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!

The Ultimate Boys Trip...

This week I’m travelling to Omaha, Nebraska.

It’s time for my annual pilgrimage to Warren Buffett’s ‘Woodstock for Capitalists’ shareholder meeting.

Even better, this year I’m taking my old man.

It’s the ultimate boys’ trip … organised this year by my mother, a self-confessed ‘details’ person.

We have printouts. Stapled. Highlighted. In plastic pockets.

Seriously, I wouldn’t be the least bit surprised if the old man rocks up to the airport with one of those hidden bum-bag travel wallets, just in case he encounters trouble on the mean streets … or cornfields ... of Omaha.

It also means we booked the trip through Mum’s local travel agent, Carol.In the age of the interwebs you’d be forgiven for thinking a travel agent is about as relevant as Clive Palmer's political career.

Not so.

Carol managed to get Dad a seriously cheap fare that was exclusive to her agency, which I couldn’t replicate over the web (I tried).

“It comes with a few conditions” announced my mother.

“Here we go” I grumbled.Ignoring me, she continued, “you have to fly out on Wednesday...and stay in Los Angeles… and you have to be away for a minimum ten days”.

I could see what was happening here. My diary has interviews and meetings backed up to the hour before I leave (and more while I’m away). Dad’s diary? “April is clear … and so is May”. (Retirement is a relaxing time of life. Then again, he always seems to be busy).

Anyway, I relented. We’re staying in Los Angeles. I’m secretly hoping that thirty years on he’ll make good on his promise of taking me to Disneyland … instead of camping at the Murray River.

So with travel on my mind, let’s go Barefoot and talk about how you can cut two big costs from your next overseas trip.

How Not to Get Screwed on Travel Money

I’ve long recommended overseas travellers sign up for a GE Money 28 Degrees MasterCard.

And that’s despite the fact that I hold GE Money in the same regard as Tigerair, where on my last flight I was wedged between a rotund Greek man and the dunnies (each time I’d hear the flush and the opening of the door, I was hit with a waft of … recycled airline food).

Anyways, the 28 Degrees has no annual fees and no currency conversion fees. Yet they’ve now managed to balls it up by introducing a 3.3 per cent charge on cash advances.“Buh-Buh GE Money”, as Bill Clinton would say.

The other cards I’ve recommended in the past are pre-loaded travel money cards from the banks -- however I’ve now ditched them as well.

The idea is attractive: you pay $15 or thereabouts for the card, and preload your travel currency and lock in the rate (the banks will screw you a few percent on the exchange, just so you remember who’s in charge).

There are no ATM fees, and you’ve got the security of having a separate card to your daily banking.

The problem occurs when you return.

It seems the banks have taken a leaf out of the gift card market. See, the reason that retailers push gift cards so heavily is that they get paid upfront, and they know a certain percentage of the cards will end up in a sock draw and never be redeemed.

In late 2014 ASIC slapped the Commonwealth Bank over the fact that 45,000 of its customers had $2.2 million sitting in expired Commbank Travel Money cards.And with the deft touch of arrogance that embodies Australia’s biggest bank, they flatly refused to get in touch with their customers and offer them refunds of their own money.

Instead, any leftover money has to be claimed by customers within three years, otherwise it goes into the government’s consolidated revenue fund, and can only be claimed by searching ASIC’s MoneySmart unclaimed money website.

So what card do I recommend these days?

The Citibank Plus Transaction Account.

It’s got no annual fees, no overseas ATM fees, and no currency conversion fees.

However, like opening any new bank account, it’s initially a pain in the rump, and it takes longer than you expect. So my suggestion would be to open it now, and keep it in your sock draw for the next trip.

One more tip I’ll give you is if you’re paying for something by card, and you’re given the option to pay in Aussie dollars -- never do it. It’s called Dynamic Currency Conversion (DCC), and it’s an absolute rort that will slug you an additional 5 per cent on your transaction.

The bottom line is that you can’t control the direction of the Aussie dollar, but you can control how much you get slugged when you’re overseas.A Golden Era of TravelIt’s seriously cheap to fly overseas right now. Data from the International Air Transport Association shows that international airfares are the lowest they’ve been in three decades.

I called up Skroo Turner, the founder of Flight Centre, who has been a pioneer in the travel industry for four decades. He reckons we’re in a Golden Age of travel:

When Qantas’ first flight to London took off 68 years ago, it was only the very well-heeled who could afford to step onboard. Passengers were paying the equivalent of about 85 weeks’ pay. So, based on what people are making now, a 1947 flight would set you back $130,000.By the early 1980s, the Flying Kangaroo had started a price war - and flights to London were down to $1800 return. Today you can pick up a return flight to London from $1063 - less than an average week’s salary.

