The Barefoot Investor bucket strategy is a really simple way to start taking control of your finances and applying some basic budgeting and cash flow management techniques. Roughly speaking, you split your income into three main accounts of ‘buckets’ – the Mojo bucket (emergency fund), the Grow bucket (long term wealth building), and the blow Bucket (cost of living and lifestyle expenses). The Blow bucket is then broken down again into four separate accounts or ‘sub-buckets’: the Daily Expenses (your regular bills), The Splurge (goes without saying), The Smile (long term savings for things like holidays), and the mighty Fire Extinguisher account, which you can use to put out spot fires and propel yourself towards FIRE!
So how exactly does it work – How many buckets do you need, how do you actually set it up, and what percentages or splits should you use? Finally, we will explore how CaptainFI – the self professed ‘Half-arsed Investor’ – uses the Barefoot Investor Bucket strategy. Read on to find out!
“I decided to make our financial strategy so simple that I could draw our plan on the back of a serviette.”The Barefoot Investor.
Introduction to the Barefoot Investor buckets
The barefoot investor bucket strategy is a great way to start taking control of your finances and applying budgeting and cash flow management. The Barefoot Strategy roughly goes like this….
Starts by splitting your regular household income into three buckets
- Mojo account – Emergency fund
- Grow account – To build long term wealth
- Blow Account – Money that is used to live on / fund your lifestyle
It is recommended that you split your three main buckets up between separate institutions – that way you cant get them mixed up. If you don’t get paid a regular income (maybe you get paid on a per project basis or you run a small buisness), you can do this by splitting up lump sum payments, or if you really wanted to you could put all of your lumpy income into a buffer account and then pay yourself a regular income out of there – just divide your yearly income into weekly or fortnightly splits and set up an automated payment (be mindful to keep a small buffer in there so you don’t run out though).
Barefoot Investor Buckets: Mojo
Your Mojo is your emergency fund. This is the simplest of all the buckets and is money you have tucked away just in case. Mojo is your rainy day fund. Mojo is your stress-free fund, Mojo is your back up plan, baby!
To get started, you want at least $2,000 in there, and eventually you want to grow it to 6 months worth of your living expenses. You need to get the money anyway you can – try selling your old stuff online (a modern garage sale), or picking up a side hustle or two.
You will learn about the ‘Fire Extinguisher’ bucket below, and you can direct this fire extinguisher into your Mojo bucket to build it up to a healthy balance in no time. Once you have $2,000 in your Mojo, your next job is directing all of your surplus cash into paying down any forms of bad debt like credit cards, personal loans or car payments which have a high interest rate (anything above 5% is pretty bad really).
Once that bad debt is knocked down, turn the fire extinguisher back to the Mojo to build it up even bigger. The Barefoot Investor suggests to at least 3 months of living expenses, but I would suggest 6 months is a safer number.
Barefoot Investor Buckets: Blow bucket
The Blow bucket is there to cover your cost of living. It actually gets split up into four separate buckets itself, which makes it a little easier to manage your cash flows and helps you to spend guilt free.
- Blow account – Daily Expenses: recommended to be 60% or less of your total household income (Rent, Mortgage repayments, Groceries, Utilities, Petrol, Car registration, Insurance etc). Now you have an incentive to work towards – slashing those bills. The Barefoot Investor gives some great tips on how to cut your daily expenses down, including some scripts you can use with things like your phone provider, mortgage provider and utilities provider. You will also find lots of awesome tips right here on this blog.
- Blow account – Splurge: 10% or less of your income on impulse spending and life’s little luxuries and conveniences: Orange-mocha-frappe-chino-lattes, Date nights, small gifts and fluffy dice for your ride.
- Blow account – Smile – 10% or less of your income to save for long term goals like family vacations, a new car, Christmas or Birthday gifts, or that new kitchen renovation you’ve been wanting!
