This is part of our Rockstar Book Review series.
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“The Wealthy Barber” is a Sound Introduction to Personal Money Management or an Entertaining Refresher
In this book, Chilton chose a small town barber shop as the setting for his characters’ much needed discussions about money.
Roy, the shop’s owner, has become known around town as the man to talk to when it comes to personal finance and that’s where David, the story’s protagonist, goes to get his hair cut and his financial mind sharpened every month, along with his sister Cathy and his best friend Tom.
Over a seven-month period, Roy teaches the trio seven important lessons:
- Put 10% of your income in long-term investments
- Take care of your dependents with the proper amount of insurance and estate planning
- Put another 10% in retirement savings accounts
- Homeownership is not for everyone
- Forced savings beats budgeting
- Debt repayment offers the best return
- Minimizing taxation matters
#1. Save 10% for the Long-Term
According to the author, everyone should be putting 10% of everything they make aside and investing it for the long-term. No exceptions. He further asserts that this is the surest way to become wealthy. The only piece of advice that might need updating is his focus on mutual funds, as opposed to the lower-cost options available today (though he does mention the need to minimize commissions).
Chilton advises dollar-cost averaging and keeping things steady and boring and growing for the long-term; it’s a “set it and forget it” investment strategy.
The bottom line is simply this… fancy tax shelters, straddle-option strategies and future contracts on gold all make for great conversation at cocktail parties. Forced savings, dollar cost averaging, and compound interest simply make for great cocktail parties. (pg. 196)
#2. Insurance and Estate Planning – Do It
Chilton believes that life insurance should be called “financial protection for dependents, or income replacement insurance” because it doesn’t have to do with your life per se but that of your dependents. Any one of us who have dependents should hold enough insurance to cover the financial impacts associated with the potential inability for us to provide for them, either due to an untimely death or due to an accident or illness that prevents us from earning an income and that might even cost the family more due to the extra expenses incurred.
Along with life insurance, a will is also a must. Chilton does a good job of scaring us straight by explaining how the state determines what happens to our money when we’re gone when there’s no will to direct moneys and other assets to the right people. And that includes taking a larger “chunk of flesh” than necessary through taxation.
The short of it? If you haven’t written a will or updated it recently, just do it already! Draw up a will, choose an executor (and a backup executor) and have a net worth summary of all your financial assets and liabilities in an easily-understandable format to ensure your entire estate is handled appropriately upon your passing. The alternative? It’s just too ugly to talk about.
#3. Save 10% for Retirement
Once we’ve started saving 10% in long-term investments, Chilton suggests that we go further by saving 10% for retirement by taking advantage of employer matches and tax sheltered or tax deferred investment accounts. Along with saving 10%, the 10% towards retirement is table stakes if we want to build wealth and comfort in retirement. How much is enough? It should replace the income from the last year of work. Why? Because, in the author’s opinion, the idea that expenses upon retirement are much lower is outdated. Modern retirees want to do more and experience more than did previous generations.
#4. Homeownership – It Depends
To own or not to own, that is the question. Chilton makes fine arguments for both, which is refreshing as so many personal finance writers seem to try to sell us on the idea of homeownership no matter what.
On the pro side are forced savings (unfortunately for many, their home is their only investment), the pride of ownership, the tax-free gains available when selling a home, and the potential to leverage the home equity if need be.
On the con side are the interest costs of carrying a mortgage (essentially the reverse experience when it comes to compound interest), property taxes, insurance, utilities, upkeep and the time required for maintenance. In addition, Chilton stresses that more often than not, we buy more square footage than we rent, which can make a big difference when making a buy vs. rent comparison.
One last point that deserves mention: the author states that many homeowners never benefit from their forced savings in retirement because they never downsize!
#5. Forced Savings are Better than Budgeting
Chilton makes a compelling argument that there is little need to budget when you pay yourself first. If long-term savings, retirement savings, insurance premiums, the mortgage payment & other fixed expenses come right off the top, there’s little need for a line by line budget. If there’s no money, there’s no money. Period.
That said, the author suggests that a spending audit is a good thing to do on occasion to see where the money is going. I have to concur. I find the occasional spending audit always holds some surprises and results in some fine tuning of my spending behavior.
#6. Debt Repayment Offers the Best Return
This lesson was one of the most compelling in this book. If we have any consumer debt, and this includes a mortgage, there is absolutely no better return than to eliminate that debt. Why? Because when compared to investment returns, a debt repayment return (a.k.a. interest avoidance):
- is made using after tax dollars (most of our investment returns are taxed, which reduces their significance),
- does not experience loss due to inflation, and
- is guaranteed, no matter what.
Why would a mortgage be included in the consumer debt category, despite relatively low interest rates? Because as any amortization table will show us, most of our payments early on are interest and we can save a considerable amount of interest by accelerating our payments.
You’ll find sleep comes more easily when you’re earning interest rather than when you’re paying it. (pg. 160)
#7. Minimizing Your Tax Exposure = More Money for the Long-Term
Once we’re well on our way toward building a great nest egg, we should be looking to protect it. We’ve addressed the need for insurance, but we also need to pay attention to how we can reduce our tax burden, and we can do this in two ways:
- By using tax-sheltered and tax deferred accounts, and by maximizing these within the household if we have a spouse, and
- By becoming knowledgeable about all the deductions and credits we’re entitled to—why leave money on the table?
There you have it. Seven important lessons that can have anyone—including a small-town barber—building significant, even life-changing wealth.
Read this book to know more about each of the points above by diving into them right along with the story’s interesting characters. After all, the “personal” in personal finance is best shared through stories and Chilton uses these to great effect by delivering much needed “money talks” in a relatable way.
As mentioned in the summary above, I would also recommend Chilton’s non-fiction follow up: “The Wealthy Barber Returns“.
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