What is the key thing to having a good life and feeling happy? Many people believe that it’s the ability to spend as much money as you want. If there is a need to scrimp, save, or budget, that’s not a good life. It takes the fun out of it and can lead to unhappiness. To some degree, I believed this myself, until I read a book called The Barefoot Investor by Scott Pape.
The Barefoot Investor and Scott Pape have become household names within Australia. Back in 2014, Scott lost everything due to a bush fire – his home, farm, and business. But he was able to recover and get his life back on track relatively quickly compared to other people in the same situation. How come? Well, thanks to some good financial decisions he made before that misfortunate event.
I want to share with you how The Barefoot Investor helped me learn that it was not so hard to spend less than you earn. I’ve only read about a quarter of the book. So at the moment, I want to share with you some of the crucial components that I’ve implemented. These helped me save an extra $500 per month without a lot of effort. And certainly without any effect on my happiness.
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I am now going to cover the Barefoot Investor 6-step approach to budgeting and explain how to handle your money effectively. Once you learn and apply this, you’ll find it much easier to spend considerably less than you earn.
Step 1: Save an Initial $2,000
The Mojo Account
Having $2000 in a savings account is an essential first step. There is always a chance of some unexpected financial costs occurring. If you have that $2,000 buffer, you’ll be able to cope to at least some degree. Also, when you claim on your insurance, there’s often an excess to pay. So it’s good to have that backup money.
Scott Pape calls this money Mojo. He recommends putting it in a savings account – the Mojo account. When you have that money in a separate account, in a time of need, it will help you get your Mojo back. It gives you financial confidence. It makes you feel that you can cope if something unexpected happens. It also provides a head start in a financial crisis.
No Money for the Mojo Account?
What if you don’t have $2,000 in the bank right now? What can you do to get it? The first most obvious thing is to sell some of your stuff. Look around your home. Look for the things that you don’t use very much and sell them.
If there’s nothing you could sell, find a second job for a few weeks until you earn that $2,000.
For me, this step was very easy. I already had more than $2,000 in savings.
Step 2: Live on 60% of Your Income
Can You Do It?
You’ll need to do a bit of research to find out whether you can spend less than you earn. Basically, look at your outgoings. Look at your rent or your mortgage payments. Find out the cost of your utility, phone, and internet bills. Pay attention to your car, house, health, or life insurance. Calculate how much you spend on food each month and look at any loan repayments that you have. Ideally, they should all add up to only being 60% of your income.
What If You Can’t?
If you find that your living costs add up to more than 60% of your income, what can you do? There are only two things – earn more or spend less.
Earn more – You could find a second job for a while, or try to get a promotion at your current work. You could rent out a room, or start some part-time business.
Spend less – You could also try to save some money. Review your monthly expenses. See if there’s something that you could reduce or lose altogether. Maybe move to a smaller place and save on rent. You could also review your insurance premiums and your cover. Quite often, you can increase the excess and get a lower monthly premium.
Here in Australia, we have health insurance that comes with what’s called extras. These extras cover things like dentists, chiropractors, therapists, personal trainers, massages, or acupuncture. Typically, you can get 20 to 25% of the cost of those back.
It would be good to check how much you claimed back for those services in a year. Then look at how much you’re paying for the extras cover. I found I was paying more for the extras cover then I was claiming back. It just didn’t make sense to continue paying that, so I saved some money there.
I’m going to give you some personal experience here. I found it reasonably easy to live on 60% of my income. My income does fluctuate from month to month because my business as a hypnotherapist means that I have good months and bad months.
So I did some things to reduce my costs. I reviewed my health insurance and changed my insurance company. I reviewed the internet service to see if we could make some savings there.
And for the last three months, I’ve been able to live on 60% of my income comfortably. The fact is, you can spend less than you earn more easily than you think.
Step 3: Find a Bank with No Fees
When I lived in the UK, free-banking was normal. But when I moved to Australia, it was common to pay $5 a month for running a current account. And also quite common to pay an annual fee on credit cards. If you use another bank’s ATMs, you pay a surcharge on that as well. This might be the case in your country also.
So an important step is to find a bank that doesn’t charge those fees. Another thing to watch as well are international transaction fees. I assumed that, when traveling to another country or buying things online, it was normal to pay some surcharge on my credit or debit card. But Scott Pape says in The Barefoot Investor that you shouldn’t be paying these. Some banks will refund or not charge international transaction fees. Here in Australia, one of the banks that does that is ING. It’s an online bank that doesn’t have any branches.
So do some research. If you’re paying any fees, including international transaction fees, find a bank that refunds them or doesn’t charge them in the first place. Look for online banks. See if you can find one in your country that has no bank fees and offers refunds for international transactions.
Step 4: Open 2 Current Accounts
Once you found a bank that charges no fees, you’re going to want to open two current accounts. With both of these bank accounts, you should have a debit card for transactions.
The Daily Expenses Account – 60% of Your Income
With online banking these days, you can often give bank accounts nicknames. So the first one you’re going to call Daily Expenses. This is the account where all your income is going to go. And this is also the account where 60% of your income will stay and cover your living expenses. Remember, we are talking about living on 60% of what you earn. The other 40% is going to go out of this account to other accounts. The goal is to spend less than you earn and save the rest of the money.
