The Wealthy Barber Book Summary
The Wealthy Barber, Updated 3rd Edition: Everyone's Commonsense Guide to Becoming Financially Independent Wealthy Barber: Everyone's Commonsense Guide to Becoming Financially Independent, by David Chilton. Get the updated third edition.
The Fortune Book Club said, "It's quite simply the best financial self-help book." Chilton's 211 pages of financial wisdom are made easy to read by putting it in story form. You don't sell 2 million copies of a book unless it's something special.
The story: some young people in their 20's and perhaps early 30's need help with their personal finances and are directed to a local barber, who's known for his financial wisdom. The implication? If someone can become wealthy on a barber's salary, the rest of us can as well. Their monthly meetings include plenty of humor and enough character development to keep it interesting. Includes wisdom on saving, wills, life insurance, retirement, housing, investing and taxes.
Invest Wisely (Chapters 4 and 9):
Pay Yourself First: When you get your paycheck, pay yourself first, investing 10% of your income. This 10% doesn't include retirement. (For retirement, see chapter 6)
Invest the 10% in Mutual Funds: Start young, putting it first into carefully selected mutual funds (not buying and selling individual stocks). Invest each month, ignoring whether the market is high or low (dollar cost averaging). When you choose a fund, look for funds with topnotch fund managers.
Find which funds perform consistently better than other funds with similar goals and objectives. Discover how they perform in down markets. You can find this information in magazines like Money, Forbes, Worth, Kiplinger's, and SmartMoney. See also the Morningstar Rating Service for great statistics and advice. Also choose a fund with low commissions, generally no load (no up front commission). Index funds beat the vast majority of managed funds over time.
Add Real Estate: Later, after you've saved up a substantial amount in your mutual funds, add real estate to your investments.
It's better to pay off your non tax-deductible debts than to put that money into other investments. Example: Let's say you're carrying a balance on your credit card and having to pay 15% interest on that balance. If you're in the 50% tax bracket, you'd have to earn over 30% on another investment (good luck!) to beat a 15% return. Your best investment is usually to pay off your loans, starting with the loans with the highest interest rates.
Favorite Quotes from Chilton on Investments:
"Wealth beyond your wildest dreams is possible if you follow the golden rule: Invest ten percent of all you make for long-term growth. If you follow that one simple guideline, someday you'll be a very rich man." (p. 32)
"By saving ten percent of your pay now, you virtually guarantee yourself financial freedom later in life. Only a fool would say no to that. So, start now and don't stop!" (p. 64)
Mutual funds "have a low PITA factor." (Pain In The Ass factor) (p. 45)
"The only thing worse than a bad investment is a bad investment made with borrowed money." (p. 61)
"There are two times in a man's life when he should not speculate: when he can't afford it, and when he can." (p. 185, by Mark Twain)
Get a Will and Adequate Life Insurance (Chapter 5)
Keep an Up-To-Date Will, Even if You're Single.
- Get a lawyer to draw it up who has experience in wills and estate planning.
- Get one even if you're single.
- In some cases, especially if an estate is large or complex, set up a revocable living trust.
- Set up a living will to express your desires about being kept alive by artificial means.
- Grant power of attorney to someone you trust so that decisions can be made if you're incapacitated.
- Keep an up-to-date net worth statement, detailing all you own and owe. This will make things much easier on the executor of your estate.
Purchase "Renewable" and "Convertible" Term Insurance
- "Renewable" means you can renew it without taking a physical when your term expires.
- "Convertible" means you can "convert the face amount of the policy to any cash-value plan sold by the issuing company, again without proving insurability."
- The purpose of life insurance: to provide for your dependents if you die.
- You don't need life insurance if you don't have dependents, unless you need enough insurance to cover your funeral.
- You don't need insurance if you've saved up enough to provide for your dependents.
- How much to get? Enough to pay off any debt, cover your funeral (about $10,000) and other future obligations (like college for your children), pay living expenses for your dependents, and allow for inflation. Figure getting an 8% yearly return on the lump sum they'll have to invest.
- Shop insurance companies for a good price, but also for quality - as rated by such companies as A.M. Best, Duff & Phelps, and Standard and Poor's.
- Make sure to check out group plans available to you through your work, university alumni association, fraternal society, or union.
Favorite Quotes on Wills and Insurance:
"...more people foul up in this area [wills and insurance] than in any other part of financial planning." (p. 69)
Plan for Retirement (Chapter 6)
- Retirement planning defined: "Building for the future without killing the present." (p. 102)
- Saving for retirement is in addition to the 10% he recommended saving and investing in chapter 4.
- Don't plan on social security bailing you out. Although it's unlikely to be phased out completely, its benefits will continue to drop until it will be only a small portion of what you need for retirement.
- How much to save? On the positive side, your house will hopefully be paid off, your children independent, and you won't need life insurance. But your medical bills will escalate, you may need to care for your aging parents, and inflation will keep the cost of living escalating. Plan on needing at least as much to live per year as you need now.
- Invest as much as you're allowed by law each year in an IRA (Individual Retirement Account), placed into a good mutual fund so that it can grow TAX FREE - significantly increasing your gain over time. The contributions are also tax deductible.
- If you're self-employed, even part time, you may qualify to set up a Keogh plan, which, like an IRA, allows your contribution to be tax free and allows you to multiply your money tax free. Yet, you can contribute much more money per year than you can to an IRA.
- With an SEP (Simplified Employee Pension), both employers and employees make tax deductible contributions to the employees' IRA.