- Blow account – Fire extinguisher – 20% or more of your income to be directed to paying down non productive debt – credit cards, personal loans, car loans, student loans. After thats done, use it to boost your Mojo to three to six months living expenses, and then to boost your super contributions to 15% and finally, use whatever is left over to pay off your mortgage quicker. Once this is done and you are debt free, then the Barefoot Investor suggests you direct it into your Grow account to build your long term wealth. Although, you don’t always have to do it in this order (as you will find out when you read how I do the barefoot buckets…)
Barefoot Investor Buckets: Grow
Your Grow bucket includes things like your Superannuation, Investment properties, Investing in shares through brokerage accounts or maybe even Starting up a small business. These are all ways to grow your Net Worth.
These are all ways to grow your net worth and passive income become wealthier over the long term. Personally, I think the grow bucket should get A LOT more attention than it currently gets, because this is the bucket that will let you reach Financial Independence and Retire Early (if you should so choose to).
Your Superannuation will automatically be paid 9.5% of your wages by your employer – and this figure is set to increase with governments superannuation contribution indexing in a series of increases that will bring that up to 12% by 2025. This is a great thing for workers, but The Barefoot Investor reckons we can go one better – make some salary sacrifice contributions using your Fire Extinguisher bucket to raise your personal super contributions to at least 15% of your wage. Actually, its a bit tricky to do with your Fire Extinguisher bucket, but you get the notion, right?
To increase your personal super contributuons, you can engage with a salary sacrifice company, contact your HR / payroll department, engage with your superannuation fund directly, and of course make sure to visit the ATO to double check any rules and regulations (including potential lodgement of an intent to claim a concessional contribution to your super if relevant to you). The current concessional cap is $25,000 per year, but there are a few quirks and interesting rules to wrap your head around. If your finding it all a bit confusing, a good, independent, fee-for-service (hourly rate) financial advisor is a wise investment!
Once you’ve boosted your super to levels that will automatically provide you a very comfortable retirement in a very tax efficient manner, the Barefoot Investor recommends to use whatever remaining surplus Fire Extinguisher funds you have to fully pay off your mortgage. After that – its open slather on shares and investment properties!
Of course, For those on the path to FIRE we might choose to instead invest sooner in conventional brokerage accounts and investment properties – after all, we want to build up streams of passive income that we can access earlier than our superannuation to cover our cost of living!
Setting up your barefoot investor buckets
There are a heap of great bank accounts that you can use to set up your barefoot investor buckets – check out Barefoot Investor Accounts: Best Online Bank Accounts In 2020 for the full list of the best online banks to use, but for now I will focus on what I think are two of the best right now – ING Bank and Up Bank.
Barefoot Investor buckets with ING Bank
ING Bank makes it very easy to set up your barefoot buckets. Once you have your account opened, you can use the online banking portal to open any number of accounts. You can create multiple Orange everyday transaction accounts which come with their own debit cards for the spending accounts, as well as a number of savings maximiser accounts for the accumulation accounts. Be warned however, you only will receive bonus interest on one savings maximiser that is linked to an orange everyday transaction account.
Mojo: Savings Maximiser (however personally many people, including the Barefoot Investor, reccomend you go with a completely different institution for this account so you aren’t tempted to use the funds in anything other than an emergency)
Grow: ING do not offer a brokerage account for investing, however they do have superannuation products and offer home loans for your mortgage. I personally do not have much experience with these products and to be honest, I haven’t really heard great things about them anyway. Stick to the providers you know and love for Super and Brokerage, and hit up a mortgage broker or get Googling to find the best rate to switch your mortgage to
Blow – Daily Expenses: Orange Everyday Transaction account
Blow – Smile: Savings Maximiser
Blow – Splurge: Orange Everyday Transaction account
Blow – Fire Extinguisher: Savings Maximiser
Barefoot Investor buckets with Up Bank
Up Bank lets you create infinite number of saver accounts which you can label, assign an Emoji to, set goals, and set up automated transfer into. They only have one main transaction or ‘Everyday account’ which will display activity on though, so it could make it tricky if you wanted to fully separate your ‘splurge’ accounts. My trick would be to just immediately transfer out of the ‘splurge’ account back into your transaction account to maintain its float.