I’ll give you a really helpful tip here. Pay for everything with a debit card. I used to pay cash for a lot of little things, like coffees and lunches. Now I’m paying for everything by card. Why is this an excellent idea? Because it’s much easier to keep track of how much you’re spending. You just have to look at your statements. I highly recommend that you start paying for everything using your debit card.
The Splurge Account – 10% of Your Income
The second current account that you’re going to open is called Splurge. The Splurge account is for guilt-free spending on fun things. These would typically include eating out, drinks at the pub, massages, maybe buying books, CDs, or DVDs. It could also be for your Netflix or your Spotify subscription. Basically, for those things that make life enjoyable and fun. They’re not essential; you could manage without them. But those are the things that put a smile on your face and make you feel happy. The key here is, it’s guilt-free spending. This account should also have a debit card. A recommended guideline is to put 10% of your income in your Splurge account.
Step 5: Open 2 Savings Accounts
These accounts should be with a different bank to your Mojo account. Look around and see which bank has the highest interest rate on their savings accounts. Here in Australia, the typical interest rate is 1% at the moment. That is very, very low. But there are online banks that are willing to pay up to 2%. When you find a good deal, open two savings accounts. Some banks require you to have a current account to take advantage of any bonus savings interest. If this is the case, open your Daily Expenses and Splurge accounts with the same bank. Just check they don’t charge any fees first!
The Smile Account – 10% of Your Income
The first savings account you can call Smile. Why is that? This account is for longer-term purchases, things like holidays, a new computer or a new TV. It’s for items that you can’t save up for in one month. And as the name suggests, those are the things that will make you smile.
You should put 10% of your income into this account. So every month, you are going to transfer 10% of your income from your Daily Expenses account to this high-interest account. For me, the money from the Smile account is primarily used for holidays.
The Fire Extinguisher Account – 20% of Your Income
The second savings account you’re going to call Fire Extinguisher. Why? Because this account will be your financial fire extinguisher. You point it at whatever your financial fire is. If it’s paying off debts, point it at your debts. If it’s saving for a down payment or deposit for a house, then use this account for that.
If you don’t have debts and you already own a house, then you can point it towards unexpected costs. These could be health challenges, redundancy, or an economic downturn. You can also use it for different types of investments. Once you build up a bit of a nest egg in this Fire Extinguisher account, you can start using some of the money to invest in stocks and shares, or additional properties.
When Scott lost everything, he had a significant amount of money already set aside. That’s why he was able to recover fast even though he lost his house, farm, and business. He put that money towards rebuilding his life. The crucial reason to spend less than you earn is to have the money saved for unpredictable situations like these.
Sometimes it’s not possible to have two accounts with high-interest rates at the same bank, at least not in Australia. If you have to choose, use the higher interest rate account for Fire Extinguisher. You’re most likely to have more money in this than in your Smile account. A good recommendation is to put 20% of your income into the Fire Extinguisher account. That’s what I do. You can adjust it according to your needs.
Step 6: Automate!
Now set up regular automatic payments from Daily Expenses to all the other accounts. You can set these to go out the day after your salary comes in. That way, before you get a chance to spend this money, it will already have gone into other accounts.
Scott recommends setting 10% to be transferred to your Spurge account, 10% to your Smile account, and 20% to your Fire Extinguisher account. These percentages can be different for you, depending on your priorities. Now you can see what’s left in Daily Expenses and how much money you have for your living costs. You will realize it’s not that hard to spend less than you earn.
So let’s summarize the 6 steps. Step 1, find a way to save $2,000 and put that in a separate bank account called Mojo.
Step 2, find a way to live on 60% of your income by earning more and/or spending less
Step 3, find a bank account that has no fees, and this may well be an online bank.
Step 4, open 2 current accounts. One called Daily Expenses. This is where your salary goes in, and this is where your expenses go out. The second current account is called Splurge. This one is for your guilt-free expenses. Make sure you have a debit card for both of these accounts to track your spending.
Step 5, open two high-interest accounts. One is going to be called Smile. It’s for your holidays and other things that take a few months to save up for. The other one’s going to be called Fire Extinguisher, which is for your longer-term financial fires. It could be for paying off debt, saving up for a down payment for a house, or just putting towards unexpected costs in the future.
Step 6, automate to make the whole process easier.
I’ve been doing the barefoot investor process for three months now. While doing it, I’ve been able to save an extra $500 into my long-term savings. And that’s been relatively easy. I’ve been able to do it while enjoying my life pretty much at the same level as before. I’ve just been a bit more aware of what I’m spending money on. So I find this very useful. It’s helping me feel more confident now about my longer-term financial future.
So, I highly recommend that you check out The Barefoot Investor by Scott Pape. I ‘m sure you’ll find it extremely valuable, especially if you’re in Australia. The examples are Australian based, but if you live in another country, the principles are the same. You’ll just need to do a bit of your own research to find the best banks and policies for things like insurance.
You’ll soon realize that it’s very possible to spend less than you earn and still live a happy and fulfilled life. You will be amazed by the results!
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