by Scott Pape
‘It wasn’t until I was about 25 that I actually realised my father had amassed so much wealth,’ said Peter.
Warren Buffett jokingly describes his kids as being members of ‘the lucky sperm club’.
However, he was intentional about not letting his wealth spoil his kids, saying he wanted to give them ‘enough money so that they would feel they could do anything, but not so much that they could do nothing’.
And he meant it.
Peter told me about his early years when he struggled to afford his mortgage and make ends meet. Even now he won’t be getting any of his father’s $US85 billion ($A110 billion) fortune, and he’s totally okay with that.
He drives a Ford, doesn’t wear designer clothes and seems genuinely happy with his lot in life.
Okay, so you’re probably thinking, ‘What an absolute Scrooge McDuck that old man Buffett is!’
Well, the day after I spoke to Peter I had an interview with Warren.
(I wisely decided not to tell him that I named my dog after him.)
There were a million things I could have asked him about (not least for a stock pick), but only one that really mattered:
‘What advice did you give to Peter when he was growing up?’
‘My investment company, Berkshire Hathaway, is my canvas,’ said Buffett.
‘It allows me to paint a little every day. I encouraged Peter to find his own canvas. It wasn’t money he should focus on—but working out what his passions were that would allow him to tap dance to work each day.’
Peter found his canvas. He went on to become an accomplished composer and producer whose achievements include writing the Emmy Award–winning ‘fire dance’ music for the movie Dances with Wolves.
When I spoke to Peter, he mentioned a study that found that up to 40 per cent of kids from affluent homes experience troubling psychological symptoms and depression—around three times the average.
Yet, thanks to his dad’s wisdom, he sidestepped all that.
So you could argue that Buffett did share his wealth with his son. He taught his son about the power of having a strong work ethic, of building something you’re passionate about over a lifetime, and of letting that be its own reward.
No trust fund kids
Look, there’s a reason Buffett is the world’s greatest investor—he’s a smart bloke. He knows that money can screw kids up big time . . . and it’s something I’ve personally seen happen over and over again in my career too.
And if you want any more confirmation, consider the following: Donald Trump got a trust fund and he grew into a man-child:
In summary then: handing your kids a blank cheque is not the best way to help them.
So, how should you help them?
Well, the real question is: how can you teach your kids to fend for themselves?
And I have just the answer for you.
Introducing the Barefoot Ladder
Most kids approach buying a house the same way as getting down a ball that’s stuck on a roof.
They look up, and realise it’s too high to grab.
After a few half-hearted jumps, they stomp their feet and resign themselves to the fact that it’s ‘impossible’ to ever get it back.
(Then they go inside and eat a smashed avocado sandwich.)
As the parent, what you’re going to do is put up a ladder, and you’ll hold it for them, as they climb.
But you’re not going to do the climbing for them. And you’re not going to push them up with your head up their backside.
‘HEAVE!’
No, it’s your kid’s choice as to whether they want to climb the ladder.
Okay, so it’s a simple metaphor, but an incredibly powerful one.
The Barefoot Ladder will light a fire in the belly for your kids, and get them into their first home.
It’ll incentivise them to work hard, and save even harder.
And best of all, it won’t blow a hole in your own financial plan.
Let me explain how it works:
Your teen (if you have one) is going to open a savings account for their home deposit. And they’re going to begin saving into it, starting now. No ifs. No buts. Even if it’s just a few bucks.
At the same time, you’re going to set up your own ‘Barefoot Ladder Fund’ where you can start socking money away today so that you can help your teen as they climb up the property ladder. (If you don’t have a teen yet, even better—the earlier you start this, the better it works.)
Yet it won’t be a handout.
Because here’s what’s special about this money you’ll save: it’s your money, not theirs.
You control it. You invest it long term for maximum growth (I’ll show you how). You decide how much you give them, and when.
And when you pay out, you do not give them a handout—instead you’re going to match their savings efforts (more on this in a moment). So you’re still helping them . . . yet they’re working for every cent you give them.
This is the Barefoot Ladder in a nutshell.
Now let’s talk about how to make it happen.
Your teen’s home deposit savings account
Back in Chapter 1, your teen got their own Serviette Strategy.
Now I want you to add to the serviette by having them open up another linked high-interest savings account, and nickname it ‘Tom’s Home Deposit’.
And when they do, they’ll probably think you’ve finally gone off your rocker:
‘Awesome! I have $48 in my “House Deposit” account—only $499 952 to go!’
So explain what it’s all about. Tell them that when it comes to getting their first home, the ball is on the roof . . . and you’re going to give them a ladder to help them get there, if they’re willing to climb it.
There’s power in starting something, even if achieving it is many years away.
What you’re really doing is putting the idea on their radar: you’re setting up the ladder and showing them the path they have to climb.
