I often get questions about how The Barefoot Investor can work in New Zealand. So I’ve popped this post together to cover the New Zealand basics and look how Kiwis can take The Barefoot approach.
Why the distinction? The Barefoot Investor book was written by an Aussie, for the Australian market. You wouldn’t think we’d be all that different, but when it comes to applying the Barefoot financial guidelines, we really are.
How does The Barefoot Investor method work?
Here’s a quick refresher on how the BFI (Barefoot Investor) method works. You allocate all of your money into three ‘buckets’, each of these with specific bank accounts and rules to be followed.
🛒 The Blow Bucket
The Blow bucket is for money that comes in and goes out again. It should be split across four bank accounts. They are:
- Daily Expenses: All your everyday expenses, like rent, mortgage, power, food, petrol, insurance. 60% of your take home pay.
- Smile: A savings fund for things that make you smile! Like a holiday, a new bike, home renovations. 10% of your take home pay.
- Splurge: Money to spend on anything you want, like coffees, entertainment, drinks with friends. 10% of your take home pay.
- Fire Extinguisher: this fund should be first directed to paying off debt (not mortgage though), then adding to your Mojo, then adding to your Grow bucket. 20% of your take home pay.
💰 The Mojo Bucket
The Mojo Bucket is a separate bank account, at another bank. This is to make it harder to dip into. It should start off with $1000-2000, to be used ONLY for emergencies. Once your debts have been paid off (other than mortgage) all the Fire Extinguisher money (see above, 20% of your take home pay) will go in here until it has reached the value of 3-6 months of daily expenses.
The ultimate goal is that it becomes a real emergency cushion, and if you suddenly had no income, your Mojo account would cover your essential costs for a long period of time. 3 months is a great start, 6 months is better and 12 months is pretty epic.
🌱 The Grow Bucket
The Grow Bucket includes your superannuation , so in NZ this would start off as your Kiwisaver. For most people this is taken out of your income before you get paid, so is not part of your take home pay calculations above.
As you move through the Barefoot Method and reduce debt, you’ll then get to 3-6 months of Mojo. After this you can start adding your Fire Extinguisher money to your Grow Bucket (and there are obviously loads of ways to add to a Grow bucket other than Kiwisaver… more on that later).
The Barefoot Investor New Zealand in 2020
Kiwis have been using the BFI method for years and many have tweaked it to suit life in New Zealand. I’m going to cover the little changes that I’ve found useful to make BFI work in New Zealand, along with a few of my favourite ideas from other Kiwis.
Do you have other ideas, changes or additions to The Barefoot Investor for New Zealanders? We’d love to hear more and I’ll update this article with any helpful tips that you send my was so we can all learn more.
Set your own Barefoot Percentages for New Zealand
Many New Zealanders who read the BFI will be shocked when they do the sums for their own finances.
In the book, Scott makes it sound super simple to just set your Daily Expenses to 60% of your take home pay, no worries at all.
But in New Zealand, our cost of living compared to income is much higher than in Australia. Basically, we get paid a lot less, but our bills are the same! So instead of beating ourselves up because our daily Expenses are WAY MORE than 60% of our take home pay, we Kiwis need to tweak our percentages instead.
🍊 Daily Expenses: 60%?
What percentage should it be in NZ? As low as is realistic. Spoiler: it’s probably not going to be 60% for most people. I’ve been working at this for 10 years and I’m just closing in on 60%. Everyone’s situation is different, so settle on a realistic percentage that works for you.
If it’s over 100%, reducing it is a bit more urgent as that means you’re spending more than you make.
🍕 For a step by step approach to systematically reducing your expenses, check out our post on The Tempest Challenge.
🍊 Smile, Splurge and Fire Extinguisher?
After you’ve calculated your Daily Expenses %, work out what percentage is left. How you split this up should depend on how much high interest debt you have.
Don’t include a mortgage or Student Loan in this debt figure – just things like credit cards, personal loans, hire purchase, or finance cards.
- If you’ve got a lot of high interest debt, I’d aim for going all out and putting as much as possible into your Fire Extinguisher account. You might choose to ditch the Smile and Splurge for a while. You could also put in a super small amount each week. Remember you won’t do this forever, just until your debt is paid down. Then your Smile and Splurge can ramp back up.
- If high interest debt is not an issue, then split the remaining percentage in the following three ways. Of the remaining percentage (what’s left after Daily Expenses) put half into Fire Extinguisher, a quarter into Smile and the last quarter into Splurge.
🍩 Let’s see an Example
Daily Expenses at 80% of your take home pay. That leaves 20% of your take home pay to cover Smile, Splurge and Fire Extinguisher.
