Lately, we’ve found a lot of our clients have read the ‘Barefoot Investor’ book and have been implementing some of its frameworks and strategies to manage their money. One of the things about the Barefoot Investor is that he encourages you to put money into different bank accounts or ‘buckets’ to spend, save or grow and that some money is put into each account every pay day. Whilst a regular savings plan is critical to long-term wealth creation, what we’ve found is a lot of our clients are putting this money into external bank accounts and are not using their money to offset or save interest on their home loan. We’ve developed a tool that can help you use both the Barefoot method and save money on your home loan.
The Barefoot Investor Buckets
To give you some background, the Barefoot Investor ‘buckets’ (separate accounts) are set up as follows;
Daily Expenses: 60% of salary (daily living costs – food, bills, minimum debt payments)
Splurge: 10% of salary (use this for fun things each week)
Smile: 10% of salary (for longer-term savings that make you smile! holidays, coffee machine…)
Fire Extinguisher: 20% of salary (used to reduce debt or save for a house deposit)
Mojo: at least $2,000 (this is money put aside for emergencies – losing your job, getting sick, family in need…)
Reference: image from Barefoot Investor ’Step 2: Set Up Your Buckets’
What is the tool our brokers have created?
Launch Finance has created a spreadsheet tool that essentially enables you to track how much you have available in your main offset or redraw account as well as the balance of the sub-accounts or the separate ‘buckets’ within that one main account.
The result is that you are able to ‘at a glance’ track your deposits and running balance in the sub-accounts. All the while, you benefit from that cash sitting in the one main offset or redraw account resulting in you paying less interest on your mortgage and paying off your home loan sooner.
How does it work?
Each month, when you deposit into your main account, you then enter an allocation into the sub-account you want that money to go to (i.e daily expenses, splurge, smile, fire extinguisher or mojo). You follow the same process when you make a withdrawal from any of those accounts. The result is that you know at any point in time, what the balance is for the sub-accounts within your main account. Again, all while using your available cash to reduce the interest on your home loan repayments.
What is the difference between using this tool with a redraw vs offset account?
Let’s start with an offset account. This is a transactional savings account where the balance in the account is ‘offset’ against the interest payable on the balance of your home loan. You will only pay interest on your home loan minus the amount in your offset account.
A redraw facility, in contrast, is the amount that you have paid towards the principal of your home loan ahead of schedule i.e. additional capital repayments. It is not a separate account, but rather the amount calculated by your bank as available funds for redraw.
In both scenarios, the tool calculates and tracks the allocation of funds to each of the sub-accounts based on funds available either from the redraw or the offset account. The difference is that the offset account is a positive cash balance whereas the redraw facility increases the debt position when drawn upon.
Based on our experiences with clients, those that use a redraw account in comparison to an offset are usually better off in the long term as they are less likely to ‘spend’ debt rather than savings.
Who should use this tool?
This tool can be used by anyone who is wanting to reduce the interest they pay on their mortgage, especially if they are keeping funds in separate accounts from their offset or redraw account.
Why should people use this tool now?
It’s going to save you money, it is that simple. By using this tool, the main benefit is that you combine the Barefoot Investor style of managing your money as well as saving interest on your mortgage. It helps you budget, helps you allocate your funds to specific savings goals, and of course, you reduce the interest you pay on your mortgage, which means you’re paying it off quicker.
Speak to your Launch Finance broker today and they will explain how to save money through offset or redraw and help find the right loan for you. If you’d like a copy of the tool, simply email ‘Redraw or Offset Tool’ to [email protected]
If you would like to meet with one of our expert brokers to review your finances, you can book an obligation free consult by calling (08) 9367 4222 or fill out an enquire now form on our website. We look forward to helping build your financial future with you.