The Barefoot Investor for Families
Page 16
Let’s ROCK!
Step 1: Check yourself before you wreck yourself
Call your HR department (or just call your boss at lunchtime, when they’re not busy).
Say this:
‘Hello, I’d like to know if you allow me to choose my own super fund.’
Some workplaces allow it, others don’t (because of workplace agreements), and the only way to know is to ask the question.
If you think this phone call is slightly awkward, don’t worry. I guarantee the person on the other end of the line is thinking to themselves: ‘Golly, I wish I’d been that smart when I was a kid.’
Whether you’re allowed to choose your own super or not, you’ve just gone WAY UP in their estimations. You, my friend, are killing it.
Step 2: Your 15 minutes of fame (and fortune)
So, you’re going to be told one of two things: you can’t switch, or you can. Here’s what to do either way.
If you can’t switch super funds . . .
Bummer—for the time being, you’re stuck in your employer’s ‘default’ super fund.
Thankfully, all super funds (including yours) will offer a range of investment options.
It’s like standing in front of the menu board at Macca’s. There are a dozen things you could choose to eat—a McFlurry, a Quarter Pounder, McNuggets.
People who just accept the ‘default’ option aren’t even making a choice . . . they’re just sitting there with their mouths open, hoping someone will throw a McNugget into their gob.
Instead, I want you to pull out your phone and call your super fund and ask to be invested in their ‘high growth’ investment option (100 per cent in shares, no 25 per cent ‘safety net’ like Warren).
Just by doing this, you’ll likely have boosted your end balance by hundreds of thousands of dollars.
In fact, even if you only do this, you are so far ahead of everyone else it’s not funny.
Oh, and this is all assuming you can’t switch out of your employer’s default fund.
But what if you can?
If you can switch super funds . . .
Well, you don’t have to eat off the Macca’s menu (the default fund).
Instead you can get up and walk across the road where the burgers are better (another super fund).
(And I’ll now stop with the burger analogies.)
Why would you bother switching super funds?
Fees.
I’ve made many, many, many enemies in the world of finance for pointing out what a giant rip-off the super industry is.
The finance industry skims off $31 billion each year from our super funds.
Which means that many boats, mansions, planes and overseas junkets have been financed by compulsory superannuation. From your super.
These financial leeches are happy to get their hands on your money, because they know the average kid doesn’t give a guacamole about super fees. And over decades that will rob you of hundreds of thousands of dollars.
If you wondering whether I’m POUNDING THE KEYBOARD right now, you are correct.
It’s pretty simple really: the more fees the fund manager takes, the less you make.
Let’s beat them. Here’s how:
When my 15-year-old twin nephews went super shopping, they came to me for help.
(Actually, that’s not true: they weren’t looking for super, and they didn’t come to me for help. But hey, I’m their uncle, so why wait for an invitation?)
First, I suggested they invest their money 100 per cent in shares, just like I told you. And to keep costs low plus get broad diversification, they should invest in ‘index funds’ that automatically buy all the companies that make up a share market index, and track the market.
I recommended they split it half and half between Aussie shares and international shares:
Fifty per cent in 200 of the largest businesses in Australia—like the banks, BHP, Sydney Airport, Telstra, Woolies and CSL.
Fifty per cent in 1582 of the world’s largest businesses—like Apple, Facebook, Amazon, Nike and Nestlé.
To illustrate how powerful investing in the share market is, let’s you and I jump in Marty McFly’s DeLorean and head back in time to 1970.
Let’s say we invest $10 000 into a broad-based Aussie share fund, and leave it there. Over the next 48 years, there will be a lot of things to completely freak out about:
•the Black Tuesday stock market crash (1987)
•the Asian financial crisis (1997)
•the Tech Wreck (2000)
•the Global Financial Crisis (2008)
•Barnaby Joyce being appointed Shadow Finance Minister (2010).
How is our $10 000 looking today after all this carnage? It would now be worth a staggering $923 107.
Now, the average super fund charges a fee of 0.80 per cent p.a. (per year), plus $70 a year.
Could I find a lower-cost fund?
The hunt was on.
I found one that could do it for a fee of just 0.13 per cent p.a., plus $78 per year (see the box on page for details.)
Now, the difference between my ‘index fund’ (0.13 per cent) and the average fund (0.80 per cent) was only a piddly 0.67 per cent per year in fees.
But check out what happened when I crunched the numbers (to keep things simple, I’ve used after-inflation figures—ask your economics teacher about it).
My nephews are going to work for, say, 55 years.
At the end of those 55 years, guess what their end balance is with a fund that charges fees of 0.80 per cent?
$1 979 997
However, if they’d paid just 0.67 per cent less in fees with a lower-cost fund, they’d have:
$2 433 326
In other words, they will have around $453 329 more just by ticking a form and choosing a lower-cost fund!