The other thing that will keep Skroo happy is that I’ve found the process of booking through a travel agent -- like Carol -- to be worthwhile: they can often get better deals than what’s on the web, they cop the same commissions on hotels as Expedia and Wotif (about 10 per cent), plus they do all the legwork, and are a central, single contact if things go wrong when you’re overseas.

Think of your travel agent as a pretty good substitute for a details-oriented mum.

Tread Your Own Path!

Copping a Big Loss

Barefoot,

We are huge fans -- we religiously read your columns every week. We are in our 40s and earn around $140k between us. We have been badly burnt with a Melbourne CBD apartment. We owe $550k on it and rent it out for $360 a week. Today, units in the block are selling for just $400k. Do we sell for a massive loss and tack it on to our home loan, or hope in time it will bounce back?

Jen

 Hi Jen,

Only you can make that decision.

However, I have one observation to make after watching a lot of people lose a lot of money on dud property deals over the years: time doesn’t turn a bad property into a good one.

The truth is you actually lost your money when you bought. That money is gone. It’s not coming back. Now, you can anchor your expectations on getting back to $550k, but what you paid for the apartment is irrelevant to your renter, or the next buyer.All you can deal with is the here and now. So let’s deal with that. You own a $400,000 apartment which is costing you by my (rough) calculations around $10,000 a year in after-tax losses to hold onto. There’s a huge oversupply of Melbourne apartments, so I doubt your rent (or value) will increase anytime soon. The question you need to ask yourself is, knowing what you know now, would you buy that apartment today?

Thanks for your support,

Scott

400,000 problems

Hi Scott,

My partner and I earn great money, close to $400k a year. After years of splurging on kids, cars, houses and fantastic holidays, we are finally sorting out our ‘stuff’. We have savings of about $70k plus about $150k in shares. Here is my question: I took a call today from a financial company talking about a strategy called ‘post reduction tax’. Sounded good. Is it a real thing?

Cindy

Is ‘post reduction tax’ a real strategy?

Well, I think I remember reading about that in the Australian Journal of New Idea. Professor Kim Kardashian was detailing a ‘post reduction strategy’ to get her bikini bod back after having her latest baby.

Cindy, what I’ve just said is no more stupid than taking a cold call from a stranger who pitches you an investment opportunity to save you tax.

Statistically, on your household income, you’re 97 percent wealthier than the rest of the population -- it’s time you started acting like it.

Three points:

First, while a high income allows you to look rich, it doesn’t automatically make you wealthy. For that you need to save, which you seem to be doing, so well done.

Second, you should minimise your taxable income the smart way. Salary-sacrifice the maximum amounts you can both put into super ($30,000 if you’re under 50, $35,000 if you’re 50+). With any money left over, focus on paying down your mortgage, as well as looking to invest either in a family trust or investment bonds.

Finally, don’t get too stressed about paying tax. It’s a good thing! This is something I know about -- I’m a high income earner but I don’t have a dollar of debt. Some people would call that silly. I call it peace of mind -- and when you’ve got that, you’ve really got it made.

Scott

The Lying Scumbag

Hi Scott,

I am negotiating with my ex-husband on our separation. It has been a long and arduous process, mainly because he is a lying scumbag and has no regard for anyone but himself. I want his super, which he says is ‘bugger all’. When pressed he said it is less than $4,000 (because he has always been self-employed and never bothered with it). No matter. I want it. He says I can’t get it because it’s too small. What do you say?

Nicole

Your lying scumbag of an ex-husband is actually telling the truth. Well, what I mean is, if his balance is under $5,000 then it’s deemed ‘unsplittable’ in a separation. Having said that, your husband isn’t the sort of person I’d play golf with, or allow to ‘self-report’ on how much money he has. So I’d get your solicitor to run a check on that. One more thing (and I hate to say this): if your super balance is over $5,000, it can be split!

Scott

I Just Got Out of Jail … Now What?

Hi Scott,

I made a huge mistake years ago and ended up in jail. I got out, put it all behind me, and found a job. But now I’ve been made redundant, and I can’t find another job because of my criminal record. I owe $360k on my mortgage (I live alone). I have redundancy money of $14k, and I'm really scared that I won't find another job. I have applied for fifty jobs and got three interviews -- and as soon as they hear about my jail time I get stonewalled. I want to work. I don't want to lose everything. How can I survive?

Steve

Hi Steve,

First, well done for turning your life around.

