Tuesday, January 3, 2012

The Wealthy Barber Returns

I do my best to explain things as clearly and simply as possible, but David Chilton, author of The Wealthy Barber Returns, does a better job. Years of seeking financial strategies that work and explaining them to people has clearly paid off. It’s nearly impossible to write a financial book aimed at a broad audience that is useful, understandable, and entertaining, but Chilton has done it.

A major focus of the book is recognizing human weaknesses and finding financial strategies that work despite these weaknesses. Temptation is everywhere and “one of the biggest reasons that it’s so difficult to save is that no one out there really wants you to,” from your kids and friends to bankers and governments. Chilton says that learning to say “I can’t afford it” is liberating and “frees you from the pressures to live beyond your means.”

The book points to home-renovation expenses as a major factor in people getting into trouble with their lines of credit. As for credit cards, the cycle is “See. Salivate. Swipe. Rationalize. Rinse. Repeat.”

Banks usually determine how much debt you can afford based on your gross income. Chilton advises using your income after taxes and after proper savings. When lending you money, banks don’t care if the interest payments keep you from saving in your RRSP or RESP.

Tracking all your expenses for a few months is tedious, but the author says that it’s important to see where your money is really going. The areas where people most underestimate their costs are “(1) cars; (2) dining out; and (3) little things.”

“CPP, QPP and OAS may become stingier. If you can survive without them, you just might have to.” This seems to imply that Chilton believes that these benefits may be clawed back (or clawed back more in the case of OAS) from higher-income earners in the future.

“Spend more on experiences and less on stuff.” I whole-heartedly agree.

On reverse mortgages, Chilton thinks they are expensive (fees and high interest rates), but that they “are, on occasion, a viable solution.” I don’t know a lot about reverse mortgages, but I’ve heard proponents say that your debt can never exceed the value of your home and you can’t be forced out no matter how long you live. This makes me nervous because old people are often forced out of their homes for health reasons. If the debt grows to consume the house, then a forced-out senior would have nothing left to pay for another place to live. I would have liked to read Chilton’s take on this issue.

The author is no fan of people using index ETFs to “time the market or play the hot sector.” These people aren’t “just sitting back, they’re making things happen. Things like commissions, higher taxes and below-average returns, for example.” That line cracked me up.

Predicting which investments will outperform in the future is very difficult. “I’ve met a phenomenal number of people, however, who can pick past outperformers with uncanny accuracy.” When he meets advisors who think that can pick future outperformers, Chilton likes to ask them “Do you recommend the same funds now that you did three, five and ten years ago?” Of course, the answer is usually no, which means that the previous recommendations didn’t perform well.

A very interesting statistic about stock market volatility: since 1926, “the S&P 500 has risen between 0 and 20 percent in only one-third of the years.” However, Chilton is positive about stock investing: “I strongly believe in human ingenuity and creativity, and I want a piece of the action.”

Chilton says that more than 80% of the people he asks have no idea how much they pay their advisors or how well their portfolios have performed. Despite this, he predicts that “the costs of financial products and financial advice are going to go down significantly.”

The frequent humour and wise advice make this book a pleasure to read. The world is full of investing books, but this one also addresses the challenge of saving enough money to make investing worthwhile.

5 comments:

  1. CPP/GIS? I ran a calculation not long ago, and at current levels indexed to inflation, fully 1/4 of my retirement funds will have been funded by CPP/GIS ... if they are getting stingier ... I'll be in big trouble...

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  2. @P2Sam: Perhaps you meant OAS rather than GIS. The GIS is only available to very low income Canadians. If the government ever starts to claw back CPP, you could be affected.

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  3. You do a good job.

    The problem is getting people to act on the advice. Most must learn the hard way by making the mistakes for themselves.

    Sad, isn't it?

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  4. @Mark: Thanks for the kind words. Sadly for me I had to learn some financial lessons the hard way. I'm lucky that my "lessons" weren't too expensive.

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