That’s why my advice to you is the same as I gave them:
‘You guys are going to work for the next 55 years. Yet spending 15 minutes choosing a cheaper fund will have a bigger impact on your final balance than your employer’s contributions over the entire period!’
‘I call it Uncle Scott’s $453 329 gift,’ I said to the boys. ‘Now hand me a beer!’
Uncle Scott’s $453 329 gift
I told you I tracked down some low-cost funds. Here’s how I did it. I called up a superannuation fund research house and asked them, ‘What are the cheapest super share funds in Australia?’ I also asked them to divide the shares 50 per cent Aussie shares and 50 per cent international shares (a good investment mix).
They found that the cheapest super share funds (30 June 2018) were:
1. Hostplus
International Shares—Indexed
IFM—Australian Shares
Total investment fees are 0.13 per cent p.a, plus $78 per year.
2. Sunsuper
Australian Shares—Index
International Shares—Index (hedged)
Total investment fees are 0.19 per cent p.a, plus $78 per year.
3. First State Super
Australian Equities
International Equities
Total investment fees are 0.23 per cent p.a, plus $52 per year.
4. Media Super
Passive Australian Shares
Passive International Shares
Total investment fees are 0.24 per cent p.a., plus $65 per year.
And then there is the ‘I Can’t Be Arsed Switching Super’ fund . . .
Switching all sounds too much trouble? Or you can’t switch? Just go with the high-growth option in your default fund. (Call the fund and ask them.)
Source: SuperRatings Pty Ltd ABN: 95 100 192 283 AFSL: 311 880
Note: Any calculations that stretch out 55 years into the future involve assumptions. Here are mine: I could have calculated the figures without adjusting for inflation—but in the future there will be inflation—so I’ve factored this into my calculations on salary and investment returns; I’ve assumed there is no incr
ease to compulsory super, or any tax changes; these investment returns are calculated using 6 per cent after inflation. (Over the past 29 years, the Aussie share market has achieved 8 per cent after inflation.)
Step 3: Forget about it
Here’s the final piece of advice I gave to my nephews:
‘I want you to summon up every ounce of indifference that you have and NOT look at your super fund for at least the next 30 years. If you look at it, you may stress yourself out. So do yourself a favour and forget about it and let it do its thing.’
Great advice, and it works well if you’ve chosen your own low-cost fund (and it remains a low-cost fund).
However, if you have a default fund and you switch to a new employer, they’ll probably just stick your super in their default fund. Don’t get caught in the trap of having multiple super funds (with multiple fees). Make sure you transfer your super to the new fund (it’s called a ‘rollover’). Also, when you can, get yourself into your own low-cost fund.
Well done!
If you’ve got to here, and understood most of what I’ve said, then well done. I often say that compound interest is the great leveller in life . . . and you’re now not only one of the few people your age who understands it.
Even better: you’re now living it.
And with that, please pass this book back to your parents.
Money Meal ‘shopping list’
Hi parents—I’m back to you now.
It’s time to get ready for the Money Meal.
Here’s what you’ll need:
•Your kid’s HR contact (phone or email), to check whether they can choose their own super.
•Their default fund’s Product Disclosure Statement (PDS) from their website, to see what investment options they offer.
•Any PDS of the low-cost funds that SuperRatings mentioned, along with other super funds you’ve researched yourself.
•If the miracle of compound interest has sparked your teen’s curiosity in investing, by all means fan those flames. The quickest way to get them investing is with an app like Raiz Kids raizinvest.com.au where you can kickstart a share portfolio with a few bucks.
BAREFOOT MONEY MEAL
THE $453,329 GIFT
Announce to your kid before dinner that tonight’s a special night, so you’re going out . . . for tacos.
ENTRÉE:
As your teen is scoffing the salsa, explain that unlike you, they have the opportunity to get it right from the start, and end up very, very rich . . . with one simple set-and-forget choice now. Get them to read about the miracle of compound interest on page (or summarise the info for them).
MAIN COURSE:
Talk through the three steps to success on page:
1.Your teen should find out whether they can switch super funds.
2.If they can’t, they should switch into their current fund’s high growth option (100 per cent in shares). If they can, they should review the options on page (or research a cheaper fund!) and switch to a low-cost index fund, split fifty-fifty Aussie shares and international shares. Flick through the PDSs for each fund.
3.Remind them to do nothing for at least 30 years—except rollover their super if they switch jobs, and try to move to a low-cost fund whenever they can.
DESSERT:
Order anything you want, because you’ve both just done a great thing. (Do Mexican restaurants have dessert on their menus? I’ve only ever had tequila shots.)
Play the Family Legends game:
Do you know . . .
•the story of Mum’s or Dad’s first investment?
•a regret Mum or Dad has about super?
•what it would have meant for us if we’d had our super sorted at 15?
Finally, do payday (three minutes is all it takes!).
Everyone pitches in and does the dishes.
