Today, I’m eating humble pie.
I have to confess to you, dear reader, that a key ‘plank’ of the advice that I have written about for over a decade is, well, wrong.
And it took a lovely couple to show me the error of my ways.
For years, this young couple have followed my advice.
However this week, they left a financial planner’s office feeling…confused.
“The advisor basically contradicted everything that the Barefoot Investor has taught us”, she wrote.
I know what you’re thinking.
No, this isn’t a beat up on some slimy used car salesman turned financial planner.
Remember, this young couple are true Barefooters.
So, they carefully sought out an appointment with a genuinely independent financial advisor — one of the very few in Australia who doesn’t accept dodgy kickbacks, or commissions.
So what the hell happened?
Well, let’s backtrack for a minute.
Years ago, the young couple bought my original book, the Barefoot Investor.
They saved up three months of Mojo.
They saved up and bought a home they could afford.
Then, they aggressively set about paying it off.
And I mean aggressively: even though they’re on an average income, they’re still on track to own their home, debt-free, by the tender age of 35.
They’ve sorted their superannuation, their insurance, and they even own some shares like AFIC.
Does this all sound familiar?
The couple’s long-term goals are as simple as they are modest: they don’t want kids, they plan on keeping working, and they want to retire to Tasmania on a small plot of land.
(I’m totally guilty of encouraging people to buy family farms…which are terrible financial investments).
And so with their goals in place, and with about three years left on their mortgage, they decided it was time to seek out an independent financial advisor…who abruptly told them that their Barefoot strategy was basically wrong.
The Independent Advisor
The independent advisor said that it didn’t make sense for the young couple to pay off their home. Instead, he suggested that one option was that they could be better off by redrawing on the equity in their home, and invest in a $600,000 apartment in inner-city Melbourne.
That’s not surprising. Most financial advisors poo-poo the idea of owning your own home outright. They think it’s too simplistic, and warn that you’re leaving wealth on the table by not using your assets to borrow and invest.
Yet the thing I’ve learned from counseling thousands of people is that the most important question to ask yourself is not ‘how much money can I make?’, but rather ‘what happens if things go wrong?’
For this young couple, they might ask: What happens if the apartment we buy doesn’t have the capital growth that’s on the financial advisor’s spreadsheet? What happens if we’re stuck with a property that we’re doling out money in maintenance for, if it flatlines in value for years?
The truth is that debt is always dangerous. It always adds more risk.
And if you can avoid it, you should.
So here’s where I was wrong.
For years I’ve advised people to go and see an independent financial advisor.
However, what I learned from this young couple is that even these planners are still biased.
Case in point: the financial planner the young couple went to see charged $5,500 for the financial plan. They also have alliances with property advocates, who charge as much as $13,200 for researching and sourcing an apartment. Then the advisors charge the couple an annual advisory fee of $1,650 a year — at a minimum.
(Picture my father whistling, with one eyebrow cocked).
Here’s the rub: if you’re paying some pencilneck $5,500 for a financial plan you want complexity! Spreadsheets! Ratios! Beef jerky! Pie charts! Tax effective borrowing! Ka-Pow!
It’s bloody hard to justify charging thousands of dollars if your advice is:
“Just keep doing what you’re doing”.
So, here’s what I would tell the young couple if they were sitting across the table from me:
In three short years time you’ll have paid off your home…at age 35!
You should totally have a ‘title party’, where you get all your friends together and get rolling drunk on your front lawn, and celebrate one of the biggest financial achievements of your life, owning your own home outright.
In over a decade, I’ve never, ever had anyone come back to me and say: “Mister Barefoot Investor, the one thing I regret was taking your advice and paying off my home. That was the worst advice EVER”.
And it gets better.
Without a monthly mortgage repayment, you’ve set yourself up to win — big time.
If you can salary sacrifice $60,000 a year into your super (the closest thing we’ve got to a legal Cayman Islands fund), you two will retire on about $4 million, completely tax free.
You’ll never have to worry about money again, and you’ll never outlive it.
My final piece of advice is…don’t pay for their advice. First, because it’s rubbish. Second, because you’d be better off saving the $18,700 in upfront fees, and the $1,650 annual fee, and investing it in the share market. By the time you retire it’ll be worth $560,000!
And thank-you for teaching me a lesson this week.
The independent advisor is right, the Barefoot plan is embarrassingly simple.
And that’s exactly why it works.
Tread Your Own Path!