When it comes to a savings plan, time is of the essence

I OFTEN wonder why “financial advisers” never address the group of men and women out in the community who are over 50 years of age and have nothing, or are starting out again financially, which is my case.

06/02/2009 BUSINESS: Scott Pape. The Barefoot Investor. HWT staff.

Q I OFTEN wonder why “financial advisers” never address the group of men and women out in the community who are over 50 years of age and have nothing, or are starting out again financially, which is my case. After declaring bankruptcy over seven years ago, I secured a good government job, and I thought I was on my way to a brighter future. Yet after dillydallying around, I am now $22,000 in debt again, still a renter after more than 30 years, and earn just over $69,000. My credit rating is bad, as one would expect. I am thinking of enlisting one of those “budget” groups but not sure about that path. Hoping you may have some wise words and realistic suggestions, as I’m sure I’m not on my own.

Joan

A I’M not sure exactly what “dillydallying around” means, but if it’s “acting like a teenager and not taking responsibility for my actions”, well, I guess that about nails it.

To make any change, you’ve first got to tell yourself the truth. So here goes: you’ve spent 30 years spending more money than you earn. That’s why you went broke. That’s why you went back into debt after you got out of bankruptcy.

Don’t blame your low income. I know dozens of people with a net worth over $1 million who earn less than you. The difference is they saved money every single payday and invested it into houses and businesses. They just got on with it, and little by little they rode the compound interest curve.

The next five years will make or break you. To give yourself a shot at retiring with dignity, you need to do two things: pick up a second job, and aggressively save more than you earn. No one is going to fix your mess — especially those “budget” outfits. They’re sharks that will just get you deeper in debt (i.e., they’ll charge you a fee on top of the debts you’ll still owe).

There is a bright side, though. You’re right — there are plenty of people in your position, and the few people who consciously decide to face their fears and move forward don’t just end up wealthier, they tend to end up happier too.

DUD PROPERTY, ZERO GAINS

Q I HAVE recently sold an investment property that, over the space of four years, returned 0 per cent capital growth. I have, however, received $24,000 from the equity in the sale. I’m married and we have children on the way and want to use the majority of this money to start building a family home. How much of this money should I look at investing to start down the path of a Barefoot investor?

Chris

A FOUR years isn’t long enough to hold a long-term investment like property, which has big upfront costs. You’re lucky you got your equity out!

As far as starting on the investing path goes, the first step would be to put three months of your household living expenses into a savings (Mojo) account. Your wife will love you for it — trust me on this one. Then I’d suggest you put the rest into a dedicated savings account for your home.

MEDIBANK PRIVATE SHARE OFFER

Q COMMSEC has emailed me a Medibank Private share offer. Normally I put my investment savings into Argo ($10,000 at a time). Would Medibank be a good change of plan?

Rick

A I’D certainly register your interest in the offer — it doesn’t cost you anything to do it, and you’re not obligated to take up the shares. None of us will know the exact details of the offer for a few weeks, so the best course of action is to register and then make your buying decision when the prospectus lands in our laps in a couple of weeks.

BUCKETS OF LOVE FOR BAREFOOT

Q NOT a question, but I didn’t know how else to email my thanks.

I have always been terrible with money, but since starting up my “Barefoot buckets” three months ago, my life has changed. Suddenly buying a house is an achievable goal. I don’t stress about how I’ll pay for a bill or save for my next holiday. The best bit is I know where my money goes and, even though I don’t earn a lot, it feels like it’s going a lot further than before. So thank you, thank you, thank you.

Sarah

A I’M really glad it’s working for you.

Yes, there are shiny iPhone budgeting apps, but the truth is that most of these plans have a high burnout rate. It’s like being on the caveman diet — for the rest of your life.

The power behind the three-bucket strategy is its simplicity. As you’ve discovered, all you need to do is allocate your money into three buckets: Blow (spending), Mojo (most important of all) and Grow (super and other investments). Follow it and you’ll grow a little wealthier every day. Enjoy the feeling!

WHOSE BUSINESS CLASS AIRFARE?

Q IS $6700 per year too much to pay an adviser for an SMSF? It’s worth about $650,000. Can you give me the name of a low-cost super fund — and is it hard to change from an SMSF?

Gary

A YOU’RE being charged roughly 1 per cent a year, which is fairly standard. But I certainly wouldn’t be paying this on an ongoing basis — that’s a business class airfare!

You don’t need to change funds, just change tack. Talk to your adviser about setting up a diversified share portfolio, and tell them you want to cut your bill (I mean their bill) in half. Better you than your adviser up the pointy end of the plane.

Originally published as When it comes to a savings plan, time is of the essence