Mojo: Saver account (however personally many people, including the Barefoot Investor, recommended you go with a completely different institution for this account so you aren’t tempted to use the funds in anything other than an emergency)
Grow: Up Bank do not offer a brokerage account, Superannuation or any lending products at the moment, and to be honest – that is fine! We just want to use it as a transaction and cash account anyway!
Blow – Daily Expenses: Everyday account
Blow – Smile: Saver account
Blow – Splurge: Everyday account OR a Saver account (and simply transfer the money before or after splurging!)
How CaptainFI uses the barefoot investor buckets
I use the barefoot investor bucket strategy myself – with a little tweaking, of course. It is just such an awesome strategy and such catchy names not to use! Although, I would probably refer to myself as ‘the half arsed investor’ since I am pretty lazy when it comes to finance and I want to automate and simplify this process as much as possible.
I am also not focused on paying down my debt like the Barefoot Investor suggests you do – I like the loan on my investment property and I treat it sort of like a business. Because I don’t have toxic debt, I have instead chosen to rename the fire extinguisher to my ‘fire hose’ and direct this into my Grow account (brokerage), so I can buy ever increasing streams of passive income through broad market index ETF and LICs. These provide passive income which increasingly cover my cost of living and hence bring me closer to reaching Financial Independence.
- Mojo account (Emergency fund): I keep about $2000 of Mojo for unexpected bills. I can currently access up to $36,000 from my investment property loan account, however once the build is finished I will be refinancing to an 80% LVR ratio and looking to keep about an extra $10,000 in a mortgage offset account against the properties interest only loan [any additional equity will be pulled out for the down-payment on IP2]. This will effectively be my new ‘Mojo’ – combination of the $10K offset for emergencies, and $2000 in cash in savings accounts. My current living expenses are around $30K per year, so this represents around 5 months living expenses which for my level of income security, insurances and passive income generation I feel is more than adequate.
- Grow account (Long term wealth like Superannuation, Investment properties or Shares) – I have previously contributed extra to Superannuation (currently rolling it over to HostPlus) however I don’t add any extra now, and instead choose to allocate all surplus funds through my ‘fire hose’ into my brokerage account where I buy ETFs and LICs to grow my net worth and stream of passive income. After IP1 is finished and refinanced, I will be using surplus equity from that and some cash from my ‘Fire Hose’ to form the deposit for IP2.
- Blow account – Daily Expenses: I try to keep this below 20% of my income – in order to maintain a target 80% savings rate.
- Blow account – Splurge: 0% – I do not allocate anything from my regular income to the splurge account and to be honest, I just buy stuff whenever I want to. However, my rule is I have to find the money by selling something else, or earning the money on top of my regular income (like picking up an extra side hustle). I am pretty disciplined when it comes to spending though, and this is the only way that this will work.
- Blow account – Smile – 0% – what makes me truly smile is having an increasing stream of passive income. That is why I don’t allocate to smile, and instead put all of my savings into my fire hose. If I really really still want something significant after a long time, I use the same strategy for splurge, and I exchange something that I already have or I put my mind to work generating extra money to afford it.
- “Blow” account – FI/RE hose – 80% of my income directed to growing my passive
The Barefoot Investor bucket strategy is bloody great way to get started taking charge of your finances. Splitting your finances into these six ‘buckets’ or accounts is actually a lot simpler than it sounds, and helps you to start responsibly allocating your funds against your goals and your personal circumstances. You don’t have to apply the rules verbatim, and can adapt them to suit your needs as required – you have seen how I have adapted the bucket strategy to my ‘Half-arsed Investor’, renaming my FI/RE extinguisher to my FI/RE hose to maximise investments that grow my passive income.
Why not give it a go, and join the Barefoot cult and then level up by also joining the FIRE cult by renaming your ‘Fire Extinguisher’ into your ‘Fire Hose’ and use this torrent of cash to buy growing streams of passive income and propel yourself towards FI/RE! My pick for two of the best bank accounts to set up the barefoot buckets are either ING Bank or Up Bank, and you can read a bit more about these two banks with my detailed reviews.
Tread your own *flight* path….