Second, you should ring your bank immediately, speak to their hardship department, and tell them you’ve lost your job.

Third, understand there are organisations that can help. WISE Employment helps former inmates get jobs, the TOLL Group has a well regarded ‘Second Step’ program, and there are heaps of government and community agencies (like the Salvation Army) that specialise in helping people like you get into a job. Get in touch with them immediately.

Finally, create a 60-second pitch about your past: take full responsibility for your mistakes, discuss your specific learning lessons, and explain why you’re a better person because of what happened -- and a harder worker than the next bloke. You’ve got a lot to prove to yourself and others. Practise it in the mirror till it’s perfect. Say it in interviews, say it on dates, say it to your kids. Say it till you beleive it.

Scott

The Gold-Plated Urinal

Scott,

I read you religiously, so I think I know your thoughts, but I’m just checking. My AMP-administered super fund financial planner charges me a management fee of 2.0058 per cent, less a rebate of 0.4500 per cent, over the range of products I hold with AMP. This equates to about $6,500 a year. I then pay an ongoing commission of 0.44 per cent, which adds a further $1,800 (pretty much cancelling out the rebate). I am assuming I have read the documents correctly. Am I being ripped off?

Peter

Hi Peter,

I once answered a similar question by suggesting that anyone being charged these nosebleed fees (and there’s a lot of people in this boat), they should have their name fixed on a gold plaque just above the urinals at AMP HQ. That way, the 26-year-old fund manager knows who he’s peeing on. “Thank you, Peter from Cranbourne.”

However, that answer caused a bit of a stir, and took a few years off my editor’s life, so let’s not engage in toilet humour (again).

Yes, you are being legged. If you have 15 years left till you retire, and you’re contributing $10,000 a year, the cost of your current fee arrangement paid to AMP will be around $283,000. With that type of money you could redecorate a bathroom, or three.

Scott

Realistic Expectations Please, Barefoot

Hi Scott,

You often quote an ‘800-fold increase’ in the share market in the last 100 years. As an investor in blue chip stocks for the last 25 years, this regrettably has not been my experience, nor do I have 75 years left for this to right-size itself. For first-time investors, and those seeking your advice, surely it is now time to recalibrate your ‘100 years of history’ example and use a more relevant percentage -- the last decade, for example.

John

Hi John,

You got your figures slightly off.

The US market has actually risen 18 thousand-fold over the past 100 years.

But, hey, I take your point -- in the long long run we’re all dead (or cryogenically frozen, like Walt Disney), right?

That’s why I’ve consistently said three things:

First, focus on dividends, not share prices. The bulk of your returns come from dividends rather than capital growth (which is why, in my days working for Channel 7 News, I used to die a little each night when I read out the ASX 200 price index).

Second, over the long run you can expect a return of about 6 per cent per annum after inflation -- and that’s a key point, you want your nest egg to grow faster than inflation. At 6 per cent you’ll double your money every 12 years.

Third, there are plenty of lean years in investing where things go sideways, or backwards. That’s the price you pay for earning higher returns over the long run. That’s why I advocate having three to five years of living expenses in retirement in savings and term deposits to get your over a hump.

The share market (as measured by the dork on the nightly news) has basically gone nowhere over the last ten years. But if you factor in dividends, you’ve made 60 per cent. That’s the real story.

Scott

HELP! My Partner has No Idea How Screwed Up I Am

Hi Scott,

I am at a low point. I have been with my partner for a year now, and I know she is ‘the one’. I want to propose ASAP but I have debt from my earlier days, and I urgently want to be rid of it before proposing. Here is my situation: credit card $15,000 (at 0 per cent, expiring in May), line of credit $15,000 (at 0 per cent, expiring in September), personal loan $10,000 (at 10 per cent), mortgage $290,000 on a house valued at $330,000 (rented out at $1,100 per month), salary $85,000 plus super. Please help me, Barefoot! I do not want to start married life with debt hanging over me.

Hugh

Hi Hugh,

That’s the power of love!

Or more likely, it’s the power of overplaying your hand while you were dating -- showering her with gifts, acting like you had it all together and were husband material -- and then madly scrambling to live up to the expectations you’ve laid.

Welcome.

You’re at least 16 months of two-minute noodles away from getting engaged.

You’ve got $40,000 worth of debt. I assume you’re also having to tip in at least $500 a month on your investment property. You’re taking home roughly $5,300 a month. So you should be able to save around $2,500 per month to knock off your debt if you really pull your horns in.