- If you're not self-employed, contribute to a 401(k) plan. In addition to your contributions being non-taxable and growing tax deferred, your employer may match your contributions. Teachers may qualify for a 403(b). Talk to your personnel department to discover what they offer.
- Read these two excellent books on saving for retirement: Making the Most of Your Money, by Jane Bryant Quinn, and Personal Finance for Dummies, by Eric Tyson.
Favorite Quote in Retirement Section:
"If you want to become really wealthy, you must have your money work for you. The amount you get paid for your personal effort is relatively small compared with the amount you can earn by having your money make money." (Quote from John D. Rockefeller, p. 118)
Make the Most of Your Home (Chapter 7)
- If you plan to live in an area for awhile, buy rather than rent. Take this example. Your parents bought a house thirty years ago for $30,000. Today it's worth $170,000. "But that's just a 6% yearly return," some would complain. They see this paltry return and advise to rent instead and invest that down payment money into a mutual fund.
But Chilton sees a different angle. In your parent's original purchase, they paid 20% down, which was $6,000. Their monthly payments were roughly equal to what they would have had to pay to rent a similar house. So, when compared with a renter, they actually invested only $6,000 to get a house worth $170,000 - a yearly return of about 11 3/4%. Additional benefits: 1 - You get to live in your investment. 2 - The interest on your mortgage payment and your property taxes are tax-deductible. 3 - Most won't have to pay capital gains tax on the sale of the house. 4 - You can borrow on the principle to invest in other real estate. 5 - It's "one of the best forced-saving methods around."
- Sometimes it makes sense to rent. Especially if you can get by with a smaller place than you would have bought, you can invest your savings in monthly payments, repairs and property taxes, investing what would have been your down payment. If you move frequently, it seldom pays to buy. You also save a lot of time if you're not responsible for a yard or for repairs.
- Remember, real estate can go down in value, especially if you buy at a time and place where the housing market has been in a "bubble," that is, rising quickly to unreasonable levels.
- Our country has enjoyed years of excellent economic growth. But we've also continued to borrow. Watch for "an inevitable slowdown," a recession accompanied by "layoffs, shutdowns, lower incomes." So don't assume that you'll always have the money to pay a large mortgage. Don't over borrow. Live well beneath your means.
- Buy the worst house on a nice street that can be fixed up to appeal to buyers. Location is key. Get it inspected by a professional.
- Read The Common-Sense Mortgage by Peter Miller.
- A fixed-rate mortgage is best for most of us.
- To get a smaller down-payment, look to an FHA loan or a foreclosure property.
Favorite Quotes on Home Ownership:
"...over the past fifty years borrowing has gone from a shameful vice to the national pastime."
"Stretching yourself to your financial limit in order to buy a house is almost always a financial mistake."
Learn How to Save (Chapter 8)
- Most people will never consistently follow a household budget. Almost everyone the wealthy barber counseled in the past followed his advice on saving ten percent and investing it for growth. Ninety-five percent of them drafted wills, got good life insurance and contributed to retirement plans. This secured their future, even if they weren't that good at handling money day by day. If you can maintain these essentials, then how you use your discretionary income is of little consequence. His counselees generally ignored his advice on "developing household budgets, avoiding credit cards, and exercising a degree of self-control."
- Live within your means. For example, if you make $40,000 per year and go out and buy a new, $25,000 vehicle with no money down, you're foolish.
- A dollar saved is two dollars earned. In other words, the check you take home at the end of the month has already deducted income taxes, Social Security and retirement. For every two dollars you earn, you might see only one dollar. But for every two dollars you save, you keep the entire two dollars. Savings aren't taxed! Thus, saving $200 on a TV set may be the same as getting a $400 bonus at work.
- Don't carry debt on credit cards.
- Even if you pay off your credit cards in full every month, you probably spend more by using credit.
- Pay yourself first in order to save up for items you want or need. If you're saving for a large item, like a $20,000 car, put it in a conservative, short-term investment, like CD's (Certificates of Deposit), not stocks or real estate.
- To discover where your money is going, write down every expenditure for a month. One person was shocked to discover that he had spent $250 on lunches in 22 days! At that rate, he'd spend $3000 that year on lunches!
Save on Your Taxes
- Most need an accountant or tax expert to help us discover how to save the most.
- Even though you're getting somebody else to do it for you, try to fill out the 1040 long form yourself. This helps you to realize what items can be deducted and what expenses you should track better next year. Then, seek professional advice.
- You might do well to take out a home equity loan and pay off your credit cards and car loans. The home equity loan may be at a better interest rate, plus the interest will be tax deductible.
- Read "Julian Block's Year-Round Tax Strategies, any tax guide by J.K. Lasser, and the IRS publication, Your Federal Income Tax."
Establish an Emergency Fund
Keep a few thousand dollars in an emergency fund. That should be adequate, if you can additionally establish a line of credit on the equity in your house, that you can use in an emergency. (Chapter 10)
Purchase Adequate Health and Disability Insurance
- Talk to your personnel department or independent independent insurance agent to make sure you're covered. Review your coverage annually.
- The odds of a thirty-year-old being disabled for a one year period during his life is one in four.
- Make sure what your policy covers. For example, what does it consider "total disability?" Are loss of hearing, sight, or speech considered "total"? Can the policy be cancelled? What exclusions are there? Does it provide benefits during rehabilitation?
Read such sources of financial wisdom as Forbes, Money, Fortune, Worth, SmartMoney, Kiplinger's Personal Finance and The Wall Street Journal.
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The Wealthy Barber Book Summary