The fact is, eventually they’re going to want to own a home . . . and this is the account they’ll use to save for it.
They may only put in a few bucks a year, but it doesn’t matter—you’ve planted the seed.
And that seed will grow, believe me. Every time they open their banking app, they’ll see their Home Deposit Savings account . . . and think of the goal they’re saving for.
Drip, drip, drip.
Too many whining millennials cry into their $12 seeded kale smoothies and moan that the expense of buying a home is unfair (which it is!). Yet crying never got anyone anywhere. By opening an account, and starting to save, your kid is already climbing the property ladder—even if they can’t see it yet.
Your Barefoot Ladder Fund
While your teen climbs towards their first property, you need to be right behind them, holding the ladder.
Let them know that for every dollar they save in their home deposit account you’ll chip in some money.
How much?
Well, if you can afford it, you could match them dollar for dollar.
However, I fully understand that most parents won’t be able to do that. Yet even if you can only match them, say, ten cents per dollar . . . wouldn’t it be great if you could say to your kids: ‘I’m going to give you some motivation to get you into your first home. For every dollar you save in your home deposit account, I’m going to award you a 10 per cent bonus. How’s that for a rocking interest rate?’
Whatever you decide is the right level of matching, I’m going to show you how to start planning for it today, so that you can make it a reality tomorrow.
Word up: if you’re stressed about money—because you have credit card debt, or you don’t have your finances under control—don’t set up a Barefoot Ladder yet. Instead, the best thing you could do is borrow my other book from the library and sort yourself out first. However, I’m assuming if you’re this far into this book, you have a pretty good handle on your money. So now, let me sh
ow you how to set up your Barefoot Ladder Fund.
Setting up your Barefoot Ladder Fund
It’s going to be years before your teen buys a home.
Yet when the time comes it’s likely going to cost a fair whack.
So if you do want to be able to give them a hand up, my advice is to start a regular savings plan now, and invest in the highest returning place possible:
The share market.
Now there are almost as many ways to invest in the share market as there are shows on Netflix:
You can open up an investing account in your own name, and sign up to a managed fund with the likes of investment giant Vanguard, or you can download an investment app like Raiz, or you can buy shares in Barefoot favourite Australian Foundation Investment Company (AFIC).
However, if you or your partner is earning over $37 000 a year (or you plan to be doing so at some stage), I’d recommend you set up your Barefoot Ladder Fund with an investment bond, which pays tax at a lower rate than you will.
Hang on, what’s an investment bond?
Let’s clear this up once and for all . . . you might have heard of bonds before: government bonds, war bonds, James Bond. Well, an investment bond has absolutely nothing to do with any of these.
Instead, it is simply an account where you invest money long term (10 years plus) into a managed share fund.
Investment bonds have some very good advantages:
•They’re an easy-peasy way of regularly investing small amounts of money into shares, via a regular direct debit monthly savings plan. You can increase your yearly contributions by 25 per cent each year.
•Anyone—parents, grandparents, family, friends—can contribute.
•And best of all, they’re really simple—just ‘set and forget’. You don’t even have to worry about including anything in your tax return because it’s a ‘tax-paid investment’. (To be exact, tax is paid on the investment income and realised gains at a rate of 30 per cent, by the bond issuer—not the investor.)
•They have the legal power of a ‘real’ trust fund (like Paris Hilton has) without going through the significant cost and hassle of setting one up (the money in the investment bond bypasses your will and goes straight to your nominated beneficiary).
So, which investment bond should you choose?
It’s fair to say that there are a lot of terrible investment bond providers in the market. The worst are a complete rip-off, like the Australian Scholarships Group (ASG).
According to my research, at the time of writing, the three cheapest investment bonds (in no particular order) are:
•Generation Life LifeBuilder Bond
•AMP Growth Investment Bond
•Australian Unity Lifeplan Investment Bond.
Honestly, there’s not much that separates these three—the main thing being that each requires slightly different minimum opening balances and charges different fees.
Again, I get no commissions, no kickbacks and no footy tickets—this is just my research. You should do your own. My suggestion? Call them all up and ask about their fees, their minimum investment amounts, their rules and how to set up the bonds.
Where should you invest the money?
After you’ve selected your bond provider, you’ll need to choose where you want your money to be invested, just like in your super fund.
My advice?
Since you’re investing for 10 years or more, you’ll want to invest 100 per cent into shares. This option will usually have ‘shares’ in the name, though providers often use more fancy names, like ‘Specialist Australian Shares’. If you’re unsure, check the product disclosure statement or give them a ring.
And one more thing on bonds: all bonds have a number of rules, so check the fine print before you invest, or talk to a licensed financial advisor who can explain it to you.
How much should you invest?