The power of moments
I spend a good part of my day reading letters from lovely, hard-working older people who are financially screwed.
When you get to retirement without enough savings, you often live your final days in fear.
Yet what you’ve helped your teen with tonight will mean they won’t have regrets.
You should be really proud of yourself, and of them.
Tonight will have a ripple effect on their entire life, and will look after your family long after you’re gone.
You did good tonight.
‘So my boss gave me your book . . .’
Jess Cleasby, Perth, WA
Just over a year ago I was a 17-year-old high school graduate with literally $0 to my name. Luckily, I managed to find a farm job over the summer break before starting uni. My boss handed me a copy of your book.
My first thoughts were . . . why does a 17-year-old girl need a finance book?
Nevertheless, I decided to give it a go. Reading your book made me feel like I had been living in the dark. There were so many things I should have known! I was taken aback by how easy it was to read and how everything was explained in a way that even I, who knew nothing about finance, could understand. Back then I had one everyday bank account and no idea about super funds.
Fast forward to now . . .
I switched super funds. I was so proud of myself when I switched to a low-cost fund. Yes, I’ve got decades till I retire . . . and that’s the point!
In the past year I have set up my buckets, and I have $3000 in ‘Mojo’. I have also saved, using your methods, for a $3000 trip to Japan, a $3000 car, a $1000 trip to Brisbane, a $1000 University Games tournament, and $2000 for braces . . . and I still have $4000 of my original money from the farm job. I have no debt, I receive no cash from my parents, and I don’t worry about money.
The Barefoot Investor has helped me survive my first year living out of home, and my first year as an adult. I owe you a tremendous thank you. If not for Scott’s advice I’m not sure where I’d be today.
The Barefoot Ladder
I don’t know about you, but the final financial yardstick that I have for my kids is them buying their first home (nothing flashy . . . just a decent starter home that they can begin building up their equity in).
Then I’ll be like George ‘Dubya’ Bush standing on an aircraft carrier under a giant ‘Mission Accomplished’ banner.
(Okay, so maybe that’s not the best image . . .)
My thinking is that if my kids can buy their own home they’ll be living the lessons of this book:
They’ll have figured out how to work bloody hard, like Barefoot Betty.
And, this being the era of Taylor Swift, they’ll have learned to Shake It Off and systematically save for years.
Holy guacamole, Barefoot! Is it even realistic in this day and age for kids to try to crack the housing market?
Yes it is—and I’m going to show you how your kids can do it . . . with a special approach I call the Barefoot Ladder.
I’m also going to show you:
•the investment account I recommend to save for your kids’ future
•how you can brainwash your teen into saving for a home . . . using a serviette
•why buying a car for your kid is financial child abuse.
Plus, I’ll lay out a very specific, very practical strategy that will get your kids into their first homes—fast.
And if you’re thinking that’s impossible . . . you’re normal.
The $80 000 handout
‘If you put your mind to it, you can achieve anything, Tommy!’
(Well . . . except a house deposit.)
That’s what 40 per cent of parents think, according to a 2017 Westpac report on housing affordability.
And that explains why one in four Aussies aged between 24 and 35 now live with their parents.
Remember . . . these are people with beards. (And sex lives.)
So, what can you do?
Most parents’ answer is . . . give them a handout. Research from Digital Finance Analytics (DFA) estimates that the number of first home buyers getting a hand
out from their parents has increased from just 3 per cent six years ago . . . to more than 50 per cent today.
And get this: DFA says that parents are handing over an average of $80 000!
That’s how much your kids’ friends’ parents are shelling out . . . so what are you going to do for your kids, bucko?
Do you even have $80 000?
Truth is, very few parents do, though that doesn’t seem to deter them: DFA found that over two-thirds of older homeowners who refinanced homes worth more than $750 000 did so for reasons that included helping their kids buy a home.
Breathe.
I believe giving your kids a handout—even if you can afford it—is more likely to hinder than help them long term.
Yet you still probably don’t believe me.
So let me tell you about a kid I know who never got a handout . . . and it turned out to be the best thing that ever happened to him.
The luckiest man in the world
Peter greeted me like an old friend, even though we were meeting for the first time.
He was in his late 50s and wore jeans, runners, a white buttoned shirt and a warm smile.
Now read this carefully, because there’s a lot that you and I can learn from Peter’s story:
He attended the local public school.
He grew up in an average, unflashy suburban home that his father bought 60 years ago, and still lives in today.
His family drove sensible cars that they kept for many years.
And when he was growing up, his father paid him a small allowance that he was expected to work for.
Pretty ordinary stuff, right?
Well, sure.
Except that Peter’s father is far from ordinary.
He’s investment legend Warren Buffett, one of the wealthiest people on the planet (and the man I named my golden retriever after).
Yet Peter says Warren was like any normal dad. In fact, for many years his father didn’t even go to an office, instead working from the spare room upstairs.