Applying The Barefoot Investor in NZ - UPDATE
Mar 8, 2020
I originally wrote this blog post back in December 2018 and I’ve decided it was time to make a few updates to it so that all those people reading the book for the first time and those who are following along with the Barefoot Investor principles have a good New Zealand resource to come to. If you have read my original post, while it’s still relevant, this one is quite different because it takes into account different providers of services, so I encourage you to read this one too!
The Barefoot Investor (BF) by Australian Scott Pape is an excellent book and it has been instrumental in changing the financial direction of not just Australians but also of Kiwis. To write this blog I read his entire book again (I think it’s the fourth time I’ve read it now) and it’s like getting a shot of motivation. If you have not read it, do so, this blog post is aimed at people who have read his book - or intend to! In the book he gives great detail about exactly which accounts to open, insurance to use etc and he puts the details in that many other personal finance books are missing; they seem to never give you the nuts and bolts of who to actually use. However there is a BUT when you read it because being Australian, many of the banks or providers he says to check out do not exist in New Zealand and also the Australian tax system is different from ours.
Many people have asked me to work out what the Kiwi equivalents are of the providers he recommends. It has not been an easy task. With so many institutions vying for our money, our debt, our retirement savings and our insurance, it’s a minefield! I’m not saying this is a conclusive list, but I’ve given it my best shot. However, you may well have your own specific details to add so please do so in the comments section as this is a blog post that I keep refining to keep it as relevant as possible and I will work in suggestions as I receive them. Also, to help you interpret it into a New Zealand context, Facebook has an excellent and supportive group called “Following the Barefoot Investor - New Zealand” where you can ask any curly question you like and everyone will give you their considered opinion. It’s really helpful.
Also, keep in mind this post is NOT endorsed by Scott Pape at all. Plus, I’m not an authorised financial advisor, these are just my opinions, at the end of the day, do your own research too.
Let’s start with a bit of an explanation...
Now, I don’t know about you but I found myself flicking back between the pages of the book KNOWING that he was proposing a simple strategy, but struggling to work out my BLOW from my GROW and my MOJO. Confused? You bet I was. So here is my breakdown for you:
Let’s start with the basics:
The Barefoot Investor proposes three different overall “buckets” that you will split your income across:
BLOW - Used for all the things you need to run your daily life: electricity, food, transportation etc.
MOJO - This is an emergency fund basically.
GROW - This is where you are going to build your long term wealth and you really start to focus on this bucket once you have cleared all debt first.
BLOW
Coming under your BLOW bucket are the following accounts:
Account 1: DAILY EXPENSES - An Everyday Transaction account with an ATM debit card. Your income comes into this account and is then split off. 60% stays here to pay for your daily expenses (rent, power bill, food etc) and the plan is that you keep these expenses as LOW as possible
Sub Account 1: Smile - Online Saver Account linked to Daily Expenses - 10% of your income automatically comes here for long term savings goals such as a holiday, new computer, new roof on your house or updating the car.
Sub Account 2: Fire Extinguisher - Online Saver Account linked to Daily Expenses - 20% of your income automatically comes into here and this money is for fighting financial fires like credit card debt, paying a mortgage. Money does not sit in this account, it moves through on its way to paying the bills you have. Once the debt is all paid off this money goes into your MOJO to build that up to 3-6 months expenses. Once THAT is done, all money goes to your GROW bucket.
Account 2: SPLURGE - An Everyday Transaction account also with an ATM debit card - 10% of your income automatically comes into here and you can spend it on whatever you like! Coffee’s with friends, dinners out etc.
MOJO
Then it’s time to grow your Mojo:
Account 3: MOJO - Online Saver Account held at a different bank* with an opening balance of $2,000 where the intention is, over time, this grows until you have set aside 3-6 months of living expenses. He recommends a separate bank to stop you spending it! Your MOJO account is in place of your credit card.
* The reason for using a different bank is to remove the money and the temptation from you and your bad habits, by having it located elsewhere it will make it harder for you to dip into your savings.