It’s totally up to you, and how much you think you’ll need . . . and how many bloody ladders you’ll need to put up!
There are minimum amounts you’ll need to start an investment bond, which vary (from $100 up to $1000). After that, you can set up an automatic savings plan (say $100 a month, which is $1200 for the year). It varies by bond provider though, so it pays to call them up and ask.
The key with investment bonds is to make the plan automatic. What matters most of all is that you start . . .
Everything you wanted to know about investing for your kids in two pages
When does my kid get the funds from the Barefoot Ladder?
When they buy their home.
Of course you could pay regularly and match their savings, but for most parents, since it’s going to be at least 10 years before your kid buys a home, you’ll get better results investing your Barefoot Ladder Fund and paying out when kid is ready to enter the property market.
Should I open one investing account for each child—or combine them all?
Open one for each kid, in the parent’s name.
How should I invest it?
If you’re investing for longer than 10 years, you should be invested in the share market. However, if your timeframe is shorter than that, sign up to an online savings account and set up a regular monthly savings plan.
When can I cash out my investment?
Any time you like. If you hold your investment bond for 10 years or more, it can be cashed out without incurring any further tax. (In technical terms, no growth will be included in the investor’s tax return.)
However, if you’re considering cashing the bond out before 10 years are up, just know that there are tax implications, and you should talk to both the bond provider and (potentially) your accountant.
Our kid just inherited a lump sum from a grandparent who passed away; how should we manage that?
An investment bond is a very strong option in this case. So is sitting down and explaining to your child that this money doesn’t come without responsibility: they need to honour their grandparent’s legacy by becoming a good money manager.
What about getting my kid into their first car?
Let me come out and say it: I think buying a car for your kid is financial child abuse.
I found my first car rusting in a farmer’s paddock. It was a 1966 XP Falcon, painted cream with a roller and some leftover house paint. My parents didn’t pay for the car; rather, it was a father and son project to do it up. And it turned out to be the ultimate way to teach me about saving. That’s why my humble—but totally correct!—view is that if you buy a car for your kid, you’re damaging them.
So, sit down with your teen and explain that if they want a car (or other big item, like a holiday) when they turn 18, they’re going to have to start saving for it right now.
I want to send my kids to a private school—how much should I be saving?
As much as you can, as soon as you can.
The Australian Financial Review reported that a quarter of parents borrow for their kids’ private school education, and one in seven run up debt on a credit card to pay for school fees.
Look, the biggest predictor of your kids’ happiness and success in life is how much time you spend with them, not the school they go to. Yet the irony is, parents often work extra jobs just to pay the fees. Personally I’d rather dial down the dollars I need to devote to school fees, which will allow me to spend more time with my kids (and make me less stressed to boot!).
Having said that, it’s your life. If you want to put some of the money from your investment bond into school fees, do it. But this is one expense the kids don’t have to contribute to themselves. You’re carrying this one.
What about saving for their uni?
I’m not paying for my kids’ uni.
Australia has one of the best university debt arrangements in the world—HECS-HELP. Remember, the HECS-HELP debt is not charged an interest rate. Instead, each year on 1 June it’s indexed to the cost of living. And, since 2017 the Government has scrapped both the 10 per cent upfront payment
discount and the 5 per cent voluntary repayment bonus. In other words, there’s no added incentive to repay early.
My view? Let them pay their own uni fees in their own good time.
Money Meal ‘shopping list’
Review the options for your Barefoot Ladder Fund:
•Generation Life LifeBuilder Bond—genlife.com.au
•AMP Growth Bond—amp.com.au/personal/investments/products/investments/growth-bond
•Australian Unity Lifeplan Investment Bond—australianunity.com.au/wealth/investment-bonds/lifeplan-products/investment-bond
•ING Orange Everyday Youth—ing.com.au
•Vanguard Australia—vanguard.com.au
•AFIC—afi.com.au
BAREFOOT MONEY MEAL
THE BAREFOOT LADDER
You’re about to put the idea of home ownership on your teen’s radar. Cook their favourite meal to get their attention.
ENTRÉE
First, it’s time to set up your Barefoot Ladder Fund.
Review the options on page and decide which investment bond is best for you—then set it up with a regular direct debit. (You may choose to do this before or even after the Money Meal—the point is that you get it done.)
MAIN COURSE:
Break out the Serviette Strategy you created for your teen in Chapter 1 (see page).
Tell your teen that they’re going to set up a new high-interest online saver, and nick-name it House Deposit Savings. This is the account they’ll one day use to buy their own home—and to encourage them to save, you’ll match their efforts dollar for dollar (or whatever you can afford).
DESSERT:
Play the Family Legends game:
Do you know . . .
•the story of how Mum and Dad bought our family home?
•what Mum and Dad’s first home was like and how much it cost?
•how high interest rates were back then?