That means you’ll be debt free in 16 months ... and then you can start saving for the wedding! If she’s a Bridezilla (and you won’t know until you’re 90 days out), you’ll be hit with another $40,000 bill, which is the average cost of a wedding these days. It’s a long road ahead, bucko.

My advice?

I’d be honest with her.

She’s going to work it out anyway when you start wining and dining her at the Ikea food court -- “Oh these Swedish meatballs are amazing!”

Admit to her the mistakes you’ve made. Show her you’re man enough to buckle down and get through them without having to sacrifice your long-term investments.

Tell her you’re doing it for her, and your future family.That’s the sort of bloke I’d like to marry (well, if I wasn’t married already, and if I was gay, which I’m not, and if gay marriage was legal, which it’s not). You get my drift. And remember, if it turns out she’s turned off by your lack of cash, well that’s a very good outcome too.

The bottom line is that you’re not the first fella who’s punched above his weight to impress a woman.

Now live up to it.

Scott

One of the Most Shocking Emails From a Reader, Ever

A couple of months ago, I received one of the most shocking emails from a reader, ever:

Cancer Stricken Single Mother ... Lends a Hand

Hi Scott,

I’m in my 50s and have just battled cancer. I foolishly helped out my partner with $112,000 in credit cards that he put in my name over a 10-year period. Now I've beat cancer, I want to fix this up. I have consolidated against my home to lower the massive credit card repayments. My partner isn't repaying the loan but instead wants me to buy a bigger home for us both. With 80 per cent debt now against my place, I can't see this happening. Should I sell up and buy cheaper?

Tina

The guts of my response to Tina was: “If you were my sister, I’d be telling you that before we sort out your finances, there’s one more cancer you need to beat: your partner.”

But I couldn’t just do that, so I called Tina later that week and offered to help her personally -- on one condition: that she throw this scumbag out on his ear. But she said she wasn’t prepared to do it.

That was six weeks ago.I have over 10,000 questions sitting in my inbox, so I archived it (physically and mentally) and moved on.

And then today, as I was sitting in front of my computer checking the share market, I got a telephone call from a number I didn’t recognise.

Barefoot: “Ello?”

Caller: “You said you wouldn’t help me until I kicked the financial cancer from my life. Well, I have. So I’m asking for your advice.”

Barefoot: “Go on.”

It turns out that Tina’s partner -- who I’d love to name -- is a dog.

Not only did he rack up $112,000 in credit cards in her name while she battled cancer.

Not only did he refuse to pay back the credit card debt, he asked her to buy him a bigger home.

And all the while he was cheating on her.

“He was always very secretive when it came to money … but now I know that’s not all he was hiding,” she told me.

Australia’s $11 Billion Dirty Secret

That’s all a bit heavy, right?

Well, it turns out Tina’s not dancing in the dark. Plenty of people are hiding their spending from their partners.

This week a survey by Finder.com.au found that the average Aussie spends $2,713 per year on hidden expenses -- ones they don’t tell their partner about.

Interestingly, the survey found that men spend more than three times as much on secret purchases than women -- $4,596 per year compared to $1,476 per year. It also found that the the number one guilty spending pleasure for blokes was vices like gambling (uh-oh), followed by adult entertainment (oh-kay).

Women are a bit more restrained -- the survey found they are more than twice as likely to hide clothing purchases than men. Big surprise!

Sometimes I wonder about these surveys, so this week I decided to do my own research -- and actually got a higher number of responses than the original survey, over a thousand people. Roughly 60 per cent of my audience said they’d never dream of hiding their spending from their partner.

Of those who did own up to secret spending, my favourite comments were:

“A vet bill for $1,000 … for my rabbit.”

“I bought a Porsche 911 off a friend and told the wife I was looking after it for him ... I had to admit to it after about six months.”

“A horse. In fairness I did ask, he just wasn't listening properly and I knew it, so took advantage of that. He saw it in the paddock when I brought it home.

Apparently the trick is to have at least six horses of the same colour -- that way you can keep adding and non-horsey husbands can’t tell!”

You Can’t Keep a Spending Secret

Really, there are really only two reasons that you’ll go behind your partner’s back and secretly buy stuff.

The first reason is that you’re married to a control freak who watches over their money like Clive Palmer watches over a plate of chicken wings.

Oftentimes, the controlling -- sorry ‘money minded’ -- person will ration money out and force their partner to justify every dollar they spend.

This type of relationship is more common than you’d think, and it often rears its ugly head when a woman is at home on maternity leave. The woman reverts to being a teenager, having to ask their partner for money. Throw in sleep deprivation, a teething baby and mortgage repayments, and you’re on Jerry Springer.

