• Transport: 5-10%

• Insurance: 5%

• Food: 5-10%

Hang on. I know what you’re thinking.

Sure, these percentages work for people on an average income, but they’d blow out for people on really low incomes (with more of their money going towards food and shelter), and for those on really high incomes (BMWs, baby!).

That’s true. It’s just a guide. Close enough is good enough. Run the numbers for your household.

Here’s the thing: knowing how much it costs to run ‘You Inc’ -- actually having a monthly dollar figure -- is incredibly powerful.

See, if you ask someone how much their basic living expenses are (and I do, and quite often) they’ll generally parrot back how much they earn. That’s because (a) they’ve never bothered to figure it out, and (b) whenever they get a pay rise they spend more, generally upgrading their homes and their cars. That’s normal. That’s what marketers have brainwashed us to do.

Yet it’s also what keeps people trapped in stressful jobs they hate, and in situations that aren’t healthy for them. Plenty of people lead lives of quiet desperation in trophy suburbs.

Let’s keep moving.

Savings: 20 per cent

Do you allocate 20 per cent of your hard-earned towards savings?

Most people don’t. (Including the government. Turnbull and his team spent two years complaining about ‘Labor’s debt and deficit’, but when they got approval to lift the nation’s debt, they ramped up debt from $153 billion to $400 billion.)

That’s because Australian households have some of the highest levels of debt in the world.

If you’re a card-carrying member of our credit card nation, you should first save $2,000 into a Mojo account (a high-interest online savings account).

Then you should start paying off your minor debts by attacking the smallest one first (say a parking fine), knocking it over, and then moving on to the next biggest one – and keeping going. I call this the ‘domino your debts’ method, because you knock them down one by one (other than your mortgage and your HECS-HELP debt).

If you really want to get happy, you should be devoting at least 20 per cent of your income to escaping the cult of credit and building up your Mojo. It’s the fastest way I know to gain financial self-confidence.

Splurge: 20 per cent

Do you direct 20 per cent of your money towards things that make you smile?

Again, most people don’t do this.If you’re ‘normal’ you’re like the Treasurer, shuffling money around while saying the right things (‘surplus in 2020’!) which you probably don’t even believe.

As I said at the beginning of this article, I’ve never followed a strict budget.

Where you live, what you drive and what you do for work are the heavy hitters of your financial life. Get them sorted -- and kept to a minimum -- and you’ll never have to do double-dunk your teabags again.

For me, getting a handle on my numbers was a game-changer.Knowing how much it costs to run ‘Pape Inc’ has meant that, as I’ve earned more, I haven’t just upgraded to a fancier car or suburb, none of which will make me any happier in the long run. Instead, I’ve directed the extra money to the things that really matter -- like my family, and travel, and sheep.

And that’s the cool thing about living within your means -- spending less than you earn. You’re free to really treat yourself with the nice things in life. (I’m writing this to you from an A380 sitting next to my old man, who I shouted a once-in-a-lifetime trip to see Warren Buffett.) There’s no need to feel guilty about splashing out when you have money in the bank.

Word up, Sco-Mo.

Tread Your Own Path!