A central part of the Barefoot Investor philosophy is how Scott Pape suggests you organise your banking. He shows you a system to use with a limited number of bank accounts that helps you get in control of your money. In this article, we’ll look at the Barefoot banking system and cover some of the common questions I see people asking
No More Bank Fees
A central concept of the Barefoot Investor is to reduce your bank fees wherever possible. And this makes sense. Fees are taken out of your money. And because they’re debited from your account and you don’t have to hand over cash for them, you tend to not notice them as much. But they build up. So Barefoot says to get rid of bank fees.
In the Barefoot Investor book, Scott recommends using the ING Direct Everyday Bank Account. His reasoning is that it has “zero fees”. This becomes important when you consider that up until recently in Australia, in addition to a monthly account-keeping fee, most banks charged you a $2.50 transaction fee for withdrawing money at an ATM that belonged to another bank. So if you banked with Westpac and withdrew $100 from a NAB ATM, you’d be charged $2.50 for the transaction.
A few years ago I did some temp work in a bank call centre and was staggered at the amount of money some people were paying in $2.50 ATM fees over and over again. Imagine making ten withdrawals and being charged $2.50 each time for a total of $25. I saw this every day. But little amounts add up, and a $25 charge every week becomes $1,300 over a year.
Recently the banks seem to have stopped the $2.50 transaction fee when you use an ATM from one of the major banks, probably due to government pressure on fees and their big profits. But they all still have the monthly fee of around $5 for having the account. This fee can we waived if you make certain deposits to the account i.e. deposit $2,000 in a month. But even with these changes, ING does seem to have a good account.
Let’s clarify what “zero fees” means with ING.
I’ve had an ING Account for many years dating back to when we had a mortgage with them. And the fee structure has changed slightly in recent times. It used to be that if you deposited $1,000 from an external bank account into your ING account in any month that you’d then qualify for the next month being a fee-free month. And this is all that’s mentioned in the Barefoot Book (at least the one released late in 2017).
Now, in addition to the deposit requirement is a condition that you “also make at least 5 card purchases that are settled (not pending) using your ING debit or credit card (excluding ATM withdrawals, balance inquiries, cash advances, and EFTPOS cash out only transactions).” Head over to the ING Direct page to see the current fee structure.
These two conditions are important – deposit at least $1,000 from another bank and do 5 transactions as described above. For us, we get one of our salaries deposited to our Everyday account so this covers off on the $1,000 per month deposit. It’s also not difficult to cover the five transactions per month – we use it for some PayWave transactions and find that over a couple of weeks we get up to the five transaction mark.
These conditions can be classed as ‘gate-openers’ because they open the gates to a few banking offers. Not only do you pay no ATM fees, but you also gain access to no international transaction fees and qualify for an extra 1% on your Savings Maximiser account (more on this account later).
Your First Barefoot Accounts
In the Barefoot world, you’ll open two ING Savings Maximiser accounts and name these accounts ‘Daily Expenses’ and ‘Splurge’.
A quick note about naming accounts. WIth ING, you’re actually able to name your accounts. The default name is “Orange Everyday” but when you login to your online banking, you can rename this to whatever you want. A lot of people will rename them‘Daily Expenses’ and ‘Splurge’. Also, because ING will issue you with two cards (one for each account) you need to find a way to tell them apart. The simplest way is to grab a texta and write‘Daily Expenses’ and ‘Splurge’ on the two cards so you know which is which. I’ve seen people with cards with this written on them – it’s normal in a Barefoot kind of way!
Next up, Barefoot suggests opening two high-interest online savings accounts. He uses the ING Savings Maximiser and links them to his Everyday account. These accounts also have names – ‘Smile’ and ‘Fire Extinguisher’.
Finally, Barefoot recommends one more account that’s separate from all the others. This one is called your ‘Mojo’ account. Yeah, baby!
If you’re using ING for your main accounts, use another bank for your Mojo. The idea is to have it completely separate from your other accounts so you’re not constantly seeing it and being tempted to use it.
Scott suggests the UBank Saver account for your Mojo. He also mentions the MEBank account as another option for your everyday accounts or mojo. I have a MEBank account and find it easy to use and, importantly, it’s fee-free.
The Mojo is solely for saving for unexpected expenses. It’s an emergency fund. Sadly, most people don’t have an emergency fund and get caught short when unexpected expenses occur. And believe me, they will occur. For most people, the answer is to put it on the credit card and then spend months or even years paying it off, plus interest. Then another major expense comes up and they never get ahead. So being proactive and saving money for expenses before they happen is a smart thing.
