It'd be great if someone laid out exactly what you needed to do to financial freedom. Well, someone has. And that someone is Scott Pape. A.K.A. The Barefoot Investor.
Farmboy turned financial whizz, he has the power to squash your debt and get your finances to the place you want them to be. In our last blog we covered steps 1 to 3 of his 9 step process.
Right now we are going to cover steps 4 to 6. Let’s dive right in.
Steps to Financial Freedom: 4 to 6
Step 4: Buy a home
This is the ultimate goal right? A place to call your very own, to do with what you want… and to not have to pay rent! But buying a home is a large financial commitment. Almost everyone has to take out a mortgage to even consider making a house purchase. And a mortgage usually means a 30 year repayment commitment.
Those commitments aside, you will end up with a massive asset to your name. So that is why you should do it. But, proceed with caution. The dream of owning your own home can soon turn into a nightmare if you over-extend yourselves and take on too much debt. Scott’s golden rule for home ownership is to save at least 20% for a deposit before buying.
Firstly, it proves to yourself that you can be committed. If you can work to save 20%, then you will be able to service your loan repayments down the track. Secondly, most banks require you to save this amount before they will consider lending you anything.
Saving a 20% deposit is difficult, but not impossible. Live as frugally as possible and save everything that you can. You might even want to pick up a side gig to increase your income. Just make sure that you don’t stretch yourself too far. After all, saving the deposit is only the beginning of the journey. You will still need to be able to make the repayments going forward.
Step 5: Increase your retirement fund
The best time to start saving for your future is now. The earlier you begin, the better. Saving the minimum amount for any fund is a great start, but the future is going to be pretty darn expensive. So instead of paying the minimum into your fund, why not bump that amount up?
Whether it is a superannuation scheme, Kiwisaver, or some other retirement savings, you are preparing for a future when you won’t have the ability to earn like you do now. Increasing your contributions by a small amount now won’t make much of a difference to your take home pay. But imagine the difference it could make in the future once you add interest!
Step 6: Boost your savings
Remember those buckets that we talked about in the last article? The three bucket system that will ensure you always have enough money, even when the unexpected strikes.
Well, step 6 tells you to boost the amount in the Mojo bucket. That bucket was the emergency money fund. How good would it feel to have three times as much money in that bucket?
Having a decent amount of savings in the bank allows you to live your life with freedom. You can call the shots instead of wondering how you are going to buy groceries this week. Savings provide you with a sense of security and that is the source of your Mojo. Hence, the name ‘Mojo’ bucket.
To truly feel the mojo, you need to boost your savings to 3 months of living expenses, emergency funds and splurge money.
That was steps 4 to 6 of the Barefoot Investor’s process. Your steps to financial freedom! Stay tuned for the final chapter next month when we look at the remaining steps in the process!