AND if you are STILL scratching your head, check out this online tutorial. He is Australian, so the institutions he is talking about don’t apply here, but his explanations of the buckets is good: Barefoot Investor Bank Accounts and Buckets Explained
BANKING
Day-to-day banking accounts you can check out in New Zealand:
Aim for NO fees, high interest (yeah right) and internet-only bank accounts - Finding an online bank is easy, but the other two are harder to find in New Zealand but doing all of your banking online, receiving no paper statements and no cheque book (these are being phased out anyway) will make this more doable. Aim for a “high-interest rate” but keep in mind that it’s slim pickings when it comes to earning interest on any bank account at the moment and it’s not likely to change anytime soon. You are looking at somewhere between .9% and 1.6% which are historic lows. Our bank accounts seem to always come with fish hooks like minimum deposits, a high starting balance or my least favourite, make a withdrawal and lose ALL interest for that month…
With interest rates so close to zero, I would encourage you not to sweat the small stuff because in the grand scheme of things a rate difference between two banks of .2% will make little or no impact to your overall wealth. Remember the point of The Barefoot Investor is to set up bank accounts to control your money and once you have things under control and have automated as many transactions as you can, you won’t actually be storing a large amount of money in these accounts, you will be increasing your GROW bucket by investing outside of your bank. Personally, I use my bank to keep just a small portion of my net worth these days, it’s just the money I need for daily expenses and my emergency fund and my aim is not so much to earn money from my bank, but to make sure they don’t cost me money in fees.
Here are some possibilities to consider:
This is the BF banking structure and I have added some bank accounts with TSB as the primary bank. This section falls within the BLOW bucket:
Account 1: Everyday transaction account - Daily Expenses - (TSB Personal)
Sub Account 1: Online Saver Account - Smile (TSB Websaver)
Sub Account 2: Online Saver Account - Fire Extinguisher (TSB Websaver)
Account 2: Everyday transaction account - Splurge - (TSB Personal)
Account 3: Different bank altogether for emergency money - Mojo - Online savings account. Open with $2,000 in it (Heartland Direct Call or Heartland You Choose).
This is the BF banking structure and I have added some bank accounts with Kiwibank as the primary bank:
Account 1: Everyday transaction account - Daily Expenses - (Kiwibank Free Up)
Sub Account 1: Online Saver Account - Smile (Kiwibank Online Call)
Sub Account 2: Online Saver Account - Fire Extinguisher (Kiwibank Online Call)
Account 2: Everyday transaction account - Splurge - (Kiwibank Free Up)
Account 3: Different Bank altogether for emergency money - Mojo - Online savings account. Open with $2,000 in it (Heartland Direct Call or Heartland You Choose).
Alternative banks that readers have suggested are worth looking into, particularly for your MOJO account is: Rabobank (a banking cooperative) and NZCU (this is a credit union, so it’s different to a bank)
BUT… Do you have a mortgage?
You may already be in at the deep end with a mortgage and switching banks to get no transaction fees may be too big an ask and/or not even worth the effort, but the way you structure it does have a material impact. Prioritise mortgage rates over general banking fees when deciding on your banking set up as there is little point chasing a no-fee account when that bank has a higher mortgage lending rate. If leaving your current bank is not an option AND you are paying everyday transaction fees then pick up the phone and negotiate to have these additional fees cancelled. And don’t hang up the phone until they agree with you, they are making their money out of the interest you pay on your mortgage, so what’s a $10 fee a month to them anyway?
Everyone structures their debt differently (revolving credit, fixed or floating) but paying down the debt by maximising repayments and not extending the loan is the best thing to focus on. Current mortgage interest rates are low so NOW is the best time to nail your debt by paying it down AGGRESSIVELY. Follow that up by negotiating hard with your bank and ensuring you are not excessively out of sync with market rates should keep them on course. Bringing an independent mortgage broker on board (one who works for you, not for the lender) maybe key in getting the right mortgage structure for you.
www.interest.co.nz have an up to date list of current interest rates etc and through researching for this blog post I noted that BNZ and ASB were also banks that were regularly mentioned by BF followers who had debt.
(This is my two cents here because I couldn’t resist: Banks put a lot of marketing dollars into creating products to bamboozle you into thinking you are getting a better deal. When people email me and explain their five-tiered mortgage structure, with five different time periods and five different rates, with offset XYZ I have to admit to shaking my head a bit. On the flip side, those who contact me and are furious at having a mortgage, are pissed off that the bank won’t let them make additional payments and are desperate to get out of any debt, these are the people that do everything they can to throw every cent at their debt, get rid of it asap and get on with life and when Scott Pape talks about ‘getting the banker off your back”, this is what he is talking about).
SUPERANNUATION
Australia has a lot of super schemes that are offered by employers. In Oz, the employer contributes 9.5% of your wage into your chosen super fund (compare that to our min 3% IF you choose to use KiwiSaver) and they pay less tax on their super funds too. Scott recommends putting 15% into your super which is a shock to most Kiwi’s. On the flip side, however, Australia’s pension regime is means-tested, unlike the universal NZ Super system here. Here we pay tax on our KiwiSaver returns. Things are different here and although some of you lucky sods may have a long-running private super scheme (a rare thing these days) the majority of us will use KiwiSaver (as well as savings and investments outside of these funds). And when we put our money in there, it is meant to stay, until you are 65.
