It’s here! The final instalment. These last three chapters of The Barefoot Investor take the nice nest egg you’ve already created and show you how to stay on track for the rest of your life. If you missed part’s 1 and 2 you can catch up here and here.
Step 7: Get The Banker Off Your Back
Pape’s message here is to shake the norm and start saving tens of thousands of dollars while paying off your mortgage faster. There are two ways to go about it, and he wants you to do both: lower your interest rate and make extra repayments.
Here’s an example that shows how you could save well over $70k and wipe almost seven years off your mortgage.
Rule 1: Don’t get the bells and whistles
A home loan is simple: you borrow money from the bank and then repay them, with interest, over the next 25-30 years. Don’t fall for any of the extras you can get in your home loan package. Keep it simple, stay away from fixing a portion of your loan or getting repayment holidays.
Rule 2: Don’t fix your rate
Make a promise to yourself to stick to the lowest variable rate you can find, regardless of what you hear in the lunchroom. Pape’s example is when a mate tells you they got a great deal on a fixed rate (lower than the current variable rate) and it’s locked for five years. Banks offer this so called fantastic deal because since the government has banned exit fees, they had to find other ways to stop customers from switching to better deals. Locking into a fixed rate loan gives the power back to the banks and you’ll be hit with a “break free” that can cost you thousands if you ever want to leave or refinance.
Rule 3: Get the cheapest rate possible
Pape reckons it’s easier to complain to your current bank about rates than switching to another. It costs a bank roughly $1000 on marketing costs to replace you and more if you come via a mortgage broker as they pay kickbacks. This rule comes with specific instructions from Pape on how to script your phone call (which can save you $22k on your loan based on a mortgage of $400k over 18 years at 4%).
Ring your bank and threaten to refinance with someone else like UBank or ING, unless they drop their rate. Stay firm and if they say no, stick to your word and change banks, or call back again and try another day. If they still say no and you have more than 20% equity in your home (so you don’t get hit with Lenders Mortgage Insurance if you leave), say goodbye and lower your interest rate elsewhere. Alternatively, give us a buzz and we can help with getting you a better rate.
Now for the second part: making extra payments to your home loan. If you’ve been following these chapters, you’ll have money in your “Fire Extinguisher” account. With it’s help, if you can pay an extra $1000 per month on top of your minimum repayments, along with getting a cheaper interest rate, you’ll save around $77k in interest and wipe almost seven years off your mortgage (based on a $400k mortgage over eighteen years).
Step 8: Nail Your Retirement Number
Pape wants you to follow his “Donald Bradman Retirement Strategy”. He reckons you don’t need a million in super to retire but at a minimum, you need your home paid off, plus if you’re single $170k in super or for couples, $250k. Make this your number to nail before you even consider retirement.
The Association of Superannuation Funds of Australia (ASFA) reports that to live comfortably in retirement, you need $59k per year as a couple or $43k per year as a single person. So how can you make Pape’s strategy work? Here’s where Bradman comes in.
Rule 1: Get the banker off your back again
This game plan only works if you retire debt free. The age pension doesn’t consider the value of your family home, so make sure that mortgage is gone before retirement.
Rule 2: Nail your number
As we mentioned above, no retirement before $170k as a single person or $250k as a couple is in your super fund. The reason for these figures is that they’re the maximum you can have in there whilst still being able to receive the maximum pension ($34,252.40 for couples and $22,721.40 for singles per year). On top of that, you can withdraw $12,500 tax free from your superfund annually. You can use this money for wise investments, which Pape explains further in the book, and end up with just shy of $60k per year.
Rule 3: Never, ever retire
It sounds like Pape will be working till he’s 95. He suggests working even one day a week or doing a job like Uber to keep you active. The government allows retirees to earn $28,974 each year, tax free, without effecting your pension. For singles it’s $32,279.
To summarise your position:
- You’ve paid off your home
- You’re getting the age pension of $34,252.40 per couple or $22,721.40 per single and $12,500 from super
- You and your partner are still earning $20,000, tax free. It means you’ll have $66,752 in your pockets every year, which is $8000 more than you need from a comfortable retirement.
There’s more to this strategy, which you can read in the book. Obviously, retirement planning heavily depends on your personal situations so if it sounds like something you want to get on top of now, give us a buzz to make sure this is the right strategy for you.
Step 9: Leave a Legacy
If you’ve followed the steps right up till this one, you’re on the road to building a reasonable wealth. How will you be remembered though? In this final step, Pape wants you to consider the difference you could make in other people’s lives now that you’re in a financially stable position. Look at giving away some money and time to those less fortunate. You can even make micro-loans to some of the world’s poorest entrepreneurs. Think about what you stand for and how you can pay something back to the community.
You’ve done it! All nine steps are complete. We hope this blog series has given you an insight into setting yourself up financially and made it feel more doable that it did before. As always, we’re here for further advice or to chat about any of Pape’s points. We’d love your feedback on it too! You can buy The Barefoot Investor here.