- Lots of debt: The whole 20% goes into Fire Extinguisher, cut out Smile and Splurge until the debt is gone.
- Not much/no debt: 10% into Fire Extinguisher, 5% into Smile, 5% into Splurge.
🍊 Improving your BFI percentages
Whatever your starting percentages are, there are two main ways to improve them. These are:
- Increase your income
- Reduce your Daily Expenses
Both are MUCH easier said than done right? But give yourself time, think creatively, and you may find opportunities to shift your percentages towards the BFI goals. Like I mentioned above, it’s taken me personally 10 years of working towards my percentages matching the book. Scott covers this in the BFI book and the advice given would be much the same for NZ as Australia.
Kiwisaver versus Super in the Barefoot Investor
The BFI book uses Superannuation (Super) to grow the Grow Bucket. This isn’t included in your take home pay as it is usually deducted before your pay goes out. I was stumped on this one for a bit as I couldn’t work out where the extra money was coming from! But I’ve caught up 😁😁
🍊 Key differences between Super and Kiwisaver
In the book, Super is set at 9.5% because that is Australia’s equivalent of the Kiwisaver contribution. Remember in NZ it’s 3%. In Australia, if you opt to put in your own contributions to your Super in Australia, you will also pay less tax on the money contributed. Good old Kiwis pay their usual rate of tax on any income that goes into Kiwisaver contributions.
So you can see, in New Zealand, we’re already off to a slower start. Then the book advises to ramp up your contributions to 15% of your income! Ouch. This is another shock to Kiwis considering the BFI method as it is a real stretch from the standard Kiwisaver.
🍊 Your Grow Bucket is your retirement fund
This may just be your Kiwisaver, in which case, you may need to consider putting in a lot more than the standard 3% to have a comfy retirement. The main benefit is that your money is locked away until you’re 65, and you can’t randomly blow it on anything along the way.
You may also have other provisions set up for retirement, like a business, a rental property, shares, or other investments.
Work out how best this fits for you and get some professional advice.
Barefoot Investor Bank Accounts in New Zealand
The book recommends types of bank accounts to use so we’d better take a look at the Barefoot Investor New Zealand options.
The overall goals for our bank accounts are to:
- Avoid bank fees on your accounts, and
- Use a bank that allows you to have several accounts set up together without any additional costs.
At the time of writing, the bank accounts that fit this bill are:
- Bank accounts attached to your home loan or mortgage
I’m going to add to this list as I find out more about different banking options. Please drop me a line if you have anything to add.
🍊 Why are we not looking at interest rates of different NZ bank accounts?
As I write this, interest rates are loooow and the money in your Daily Expenses, Smile, Splurge, and Fire Extinguisher is designed to be used, not to sit in savings.
That said, if you get the option to get an account with no fees and a good interest rate, take it.
Mojo money would do well to be sitting on a good interest rate, so shop around there if you can. Be careful if opting into a Term Deposit to get a better rate: you need that money to be available if an emergency arises. And definitely don’t put it into shares or property as it needs to be readily accessible, low risk, cash.
The Barefoot Investor and Property in New Zealand
Looking at Step 4: Buy your Home, you might spot some big differences between Australia and New Zealand.
🍊 LMI and LVR
LMI stands for Lenders Mortgage Insurance – this is an additional cost that you’ll pay in Australia if you have a low deposit loan. We don’t have this in New Zealand, however, we do have stricter limits on low deposit loans. In NZ we have the LVR, or loan-to-value restrictions that mean in many cases you simply can’t borrow if you have a low deposit. So we don’t have to factor in extra costs of LMI like the Aussies do. However, if we don’t have that magic 20% deposit, we may be out of luck all together.
🍊 Income and savings rate
In the BFI book, you’ll spot the following sentences:
“The average full-time pre-tax wage in Australia is $78,832, or $5000 a month in the hand (excluding super). So a couple both earning average wages could live off one income (very frugally) and save a $100,000 deposit in 20 months.”
In NZ in 2019, the average wage was $47,048 before tax, or $3154 in the hand each month. (Source: Figure NZ)
Plus our cost of living is arguably higher than in Australia. So as you can see, it’s a lot harder for the average Kiwi couple to live on one income and save the other. So for the Barefoot Investor New Zealand fans, it would take 31 months to save $100,000 rather than the 20 months listed in the book.
Your cool $100k could then secure you a 20% deposit on a $500,000 house. With our crazy property market, there are many regions where that still might not buy you very much. If you live in, or can move to a cheaper region, you may get a lot more for your money.
Going Barefoot Investor New Zealand Style
Hopefully that’s a helpful summary that Kiwis can bear in mind to get the most out of the Barefoot Investor method.
If I’ve missed anything, or if you have your own tips to share, please let us know!