We have an ever-growing list of schemes in NZ with expensive marketing campaigns that want YOU to invest with THEM. It’s very difficult to make a choice and compare apples with apples, especially when in the past they were hiding half of their apples (fees)! The fees you pay are extremely important but it’s also worth considering the approach of the investment manager i.e. two providers may have similar fees but they invest your money in polar opposite investment strategies such as actively managed vs passive management.
Checking your current fund is a good place to start your search and you can do it here: Check Your Current Fund. The point of trying out this fund finder is that it at least shows you how your current fund compares to the one you may be considering changing to.
I’m going out on a limb here to say that in New Zealand, Simplicity Simplicity would adhere to the BF principals of a low cost, indexed fund. Remember that you get to choose what stage of life you are at and whether conservative, balanced or growth is appropriate to you.
If you have other thoughts, then let’s hear them.
BF recommends investing 15% of your pre-tax pay into your superannuation. New Zealanders think they might know better and you may hear people debate the merits of ‘contributing the minimum’ to your KiwiSaver so that you reach the government threshold of $1042 of contributions (not including what your employer puts in) and then contributing no more, and that way you will receive the government contribution of $521 each year. The argument is then that you will invest any additional money outside of KiwiSaver and that way it’s always accessible to you (more on this below). If you are a saver, I can see this working for you, if you are a spender, it’s got the potential to be a terrible idea because in practice you will save a tiny amount into KiwiSaver, just 3%, for your retirement and then blow the rest of your money that you were meant to be saving elsewhere. So, tread very carefully or you may end up accessing your KiwiSaver at 65 and being terribly disappointed.
INSURANCE
Like BF, Jonny and I lost our entire house thanks to the Christchurch earthquakes and insurance paid for it to be rebuilt. Having the right insurance is a really really good idea! But only get what you need and review it when it no longer fits that need. There are a lot of people trying to sell you insurance and if you can think of it, there is probably an insurance policy for it (phone insurance and pet insurance for example). BF recommends choosing a higher excess to lower your premium costs. BF also heads this chapter “Your insurance sorted in one beer”. Well, I say, grab yourself a crate, insurance is a complex beast!
In Australia their super funds offer insurance, but only some providers (e.g. SuperLife) offer it as an option here in New Zealand. In regards to finding the right insurance, the best bet would be to contact an insurance broker as personal situations that affect underwriting vary so widely that I would be here for a month of Sundays trying to work out exactly which provider fits the BF strategy. But choose carefully and avoid the insurance salesperson who wants to sign you up to a specific company because they get a big fat commission and/or the salesperson who works FOR a specific company (obviously their insurance will be the “best” fit for you). You want them to help you find the appropriate insurance for your needs, not sell to you. A great broker will get a full understanding of your situation and give you adequate insurance at the best rate available. And if you need to claim, they will walk you through that process too.
In the original post I wrote about insurance I did list a couple of insurance brokers, but I’ve now removed them. WHY? Because there are just so many brokers offering their services. Therefore, I recommend crowdsourcing this one by going to the “Following the Barefoot Investor” group on Facebook and asking for recommendations from the group for a broker in your area. Also, Moneyhub (Insurance Brokers Explained) have also done a comprehensive article on how insurance brokers work and they have created a shortlist of advisors that you can check out.
But as far as what type of insurance you need the BF recommends you have:
Health Insurance
“Comprehensive private hospital insurance”
Hospital only cover
$500 excess
However, just a note here. This is another situation where New Zealand and Australia are different. In Australia people above a certain salary get a tax deduction for having health insurance and there is a bigger distinction between private and public health systems. The argument for health insurance is much stronger in Australia than here in New Zealand.
As you age your premiums will skyrocket and I know of some people who start up an “insurance fund” of their own very early in life, they simply put a set amount of money away in an investment over a very long period of time to cover any future events. Just a thought.
Income Protection Insurance
You have to protect the income earners in your family, just take a moment to think how you would cope if you lost this income, how soon would it be before you were in dire straights? Covering 75% of salary to age 65 or 70 is a guide. If you can afford to self insure for three months, make the waiting period three months. If you have debt this type of insurance is particularly crucial so make sure you get enough to cover payments to service debt which will take the financial pressure away from you whilst you work on your recovery.