The Barefoot Investor tells you to fund your Mojo account with an initial $2,000 deposit. And if you don’t have $2,000 sitting around the place, find a way to get it.
The simplest option is to sell stuff.
Take a look around your house, see what you don’t need anymore and sell it on Gumtree or Facebook. You’ll be amazed at what you find and how much other people will pay for it. Be brutal here. You’re starting out on a path to financial freedom and it will take a bit of work and effort to get started. Particularly because your financial inertia is probably not so great at the moment.
If you’ve run out of stuff to sell, are there extra jobs you can do that you can charge money for? Check out sites like AirTasker and Fiverr to see what people are paying for.
The point here is twofold:
- Build up a financial buffer, and
- Get some personal satisfaction. It feels good to get $2,000 saved up!
Setting Up Your Buckets
At the heart of it, the Barefoot Investor way of managing your bank accounts has been around for years and is commonly called the Bucket Strategy. Scott Pape didn’t invent the strategy, but he’s done a fantastic job of making people aware of it and actually implementing it.
The bucket strategy is simple – you allocate your money to different buckets (accounts) depending on its purpose. Having it sitting in different buckets makes it easier to see where your money is going and makes it harder to spend money that’s needed for something else. So you don’t spend your mortgage money on McDonalds!
Let’s look at how the Barefoot Investor recommends you set up your buckets.
Firstly, he suggests you split your income across three buckets – Blow, Mojo and Grow.
The Blow bucket is used for your day-to-day expenses, some every-now-and-then splurges, and some extra cash ‘to fight financial fires’. Sounds sensible. We’ve already talked about yourMojo account – it’s purpose is to provide some safety money. Finally, the Grow bucket is used to build long-term wealth and provide for your financial freedom.
The Blow Bucket and Bank Accounts
It’s taken me a couple of reads over the relevant chapters of the Barefoot Investor book to feel like I understand the Barefoot Bucket setup. It’s a little confusing the way it’s laid out in the book and I’ll try and explain it here as simply as possible.
Whilst there are the three buckets –Blow, Mojo and Grow, initially we’re only concerned with the first one –Blow.And whilst Scott Pape talks about one bucket, the money associated with this bucket is actually split across a number of different bank accounts.
TheBlow bucket is mostly about your short-term spending. The Barefoot advice is to live on 60% of your income and allocate that 60% to yourDaily Expenses account. This 60% includes your housing costs – either rent or if you have a mortgage, the minimum monthly payment. This money goes into your ING account called Daily Expenses (you could rename it to ‘Blow’ if you’d like to).
But this is where it gets a little confusing. In the diagram in the Barefoot Investor book, it shows your take-home pay being directed to yourBlow bucket and 60% of this being used for your daily expenses. Then there are three arrows coming out the bucket showing 10% goes toSplurge, 10% toSmile and 20% toFire Extinguisher. In total, these amounts together with the 60% to your daily expenses add up to 100% of your take-home income. So while Splurge, Smile and Fire Extinguisher come out of the Blow bucket, they’re separate from the 60% that remains in this bucket for your Daily Expenses.
TheSplurge account is there to spend. As Scott Pape says “blow 10 percent of your money on anything that makes you feel good (shoes, booze, lattes – whatever)”. 10% of your income goes into this account. This is the second ING Everyday Savings account you opened.
Now we move to those Savings Maximiser accounts you set up. The one you called ‘Smile’ gets an allocation of 10% of your pay. This account is for longer-term goals that you need to save for. It could be a holiday, wedding, a new guitar (or is that just me) – anything that will take more than a few weeks to save for. It’s called ‘Smile’ because when you think about what you’re saving up for, it should make you smile.
Finally, 20% goes to the Savings Maximiser account you called ‘Fire Extinguisher’. The Barefoot Investor talks about using this account to ‘put out financial fires’. These different fires will change at various times. Initially, it may be used to smash your debt. When that’s out the way you may use it to start saving for a house deposit. Or if you already have a home is could be used to pay extra off the mortgage so the loan is repaid sooner.
Your Mojo Bucket
You’ve already set up yourMojo account and, hopefully, found a way to fund it to the tune of $2,000. In the Barefoot method your take-home pay doesn’t go into yourMojo because once it has $2,000 in it, Scott feels that you don’t need to add any more to it. If you’re starting from scratch and don’t have $2,000 in your account then you will need to save up for it. My thinking is that the money you’d usually allocate towardsSmile and Fire Extinguisher could be directed initially towards yourMojo until you hit the $2,000 mark.
