Barefoot Investor: How to get your kids on the property ladder

In this exclusive edited book extract, the Barefoot Investor Scott Pape tells readers how to help get their children into their first home and set them up for life.

THE BAREFOOT LADDER

Scott Pape’s new book, The Barefoot Investor for Families, explains how to set your kids up for life.

The book takes you through the Barefoot Ten: Ten money milestones every kid should check off before they leave home.

Pape has gone from his infamous “Barefoot Date Nights” and transformed them into “Barefoot Money Meals”, where you sit down with your kids over dinner once a week and follow the program.

This exclusive edited extract is #10 from the Barefoot Ten: Your kids must set up a savings account for a home deposit.

MORE BAREFOOT INVESTOR

INTRODUCING THE BAREFOOT LADDER

I don’t know about you, but the final financial yardstick that I have for my kids is them buying their first home (nothing flashy … just a decent starter home that they can begin building up their equity in).

Then I’ll be like George “Dubya” Bush standing on an aircraft carrier under a giant “Mission Accomplished” banner.

(Okay, so maybe that’s not the best image …) My thinking is that if my kids can buy their own home they’ll be living the lessons of this book …

Most kids approach buying a house the same way as getting down a ball that’s stuck on a roof.

They look up, and realise it’s too high to grab.

After a few half-hearted jumps, they stomp their feet and resign themselves to the fact that it’s “impossible” to ever get it back.

(Then they go inside and eat a smashed avocado sandwich.)

As the parent, what you’re going to do is put up a ladder, and you’ll hold it for them, as they climb.

But you’re not going to do the climbing for them. And you’re not going to push them up with your head up their backside.

“HEAVE!”

No, it’s your kid’s choice as to whether they want to climb the ladder.

Okay, so it’s a simple metaphor, but an incredibly powerful one.

The Barefoot Ladder will light a fire in the belly for your kids, and get them into their first home.

It’ll incentivise them to work hard, and save even harder.

And best of all, it won’t blow a hole in your own financial plan.

Alan Coignet is still living at home while he contemplates buying his first house. Picture: David Crosling

LET ME EXPLAIN HOW IT WORKS

Your teen (if you have one) is going to open a savings account for their house deposit. And they’re going to begin saving into it, starting now. No ifs. No buts. Even if it’s just a few bucks.

Hang on, didn’t you already do this in your first Money Meal of the Barefoot Ten?

Correct! Which means you’re already half done with this chapter. Good on you!

Yet here’s where we’re going to make it count.

Because at the same time, you’re going to set up your own “Barefoot Ladder Fund” where you can start socking money away today so that you can help your teen as they climb up the property ladder. (If you don’t have a teen yet, even better — the earlier you start this, the better it works.)

Yet it won’t be a handout.

Because here’s what’s special about this money you’ll save: it’s your money, not theirs.

You control it. You invest it long-term for maximum growth (I’ll show you how). You decide how much you give them, and when.

And when you pay out, you do not give them a handout — instead you’re going to match their savings efforts (more on this in a moment). So you’re still helping them … yet they’re working for every cent you give them.

This is the Barefoot Ladder in a nutshell.

Now let’s talk about how to make it happen.

YOUR TEEN’S HOME DEPOSIT SAVINGS ACCOUNT

Back in Chapter 1, your teen got their own serviette strategy.

Now I want you to add to the serviette by having them open up another linked high interest savings account, and nickname it “Tom’s House Deposit”.

And when they do, they’ll probably think you’ve finally gone off your rocker:

“Awesome! I have $48 in my ‘House Deposit’ account — only $499,952 to go!”

So explain what it’s all about.

Tell them that when it comes to getting their first home, the ball is on the roof … and you’re going to give them a ladder to help them get there, if they’re willing to climb it.

There’s power in starting something, even if achieving it is many years away.

What you’re really doing is putting the idea on their radar: you’re setting up the ladder and showing them the path they have to climb.

The fact is, eventually they’re going to want to own a home … and this is the account they’ll use to save for it.

They may only put in a few bucks a year, but it doesn’t matter — you’ve planted the seed.

And that seed will grow, believe me. Every time they open their banking app, they’ll see their House Deposit Savings account … and think of the goal they’re saving for.

Drip, drip, drip.

Too many whining Millennials cry into their $12 seeded-kale smoothies and moan that buying a home is unfair (which it is!). Yet crying never got anyone anywhere. By opening an account, and starting to save, your kid is already climbing the property ladder — even if they can’t see it yet.

To give your kids a hand, start a regular savings plan now, and invest in the highest returning place possible: the share market.

YOUR BAREFOOT LADDER FUND

While your teen climbs towards their first property, you need to be right behind them, holding the ladder.