Life Insurance + Total Permanent Disability Insurance
As above, you need to ensure that if you are dead or disabled that your family (and yourself) have the money to carry on and not be forced into hardship. As above, this type of insurance is particularly important if you have debt so make sure you have enough coverage to clear any debt AND also provide for your family who is left behind. Plus, the reverse is true: as your liabilities decrease over time you can then lower your life insurance cover too.
House Insurance
Total loss
Vehicle Insurance
Choose the right cover for the vehicle you drive. Reassess each year and shop around each year too (I have blogged on vehicle insurance and managed to halve my premiums so check this post out).
INVESTING
BF mentions investing inside and outside of your KiwiSaver superannuation fund. Remember that in New Zealand our KiwiSaver is locked away until 65; except first home buyers can get most of that money back out again or you can access it if you can prove extreme hardship. If you are following BF though you should not need to access it until 65, because you have yourself sorted financially right?
He specifies pre-tax super contributions of 15%. So, you can just increase what you are already putting into your KiwiSaver fund (either via your wages or voluntary contributions) up to 15% and lock that money away OR you can split it and put some in a fund that you can access OUTSIDE of KiwiSaver. Remember that IF your employer offers to match a higher contribution rate than 3% then it’s an excellent idea to take it, then be sure to top it up to get to 15%.
Don’t be fooled by those you hear saying “just put the minimum into KiwiSaver to get the government contribution”, because those people are simply not putting enough aside for retirement. They should finish that statement by then saying “invest somewhere else as well”...
It is also a good idea for many to lock their money up where they can’t touch it, because if they could access it, they would spend it and have a very meagre retirement indeed. But for those who can show some financial restraint (i.e. everyone reading this blog post), investing in low fee index funds via an automated investment strategy that you can access at any time (but have the restraint not to) makes sense.
More recently I’ve heard more about the “Barefoot Investor Idiot Grandson Portfolio” where he recommends regular and automated investments into the following three simple, low-cost index funds and I’ve given the closest New Zealand equivalents:
Barefoot recommends three funds:
One
VAS - Vanguard Australian Shares Index ETF
Tracking the S&P/ASX 300 Index
Recommended percentage held in portfolio - 75%
New Zealand equivalents:
SmartShares - NZ Top 50 ETF (FNZ)*
Simplicity - NZ Share (it is non-index tracking but broadly the same)
AMP - Capital NZ Shares Index Fund
Alternate suggestion is a combination of Kernel’s NZ 20 and NZ Level 9 funds as that is the entire investible NZ market via index funds.
Two
VTS - Vanguard US Total Market Shares Index ETF
Tracking the CRSP (centre for research in security prices) US Total Market Index
Recommended percentage held in portfolio 10%
New Zealand equivalents:
SmartShares - US 500 ETF (USF)*
Hatch - Vanguard U.S. Total Stock Market Index (VTI)
Three
VEU - Vanguard All-World ex-US Shares Index ETF
Tracking FTSE All-World excluding USA
Recommended percentage held in portfolio 15%
New Zealand equivalents:
Hatch - Vanguard FTSE All-World ex-US ETF
AMP - Capital All Country Global Shares Index Fund*
* If you are already investing using Sharesies, you can access this fund using the Sharesies platform or you can invest directly with the provider.
The key, whatever path you choose, is to automate it and set up regular and ongoing investments into the fund and make sure that strategy continues irrelevant to market conditions. Whether the share market is up or down is of no interest to you, just remember, that over time the share market always goes up and investment in any of these funds is a 5+ year strategy. The purpose is to invest for your long term wealth.
Whatever you choose you can then use Sharesight to monitor their performance.
INVESTMENT PROPERTY
Scott Pape talks about investing in property but not in the way you would think. BF invests in BWP Trust, they own 80 Bunnings Warehouse properties etc. There are a couple of New Zealand property funds which compare:
SmartShares - NZ Property Fund (NPF)*
Kernel - NZ Commercial Property Fund
* If you are already investing using Sharesies, you can access this fund using the Sharesies platform or you can invest directly with the provider.
And remember, that if you already own your own home then you already have a significant weighting to property, plus investors will often also have some exposure to property via their KiwiSaver fund (just go to the fund update section of your KiwiSaver to find out exactly what the fund invests in).
For any New Zealand based newbie Barefoot Investor devotee, this list will give you a pretty good starting point to apply his book right here in New Zealand. Please comment below to share your experience or add a thought or suggestion for others to consider. The personal finance community in New Zealand is helpful and willing to share their knowledge so don’t be afraid to ask a question.