The reality is that if you don’t have any savings, I’d prioritise building up a financial buffer over going on a holiday. Murphy’s Law and years of experience tells me that if you don’t have a buffer built up, something will happen.
Your Grow Bucket
YourGrow bucket is for your long-term wealth. It’s mentioned in the chapter on setting up your buckets but not a lot of attention is given to it apart from mentioning that this is where your superannuation sits. He talks more about it later in the book.
TheGrow bucket is super important for the future-you. And the problem is that we find it difficult to imagine ourselves in the future and what our needs might be. And it’s certainly easier to spend money today and satisfy the needs of our current-selves rather than think about you in 30-years time.
The Key To Getting The Bucket System To Work For You
Automation.
That’s the key. And it’s so simple.
Automate your finances.
Go to your payroll area at work and ask them to split your pay across your different accounts.
- 60% of your net (after-tax) pay goes to your ING Everyday account calledDaily Expenses or Blow.
- 10% goes to theING Everyday account calledSplurge.
- 10% goes to the ING Savings Maximiser account you calledSmile. Remember, this is for saving for things that make you happy.
- 20% goes to the ING Savings Maximiser account you calledFire Extinguisher. Once that money is in the account, you direct it to the current financial ‘fire’ that you’re fighting.
You may encounter the problem that your employer won’t split your pay over this number of accounts. My employer only splits it two ways. That’s not a major problem. I get the bulk of my salary paid into one account and within that account, I have several automatic transfers set up to move money to different accounts. These transfers are set to recur every month (I get paid monthly) a day after my salary goes into my account.
Again, this is why automation is important – if I didn’t have those automatic transfers in place, I’d be too lazy to transfer the money myself. Sure, I’d be motivated sometimes to do it, but I’d forget other times and it wouldn’t happen.
Set yourself up for financial success and automate as much as possible.
You’ll now have a better understanding of how to set up the Barefoot Investor accounts and, more importantly, you’ll know what money goes where.
Do you have further questions that we haven’t answered in this article? Leave a comment below with your questions and I’ll update this article as I answer them. Be sure to check out the “Common Questions” section below to learn more.
And could you please do me a favour and share this article on social media? You probably know some people who would benefit from reading this.
Common Questions
We’re a couple, should we have separate bank accounts?
Scott says no, have joint accounts. But in the Barefoot Investor book, he says that he and his wife “have an agreement that we can each spend up to $400 on whatever we choose”. To clarify, I think you’ll need to add the words ‘within reason’ here. If you only deposited $500 a week for your expenses and one of you decides to spend $400 on some new clothes, you have a problem.
I think one of the reasons it’s suggested to keep your accounts together is because you’re on your financial journey together. It’s not two individual paths; you’re in it together. It’s a constant theme throughout the book.
Can we use our mortgage offset account for our Mojo?
Scott’s simple answer is “sure, you can if you want” but he also says he’d prefer if you didn’t.
To elaborate, the point is to keep this money totally separate from the rest of your bank accounts and use it to cover emergencies – big unexpected expenses that would create financial stress unless you had money put aside for them. If it’s in your offset account and that’s mixed with other money, or it creates the temptation to spend it, then don’t do it. If you’re fine with that, can do the mental maths to work out how much of your offset belongs to your Mojo, then fine.
What happens if the 60% allocation to daily expenses isn’t enough?
Don’t panic! It’s not easy to live on 60% of your income, particularly if you’ve been spending 100% of it. Think of the 60% as something you should aim for, but you need to be realistic and understand it can be tough, particularly if your income is low and you have a lot of fixed costs (rent etc) that you can’t reduce.
The simple answer is to allocate a higher percentage of your income to daily expenses and reduce the allocation to your Smile and Splurge accounts. I don’t advocate reducing the allocation to your Fire Extinguisher, as this money is being used to help put you in a better financial position. Your Smile and Splurge accounts are for extra spending that’s discretionary in nature.
This is a harsh reality you need to face. If you can’t live on 60% of your income, there’s no point pretending it’s okay to spend on stuff that’s nice, but isn’t helping you get ahead financially. Maybe you can’t afford a holiday and need to allocate that money to your living expenses. What’s the alternative – do you take that holiday using the money you don’t have and get further in debt? No thanks.
Budgeting is a bit like exercising – it’s a bit tough at first, but once you get into a routine you’ll start to see some good progress.