Let them know that for every dollar they save in their house deposit account you’ll chip in some money.

How much?

Well, if you can afford it, you could match them dollar for dollar.

However, I fully understand that most parents won’t be able to do that. Yet even if you can only match them, say, ten cents per dollar … wouldn’t it be great if you could say to your kids: “I’m going to give you some motivation to get you into your first home. For every dollar you save in your house deposit account, I’m going to award you a 10 per cent bonus. How’s that for a rocking interest rate?”

Whatever you decide is the right level of matching, I’m going to show you how to start planning for it today, so that you can make it a reality tomorrow.

Word Up: if you’re stressed about money — because you have credit card debt, or you don’t have your finances under control — don’t set up a Barefoot Ladder yet. Instead, the best thing you could do is borrow my other book from the library and sort yourself out first. However, I’m assuming if you’re this far into this book, you have a pretty good handle on your money. So now, let me show you how to set up your Barefoot Ladder Fund.

SETTING UP YOUR BAREFOOT LADDER FUND

It’s going to be years before your teen buys a home.

Yet when the time comes it’s likely going to cost a fair whack.

So if you do want to be able to give them a help up, my advice is to start a regular savings plan now, and invest in the highest returning place possible: the share market.

Now there are almost as many ways to invest in the share market as there are shows on Netflix:

You can open up an investing account in your own name, and sign up to a managed fund with the likes of investment giant Vanguard, or you can download an investment app like Raiz, or you can buy shares in Barefoot favourite Australian Foundation Investment Company (AFIC).

However, if you and your partner are earning over $37,000 a year (or you plan to be doing so at some stage), I’d recommend you set up your Barefoot Ladder Fund with an investment bond, which pays tax at a lower rate than you will.

Hang on, what’s an investment bond?

Let’s clear this up once and for all … you might have heard of bonds before: government bonds, war bonds, James Bond. Well, an investment bond has absolutely nothing to do with any of these.

Instead, it is simply an account where you invest money long-term (10 years plus) into a managed share fund.

Investment bonds have some very good advantages:

●They’re an easy-peasy way of regularly investing small amounts of money into shares, via a regular direct debit monthly savings plan. You can increase your yearly contributions by 25 per cent each year.

●Anyone — parents, grandparents, family, friends — can contribute.

●And best of all, they’re really simple — just “set and forget”. You don’t even have to worry about including anything in your tax return because it’s a “tax-paid investment”. (To be exact, tax is paid on the investment income and realised gains at a rate of 30 per cent, by the bond issuer — not the investor.)

●They have the legal power of a “real” trust fund (like Paris Hilton has) without going through the significant cost and hassle of setting one up (the money in the investment bond bypasses your will and goes straight to your nominated beneficiary).

So, which investment bond should you choose?

It’s fair to say that there are a lot of terrible investment bond providers in the market. The worst are a complete rip-off, like the Australian Scholarships Group (ASG).

According to my research, at the time of writing, the three cheapest investment bonds (in no particular order) are:

Generation Life LifeBuilder Bond;

AMP Growth Investment Bond;

Australian Unity Lifeplan Investment Bond.

Honestly, there’s not much that separates these three — the main thing being that each requires slightly different minimum opening balances and charges different fees.

Again, I get no commissions, no kickbacks and no footy tickets — this is just my research. You should do your own.

My suggestion? Call them all up and ask about their fees, their minimum investment amounts, their rules and how to set up the bonds.

While your teen climbs towards their first property, you need to be right behind them, holding the ladder.

WHERE SHOULD YOU INVEST THE MONEY?

After you’ve selected your bond provider, you’ll need to choose where you want your money to be invested, just like in your super fund.

My advice?

Since you’re investing for 10 years or more, you’ll want to invest 100 per cent into shares. This option will usually have “shares” in the name, though providers often use more fancy names, like “Specialist Australian Shares”. If you’re unsure, check the product disclosure statement or give them a ring.

And one more thing on bonds: all bonds have a number of rules, so check the fine print before you invest, or talk to a licensed financial adviser who can explain it to you.

Yet I’m sure you still have questions, so let’s talk.

HOW MUCH SHOULD YOU INVEST?

It’s totally up to you, and how much you think you’ll need … and how many bloody ladders you’ll need to put up!

There are minimum amounts you’ll need to start an investment bond, which varies (from $100 up to $1000). After that, you can set up an automatic savings plan (say $100 a month, which is $1200 for the year). Though, it varies by bond provider, so it pays to call them up and ask.

The Barefoot Investor For Families, by Scott Pape, is published by HarperCollins Australia and available now.

Originally published as Barefoot Investor: How to get your kids on the property ladder