That’s why, for the sake of our marriage, my wife Liz and I manage our money as a team effort.

We share the same bank account.

We agree how much is paid into it, after we’ve filled our other ‘Mojo’ and ‘Grow’ wealth buckets.

And most importantly, we have an agreement that we can each of us can spend $400 on whatever we choose. No need to ask for permission. Anything over that we talk about, and make a joint decision.

(And that’s a good thing. Personally, I am deeply offended by how much her hairdresser charges. My hairdresser hasn’t changed his ‘$20 short back and sides’ pricing in 14 years. Though, admittedly, she looks a lot better than I do.)

The second reason someone acts behind their partner’s back is simple: they don’t share their partner’s values. Sadly, it took Tina 10 years and $112,000 to work that out.

Tread Your Own Path!

We’re Getting ‘Nant’

Scott,

We were initial and ongoing ‘barrel investors’ in the Nant Distilling Company whisky investment scheme you warned about recently. We encountered extreme resistance and delay in paying out our first investment, and we are now seeing similar tactics with our next payouts, despite the recent bad publicity from you. What should I do?

Bill

Hi Bill,

I’ll give you the same advice I give to other Nant investors who’ve contacted me since I wrote my piece: if someone had $25,000 of my money, I’d call them every single day (and twice on Mondays) until they give me my freaking money back! Other people may be happy to sit, wait and see if it all comes good. My view is that it’s the early bird that catches the worm. Be an early bird, Bill. Eat those worms who’ve got your money.

Scott

The End of Australia?

Greetings Scott,

I am 65 and in the process of beginning a transition-to-retirement strategy. I am very worried about the monetary future of the world (have just read a booked called The End of Australia). My financial advisor is recommending the AMP North Protected Growth Guarantee Fund for my $832k in super. What is your opinion of this scheme? The costs will be a 1.35 per cent protection fee, 0.89 per cent for the MyNorth Personal Pension Protected Growth plan, plus a yearly fee of 0.66 per cent for my advisor. Help!

Bruce

Hi Bruce,

Sack your financial planner immediately. Seriously.

I’m so mad I’m going to invoke the spirit of Donald Trump: “Your financial planner is a total lightweight. What a loser. He’s really a dummy.”

Here’s the thing: you went to see your financial advisor, admitting that you were freaked out after reading a book that was, well, designed to freak you out (having ‘The End of ...’ in the title is always a great way to sell books).

Faced with this, your advisor should have sat you down and said something like this:

“You’re right, Bruce. We’ll face many crises in the future. Of course no one can predict precisely when the next one will happen, though generally they seem to happen every ten years or so.

“However, if you look back at the past two hundred years of panics, wars, depressions, booms and busts, investors have been well compensated for taking on this risk: the long-term annual return from shares is around 6 per cent after accounting for inflation.

“Still, it’s no use having money if you can’t sleep at night. That’s why I’m recommending that you have at least five years of living expenses in a cash account. And to counter inflation, I’m recommending you invest the rest of your super in tax-effective, dividend paying shares.”

“And Bruce, you’ll be in good company with this strategy. The greatest investor in the world, Warren Buffett, analysed the risks going forward and publicly stated that he would invest 90 per cent of his estate into a basic index fund for his wife. So the real question is, what does the author know that Warren Buffett doesn’t?”

Well, that’s what your advisor should have told you -- but the truth is he squibbed. Instead, he took the easy option and flogged you an expensive bunch of products that will ultimately eat up almost half your annual income ... and deliver him waves of commissions. Bruce, your biggest risk isn’t the ‘End of Australia’, it’s the ‘end of your savings’. Plan accordingly.

Scott

Why Won’t He Marry Me?

I’ve had a convicted murderer ask me for share tips from jail.

I’ve had a wife ask me about life insurance payouts (while they were still married, and he was still alive).

I’ve even had a few first division TattsLotto winners ask me how to hide their loot.

But I’ve never been asked to arrange a wedding. That is until last week, when this email came through:

Scott,

I need your help. It’s about my partner. See, everything Barefoot says to do, my partner does. He follows your financial advice religiously. So my question is: WHEN ARE YOU GOING TO TELL HIM TO MARRY ME? We have been together five years, have a child, a dog and a home. I get it that weddings are expensive, but I NEED the title of Mrs! Please, Barefoot, make him rush to the altar as fast as he buys your share picks!

Lauren

Yes, it’s more Dr Phil than finance, but hey, I’m as nosey as the next guy -- so I called Lauren up.

