As I mentioned in my posting Changing My Belief System the bestselling book The Wealthy Barber was the first real financial book I ever read. Not only that, it has truly had the greatest effect on what I am today financially and the direction I have taken personally over the past five years.
The Wealthy Barber is narrated through the eyes of Dave, a soon-to-be father who is ready to get his financial house in order. The story focuses on a series of conversations between Dave’s friends Cathy, Sue, James and Tom and their new mentor Roy – the wealthy barber. The characters in the story have a broad range of issues and throughout the course of the book, Roy’s ideas on wealth generation, saving and investing change this group’s viewpoint completely.
Though being written in 1989, the concepts within the book still hold strong. Chilton focuses on a few main aspects of personal finance in a humorous yet informative way.
The Ten Percent Solution
There are very few people who have read a financial book in the last 10 years that don’t know about the 10 percent solution or “paying yourself first.” This is probably one of the best pieces of advice that you can take from the entire book. Set aside 10% of your pre-tax income and invest it in mutual funds. One funny point made by Roy is that mutual funds have a low PITA factor (or pain in the ass factor).
The interesting part about this chapter is that the 10% solution does not necessarily apply to retirement saving. It is reserved for use later in life on luxuries such as boats, cottages or luxury cars. This is your money to spend how you want without guilt!
After the Ten Percent Solution discussion, the next topic moves to wills, life insurance and taking responsibility for your life (and death!) The barber demonstrates the importance of buying the right insurance for you, your spouse and children (burial costs only) to the group. A key lesson about life insurance in this topic is the value of term insurance over universal or whole life products.
This chapter gives a great discussion about protecting your family and securing an income for your partner in the case of an accident. The bottom line in this chapter is to protect your family without over-insuring and without spending too much money.
Registered Retirement Plans (RRSP or 401k)
One phrase required: “Compound Interest.” In this section, Chilton also talks about the value of a solid investment fund. He states four main points for selecting a solid fund:
- Invest in funds with solid returns
- Buy diversified investments – international and across many industries – to spread risk
- Choose value oriented funds and fund managers
- Watch the costs (MER)
Chilton takes a contrarian approach to today’s logic and recommends that a person truly examine the costs and benefits of home ownership. The best line in this chapter is “the reason that the vast majority of homeowners say that their house is the best investment that they’ve ever made is simple – it’s usually the only investment that they’ve ever made.”
One key part of this book that helped me move forward in a positive financial direction was the concept of budgeting. I am still not great at following a budget; however, I am great at knowing what I spend, where my money goes and how much I have left each month. I follow the 10% rule and the investment rules so I know what’s available for discretionary items like travel, motorbikes and golfing.
One piece of information I did not like is the suggestion that conservative investors stick their money in a bank CD then re-invest the interest. I know that Rich Dad – Robert Kiyosaki – talks about wanting his money back from every deal but investing with such a low return seems like a waste of my time. This tactic would be great for a person close to retirement but still wants some upside of a bull market.
Why did The Wealthy Barber change my life?
This book showed me what it takes to become a millionaire before the day I retired. The idea of a million dollars was always a distant goal but this book showed me how simple it was to achieve. While I have learned a lot of ways to increase the speed in which the million dollars arrives, the easy to understand concepts in this book pushed me in this direction.
For those people who need a good boost in the right financial direction this book will focus your mind. For those people who already consider themselves to have a good deal of financial knowledge, this book is still a great motivator to make sure you’re working in the right direction!
Get your copy of David Chilton’s bestselling book, The Wealthy Barber here.