Barefoot Investor Scott Pape has issued a warning to Australians looking to invest their house deposit into stocks – as the market continues to reach record highs.
'If you're planning to buy a house in less than five years, don't invest a cent of that money in the market,' warns Pape in his latest column.
'I know you want to. But take it from me: the returns we are seeing right now are not normal, and they will not last.'
- Sort out your superannuation, consolidating all the funds you have into a low-cost, high-growth super fund.
- If you're saving for a house deposit, do not invest any of this money in the market if you are planning to buy in less than five years.
- When you're ready to invest, stick to boring low-cost index funds, such as those offered by Vanguard.
His comments come after he warned Australians to keep the money they will likely spend in the next few years in a bank account or term deposit.
'Keep any money you'll need to spend in the next few years in a bank account (or term deposit) that is covered by the government deposit guarantee (up to $250,000),' he said in December.
'It's not about the interest you earn (which is pitiful), it's the sleep-easy factor of knowing you've got a backstop,' he said. That's worth more to me and my mental health than any gain I could make in the market.'
Cash up to $250,000 in an Australian bank account is guaranteed by the government in the unlikely event that the bank goes under.
But money in the sharemarket is not guaranteed, and in case the company goes under shareholders are last in line to be paid back.
Scott's sharemarket advice
- The sharemarket is not a safe place to hold your money in the next five years. However, it's arguably the safest place to invest your money over decades, as it will outrun inflation.
Figures from the ASX show more than 900,000 Aussies are looking to invest in the stockmarket in the coming year, with millennials leading the charge.
'There are two reasons why I think so many young people are interested in stocks right now,' Pape says.
'The state of the housing market is just so freaking depressing, and stocks (and crypto) have been going up a lot … so it’s a chance to get ahead financially.'
Pape's advice to those new investors is to 'stick with boring, automated, set-and-forget investments' such as those offered by Vanguard and to stay to stay away from the Dogecoin rollercoaster.
He also advised those new to investing to take a look at their superannuation first, by moving it to a low-cost, high growth fund, and consolidating super funds if they have money spread across multiple accounts.
'It is one of the most lucrative things you'll ever do,' he says.
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The Barefoot Investor basics explained:
Here's a summary of the most important points from Scott Pape's book The Barefoot Investor.
Schedule a monthly date night
Go on a monthly date with your partner or friend and discuss your financial goals. Make it enjoyable by going to a nice restaurant and review your expenses over a bottle of wine.
Set up your buckets
Barefoot Investor's money plan is to divide your money into three different buckets:
The Blow Bucket is for everyday expenses: food, home-loan expenses, your phone/internet bill, and to have some fun.
The Mojo Bucket is to provide rainy-day emergency savings. Think of it as a credit card replacement.
The Grow Bucket is for building long-term wealth through savings and investments.
The Barefoot Investor recommends listing your debts from smallest to largest, and paying off the smallest debt first. This will help you build momentum to pay off the bigger debts.
Negotiate with lenders to help pay off your debt faster – find out if your current provider can give you a better rate, if not move to another one that will offer you cuts.
Buy your home
Pape recommends that you buy a home as soon as you have the money and not to wait for a housing crash.
Pape believes you will need a 20% deposit for a home deposit. This will ensure you avoid Lenders Mortgage Insurance, which can add up to tens of thousands of dollars over the loan's lifetime.
He also advises you to borrow less than the bank will lend you. Your repayments should be less than 30 percent of your take-home pay.
Boost your super to 15 percent
Pape advises that you should increase your super payments to 15 percent after you've bought your first time. Because your employer is already paying 10%, you only need to increase it by 5%.
This reduces your taxable income, so you generally end up paying less tax overall. (You pay 15 percent tax on money going into super, which will be less than your marginal tax rate if you have a job earning more than $45,000 per year.)
Boost your Mojo bucket
Remember your Mojo bucket? This is your 'emergency fund'. Pape wants you to save towards three months of Mojo money so that you've got $6k securely stashed away.
Get the banker off your back
Pape wants you to save thousands of dollars on your mortgage payments. How? By lowering your interest rate and making extra payments.
'If you pay just $1000 extra (on top of your minimum repayment) a month off your home loan, along with getting a cheaper rate, you'll save $77,641 in interest and wipe almost seven years off your mortgage,' he explains.
Nail your retirement number
Pape recommends you have your home paid off for retirement. On top of this, he suggests you'll need $250k of superannuation for couples, and $170k for a single person. This is the maximum amount of assets you can own (excluding the family home) to receive close to full amount of the aged pension.
Leave a legacy
Once you're financially stable, Pape wants to consider how you could help others. Consider giving away some money and time to those less fortunate.