Turns out she’s a wedding planner. Seriously. A wedding planner who isn’t married is like a butcher without sausages, or Tony Abbott without his Speedos. It’s just not right. Lauren urged me to make it right. So we hatched a plan.

Lauren and Barefoot Chris (unmarried).

I rang her partner, Chris, and had Lauren waiting on another phone line. It was time to do a deal.

Barefoot: “G’day Chris, it’s the Barefoot Investor here.”

Chris: “I’ve been expecting your call.” (Turns out he’d read last week’s newspaper, where I printed Lauren’s question.)

Barefoot: “Now you trust me to give you good financial advice, right?”

Chris (laughing nervously): “Yes.”

Barefoot: “Well, I’ve got a great investment for you. It’s the bluest of blue chips. It pays amazing dividends. This isn’t a day trade, it’s long term. And I mean till-death-do-you-part type long term. It’s Lauren, the mother of your child.”

Chris: “Uh-huh.”

Barefoot (awkward silence): “So ...”

Chris: “So ... you’ve put me in a tight spot.”

Barefoot: “Look, let me take a wild stab at this. You’re thinking, we’ve already got a kid, and a mortgage, what do I need a piece of paper for … especially if it costs $40,000 … right?”

Chris: “You’ve got it! Though I’m pretty sure it would be $50,000 if she was involved.”

And with that opening bid I was off to the races.

I got Lauren on the line and went back and forth between the two of them like a real estate agent with two Chinese bidders.

Barefoot: “He thinks it’s going to cost $50,000. What’s the lowest you can go, Lauren?”

Lauren: “I’d do it for $20,000!” she squeals.

Barefoot: “She’ll do it for (cough, cough) $10,000, Chris, but I think she’s got more in her. Let’s push for $7,500.”

Lauren: “Oh now that’s stretching it … does that include a ring?”

Barefoot: “Chris, got any Burger Rings? Cheezels? Let’s get this deal over the line.”

No One Plans a $40,000 Wedding

The average cost of a wedding in Australia is somewhere between $36,700 (IBISWorld) and $48,296 (Bride To Be magazine).

Let’s call it $40,000.Of course no one sets out to spend that much –- it just works out that way.

As a wedding planner, Lauren knows that -- it’s the ultimate emotional spend.And as the partner of a wedding planner, Chris has been exposed to enough Bridezillas -- which is presumably why he’s guarding his Mojo like a junkyard dog.

There’s a ‘wedding tax’ that makes everything more expensive.

When I got married I remember meeting with a wedding photographer who came highly regarded.

“Photography will cost $5,000”, he said dismissively, straight off the bat, without even breaking a sweat.

“Right, well that sorts that out. We’ll get our best mate to take the snaps”, I said.

And on it went.

In the end we ditched a wedding venue and got married at our farm. The ceremony was just down from the shearing shed, under a big beautiful tree that I hope one day our boys will get married under too.

The reception was in the backyard.

Now three years (and two kids) after our wedding, here’s my reflections on the night:

I don’t remember the paper quality of the invitations, the cake, or the flower arrangements. All I remember is having a great time with my family and friends, dancing badly, and marrying my best friend.

What about Chris?

Well, he tells me he’s currently shopping for a ring, but in the meantime he’s turned into a bit of a Groomzilla:

“The only food I want is sausage rolls and saveloys”.

“Oh, and I want the Barefoot Investor be the MC”.

Now he’s put me in a tight spot...

Tread Your Own Path!

Marry Me, Barefoot!

Scott,

I need your help. It’s about my partner. See, everything Barefoot says to do, my partner does. He follows your financial advice religiously. So my question is: WHEN ARE YOU GOING TO TELL HIM TO MARRY ME? We have been together five years, have a child, a pet dog and a home. I get it that weddings are expensive, but I NEED the title of Mrs! Please, Barefoot, make him rush to the altar as fast as he buys your share picks!

Lauren

Hi Lauren,

I’ve had some interesting questions in my time, but this one takes the cake. I’m not sure if my financial licence covers me for such a recommendation, but let me ponder this for a week or so. Keep your eye out for next week’s column.

Scott

Help, I Have Too Much Money!

Hi Scott,

I’m in my mid-40s and making $600k a year (with bonuses). We have a house worth over $2 million fully paid off, about $850k in cash and $250k in super. I’m now trying to get organised and have engaged a financial advisor for our super and investments. I just cannot get to the bottom of what is a reasonable cost: he is charging me $16,000 a year for my SMSF and family trust, plus $11,000 a year in advice fees. In addition we are being charged about 1 per cent advisory fee on our investments. What is ‘okay’?

