Unless you’ve been living under a rock in the middle of the Great Sandy Desert for the past few years, you’ve heard of Scott Pape, the Barefoot Investor. Pape has been around and writing on financial topics for a long time but late in 2016 is when he really hit mainstream consciousness. That’s when his book The Barefoot Investor – The only money guide you’ll ever need was first published. (It’s been updated twice since.)
The book’s success was a surprise to all, including Pape. He recounts:
My editor boldly said: ‘I predict this will sell at least 20,000 copies!’.
And then all hell broke loose.
We sold 80,000 copies the day it was first released.
Then 500,000 copies.
Then 1,000,000 copies.
Then 1,500,000 copies.
That number stands at over 2 million today. The book’s popularity shows there’s a clear appetite in the Australian market for simple, no-nonsense advice on effectively managing money.
That’s something any finance professional would be totally on board with, you’d think. But there’s a bit of an adversarial relationship between Pape and the financial services industry, mostly due to the many potshots taken at the industry throughout the book.
These shots are quite specific to certain types of advisor and certain organisations, however. As a firm that has utilised the fee-for-service model Pape advocates since our inception, we’ve always found ourselves having more bouquets for Pape than brickbats:
- Our Director Michael Pyne has a dog-eared copy of the book in his office. It’s full of Post-it notes marking sections of the book he frequently uses to illustrate a heavy financial topic in a simple way.
- Many of our younger advisors are impressed by how the book has helped increase the financial literacy of their friends.
- And we often recommend the book to the children of clients who don’t need the level of service we provide or who are just getting started on their own financial journey.
All up, there are seven reasons we love the book and recommend it to clients and friends where appropriate—tempered by one primary reason we don’t.
7 reasons we love The Barefoot Investor book
1. It gets people talking honestly about money
Money is a highly loaded topic, and our line of work often sees us mediating tricky money conversations between people who aren’t sure how to talk about those things. Thus we love the way the book advocates the reader should make time (rather than waiting for the right time) to speak with their other half (or with a friend/family member if they are single) about taking affirmative action regarding their money.
2. It provides a simple method for paying off debt
We totally agree with Pape when he asserts that certain kinds of debt (credit cards, car loans and other personal loans) create an environment of crushing pressure and a niggling sense of guilt every time you spend money. It’s impossible to feel financially ‘secure’ when you don’t at least feel in control of your debt. We like the simple and easy-to-follow rules he provides to ‘domino’ all those little personal debts that weigh so heavily on those who have them.
3. It teaches the power of spending less than you earn
Despite being a straightforward strategy for effective money management, many people struggle with this concept. In the same way Pape provides simple rules for paying off debt, he also offers simple rules for spending and saving to ensure you’re never spending more than you earn. (For example, no more credit cards once they’re paid off).
4. It teaches the freedom that comes from having money in the bank
Pape calls it a ‘Mojo account’. We call it your ‘Cash Reserve’. It doesn’t matter what you call it. It only matters that you have three to six months’ worth of living expenses sitting in a bank account that you never touch except in cases of extreme emergency:
- You’ve lost your job or are unable to work due to illness.
- You suddenly need to fly interstate or overseas to be with a sick parent.
- You’re in a living or working situation that has become untenable.
All these situations are incredibly stressful by themselves. You don’t need the added weight of financial pressure exacerbating them or forcing you to stay in a bad situation. When you have a Mojo account/Cash Reserve, you have the freedom to do the thing that best preserves your health and state of mind (whether it be jumping on the first plane back home, taking leave without pay from your job, or moving into an Airbnb for a month).
5. It teaches the power of compound interest
This is one of the sections our Director Michael has bookmarked – the one that illustrates the power of starting early with savings and leveraging the power of compound interest. As Pape notes in the book: This isn’t a new thing. It’s not hit and miss. It works every time, and it’s the safest and surest way to become incredibly wealthy. (Yet many people don’t use it because it’s, well, a little boring and unsexy. And requires discipline over time.)
6. It highlights the importance of income protection insurance
It’s a pretty strong take but when Pape shares that 94% of Australian families don’t have income protection insurance and states that those people are, quote, ‘completely insane’ – we can’t help but agree. After all, as he also notes: Your most powerful financial asset isn’t your home or your car: it’s your ability to earn an income.
Over the years we’ve witnessed the extreme relief income protection provides at times of significant stress (i.e. a bad injury or severe illness). This is why one of the many things we do with clients when they come to us for the first time is review all their insurances (including income protection) to ensure their level of cover matches their needs.
7. It doesn’t expect you to live frugally now for a payoff ‘later’
One of the biggest things all credible financial advisors focus on with their clients is helping them ensure they are enjoying their lives both now and in the future. After all, life can be unpredictable, and where possible and practical, we don’t really want to sacrifice living in the now in favour of a future that may never arrive.
That’s why we appreciate his concept of setting up a ‘Splurge’ account – permission to spend 10 per cent of what you earn on anything you want, guilt-free. (But also with the understanding that when the money in there is exhausted, so too is your ability to splurge until it’s topped back up.)
And now for the 1 reason we don’t love The Barefoot Investor book
The book advises straight up (on the page after the Contents no less) that it outlines general advice only and should not replace ‘individual, independent, personal financial advice’.
Yet many readers faithfully apply (their interpretation of) the book’s general advice to their personal situation without due consideration for:
- Whether it’s actually meeting their individual needs
- Whether their interpretation of the advice is correct
For most people, the good news is that assiduously following the book’s advice will put them in a better financial position than they’d be able to achieve by themselves. The bad news is, it’s unlikely to be the same position they’d achieve with the help of an experienced financial professional delivering advice tailored to their personal situation.
The final word
Potshots aside, it would be silly for those of us in the financial services industry not to be advocates of The Barefoot Investor book.
On a business level, the economics of what we do dictate that paying for our advice is only realistic for people at a certain level of income and assets. With more than 2 million people in possession of the book, that’s a lot more people who are getting into a financial position where they can afford extra professional help to stay on top of their personal, lifestyle and business finances.
On a more human level, however, we appreciate the book’s ability to increase the financial literacy of all who read it and relieve people of the pressure of personal debt. People who are financially well are healthier, happier and more able to contribute meaningfully to society. And that’s something we’re totally on board with.