Brendan

Brendan,

You’re obviously a smart guy. So you’ll no doubt understand that your financial advisor looks at your assets in pretty much the same way a horny teenage boy looks at Kate Upton’s … err ... assets. In both cases they dream of getting their hands on them, and never letting go.

Back of the envelope: they’re charging you $37,000 a year in fees ... which will grow in line with your investments. How did they come up with that figure? Basically it’s a ‘rich bastard tax’. They know you can afford it.

Personally, I’d pay $25,000 to have a coordinated team of lawyers, financial advisors and accountants design and implement your asset structuring, and importantly your asset protection. Then I’d pay them $5,000 a year for a full annual review of your tax situation, with them advising on what loopholes they can exploit (at your income level, and wealth, there are always loopholes). Finally, I’d invest most of the money into my favourite rock-bottom-cost share funds, sign up for the dividend reinvestment plans, and focus on enjoying life.

Scott

What Would Scott Pape Do?

Hi Scott

What would Scott Pape do? This year I will receive an inheritance, around $400k, and I want to be sure I make the most of it. I am 37 and single, and that is unlikely to change (I can send photos!). I earn $77k a year and have a $250k mortgage on an unrenovated flat worth maybe $300k, $3k in credit card debt, $75k in super, $2k in shares, and exactly $0 in savings. My two sisters and I will be financially assisting my mum in the future. Please tell me: WWSPD?Thanks,

Leonie

Hi Leonie,

I’ve been told that my advice is like a comfy pair of undies: it may not be sexy, but it’s reliable, faithful, and it never changes. With that in mind, here’s what I’d do:

First, I’d do nothing for three months. You’re single. You have no dependants. You now have $400,000. There are very few people who get the chance to hit ‘reset’ on their adult lives -- you do. You don’t want to have regrets in 20 years’ time.

If you decide you want to stay in your flat long term, I’d do the following: pay off the mortgage, set aside $30,000 for renovations (less if you can), clear your credit card, and deposit $10,000 in a high-interest online savings account (Mojo). If it were me, I’d also donate some money -- remembering that ultimately the best way to honour the person who gave you this money is to manage their money well.

That’ll leave you with roughly $100,000. You then have the option of buying an investment property, investing in shares in your own name, putting money into super, or marrying a moron. The most tax-effective thing you could do is to make a voluntary contribution into an ultra-low-cost growth-orientated super fund. If you do, you’ll be on track to retiring with $2 million. That’s what I’d do. Finally, I’d save up your wage and take outrageously good holidays each year.

Scott

Liar, Liar

Hi Scott,

We’re married, aged 28 and 31. We earn a combined income of $192k, have $44k in savings, and want to build our first home. We intend on borrowing $550k and getting a guarantor option to avoid Lenders Mortgage Insurance (LMI). Our initial plan was to pay off as much as we could as fast as we could. However, we had a meeting with our mortgage broker and he advised us to have it as an investment property for five years, and therefore get a bigger loan for the tax benefits. As we plan to start a family in about five years, we could make it our home at that time, and still have all the tax benefits along the way.

Prue

Hi Prue,

Let’s recreate that meeting with your mortgage broker, but without the bulldust. I’ll play the role of the broker, who I’ll base on Jim Carrey’s character in Liar Liar (that is, he has a magic spell cast on him and has to tell the truth for 24 hours):

Prue: “We’d like to own our first home. We’re thinking of a loan of around $550k.”

Broker: “Look, the more you borrow, the more commission I make. So how about you borrow more, so I can pay for my daughter’s braces?”

Prue: “Why would I want to do that?”

Broker: “Well, if you borrow more money, and turn it into a rental property for five years, you’ll be able to claim your losses against your taxable income. You’ll still be out of pocket, and I can’t imagine whoever you’ve roped into being your guarantor won’t be very happy about it either. But again, this isn’t about you, it’s about me.”

Prue: “Is there another way?”

Broker: “Well, you’re on decent money. If you save hard for another five years, you’ll get to a 20 per cent deposit, and you’ll be able to avoid a potentially disastrous family situation with your guarantor. Or else you’ll avoid paying $14,000 in LMI. But there’s no commission for me, so that is not what I would advise. Here is a photo of my daughter’s dentist. He drives a Mercedes.”

Scott

How to Be a Lifestyle Entrepreneur

Hi Scott,

I really enjoyed your last piece on starting your own business. I’m 35, married with a son (three), and a mortgage of $660k. I’m an account exec at an advertising agency, earning $115k plus super. It is hard work, long hours, and totally unfulfilling. I know I have more to offer the world. Specifically, I am planning on creating a virtual coaching business for executives in the connected economy. Other lifestyle entrepreneurs in this niche earn amazing money, can work around family commitments, and even find time to travel. Financially, what do I need before I quit my job?

Chris

Hey Chris,

A couple of observations.

Firstly, I’ve met many a lifestyle entrepreneur -- including quite a few who’ve been written up in magazines with headlines like ‘I stumbled onto a million-dollar business and now live on my own island!’ Experience has shown me that it’s all coconuts.

The people who really make it to the top of their field in small business are, in most cases, total workaholics, absolutely ruthless, and often a little unhinged.

It makes total sense when you think about it. They’re willing to throw in the security and benefits of a full-time job to go into battle with established players who have more experience and more money than they do. It’s not an easy path, or everyone would follow it. Most people are not cut out for it.

Second observation. Reading The 4-Hour Workweek a few times will not prepare you for business.

The only way you can work out whether you’ve got the ticker is to go out on your own while still working full time. If you’re doing 40 hours a week at the advertising agency, do another 4 hours each night after the anklebiter is in bed (oh, and work all weekend) for a few years until you’re earning at least $115k a year from the business.

I call it the ‘trapeze strategy’: don’t let go of the bar (your secure paycheque) until you’re safely holding the next one (your successful business). Enjoy the lifestyle!

Scott

Scam Me Two Times, Baby!

Hi Scott,

Your article on land banking hit me between the eyes. You really try and protect people. I wish I had listened to your advice! I invested about $100k in a land banking deal, which I paid for with an SMSF they set up for me (just like you said). The company is now in liquidation, and lawyers are trying to get some money back for us investors. At the age of 53 I am left with only $30k in super and a huge mortgage to pay. I want to close my SMSF down, but the lawyers say that if they get some money it has to be paid back to the same super fund. It’s costing me $2,000 a year to keep it open. What should I do?

Lisa

Hi Lisa,

Most people get robbed with a gun -- you got robbed with a pen.Here’s the thing that frustrates me about white-collar crime: if they’d used a gun instead of a pen, these crooks would be (rightly) rotting in jail, and you’d have some recourse to your money through the ‘Victims of Crime’ compensation system.

Yet this scam is aided and abetted by lawyers, and is designed with the end game in mind -- making off with your loot, no matter how long it takes them. (At the very least, when a scumbag sticks you up in a dark alley you know what the outcome will be -- and that it’ll be over quickly.)

For all these reasons it’s doubtful they’ll ever get you any money -- that was never part of the plan. However, I can understand you live in hope that they’ll get some back for you, and if so it’s true they can only pay the trustees of your current super fund.

So you’ll have to keep it open. However, with only $30,000 in your account it’ll be eaten up if you live in hope for too long. My recommendation is to switch your fund over to an outfit like esuperfund, which will run an SMSF for $799 (it will still be the same fund, just managed by a different outfit). If at the end of the two years there’s no money, close it down.

Scott

All that Glitters is ... Silver?

Scott,

Why would you tell Mark (27th March) to get rid of his silver? If you were to do some deeper research on gold and silver, you would find they are likely to multiply many times. This will be due to the inflated world money supply producing a Ponzi-like bubble on world stock markets, and then crashing, making for a rush to silver and gold, even with a high AU dollar. Look ahead a bit!

Doug

Hi Doug,

Let’s do some ‘deeper research’.

First, I appreciate and totally agree with you that central bankers have put the world in uncharted territory. I also share your hunch that, when our day of reckoning comes, gold and silver and cans of tinned baked beans will all move higher, albeit temporarily, which could make you a trading profit.

The question is when this will happen. You don’t know. I don’t know. The doom and gloom newsletter publishers who make millions of dollars a year selling subscriptions don’t know either. A 20-year study by academic Philip Tetlock from the University of Pennsylvania tracked 82,361 economic and political predictions from academics, experts and gurus, and found they were about as reliable as a dart-throwing monkey.

So while you wait for the world to crash, you’ll be stuck with an investment that misses the secret source of wealth: compound interest. See, the problem with trying to predict the future price of silver, gold, or my grandma’s prized Victorian teapot is that none of them have any practical utility (other than looking pretty). They’re not like a company that generates profits and pays dividends, nor a home that can be rented out. You can only make money by trading it -- selling a lump of metal with no intrinsic use to someone who believes the same story that you do.

Finally, if you do some ‘deeper research’, you’ll see that over the past 100 years gold and silver have barely managed to keep up with inflation. Over the same time period, the US share market has risen a staggering 18,520-fold.

Scott