Few people believe they’re digging themselves a financial hole and making their lives worse while they’re in the middle of doing just that. Robert R. Brown’s book Wealthing Like Rabbits uses an engaging story-telling style to persuade readers to avoid the most common ways that they can set back their personal finances.
The main areas Brown covers are homes, credit cards, lines of credit, vehicles, weddings, home renovations, vacations, and Christmas. The approach he takes is to paint a picture of two families in similar circumstances except that one made more expensive choices. An extended analogy between credit cards and smoking was particularly amusing. In the end, the more modest family’s disadvantages are minor but their advantages in greater freedom to make life choices are huge. This style is persuasive.
Brown manages to slip in the usual information about RRSPs, TFSAs, etc., but this is all just secondary to the stories designed to persuade readers that a modest home and an inexpensive car are the pathway to a happy life.
What few criticisms I have are relatively minor. They’re included in the comments on specific parts of the book that follow.
“Behind a bunch of crap was an exercise bicycle that was both brand new and eight years old.” A perfect description.
RRSP and TFSA room
Maxing out RRSPs and TFSAs “would make for a world-class retirement ... and if you earn a 7-digit salary, live in a tent, and really like Kraft Dinner that’s the way to go. However, most of us have to choose one, the other, or possibly a combination of both.” Of course, it’s nowhere near this difficult to max out both, but the real message here is to help people who don’t max out both get over the guilt. What matters is how much you save, not how much room remains. We can’t let unused RRSP and TFSA room that keeps building up discourage us from saving money. Brown’s quote is likely more effective at reducing guilt than my explanation.
RRSP vs. TFSA
Even though the math might say that younger, low-income savers are better off with a TFSA than an RRSP, Brown still prefers RRSPs because “with RRSPs they get the tax savings now, when they are younger, lower income earners and they likely need it more.”
This isn’t good logic. Suppose a saver has a marginal tax rate of 20%. So, saving $5000 in an RRSP will generate a $1000 tax refund that the saver likely needs. Why not just save only $4000 in a TFSA to free up that needed $1000 right now? It may seem like the young saver is saving less money in this case, but this isn’t true. Future taxes when the money comes out of the RRSP will balance this out. If the saver’s marginal tax rate is higher than 20% in the future, then saving $4000 in the TFSA is actually better than saving $5000 in the RRSP and both still free up that same $1000 right now.
Brown also prefers RRSPs over TFSAs because people are less likely to withdraw from RRSPs before retirement. This may be true, but his preference for RRSPs will have to stand on this argument and not the one about getting tax refunds.
Like many books trying to persuade people to save, there is the obligatory example of saving some fixed amount of money each month and ending up with millions in 40 years. Of course, inflation will make these millions worth a lot less in 40 years than they would be worth right now. Brown does the same thing with examples of huge future interest costs on long-term mortgages.
These little white lies are mostly harmless because they are intended to steer readers in the correct direction. Saving is a good idea and interest costs on mortgages are bad, even if this book overstates the case by ignoring inflation.
Tax reductions from RRSP contributions
“If you contribute $50 a week to your RRSP, you can reduce your taxes by $50 a week.” Not quite. You’re reducing your taxable income by $50 a week. How much your taxes are reduced depends on your marginal tax rate. This same slip occurred a second time a page later.
How to invest your savings isn’t a main theme of this book, but Brown does say “you should invest in a low-cost index fund.” He goes on to explain the higher costs and general lack of greater performance from actively-managed funds.
In a story of two brothers who each buy new homes, Brown hammers home the point that banks will lend you more than enough money to drown your finances. People have to figure out for themselves what their borrowing limit should be.
The usual reason given to track your spending is to be able to see where your money is going and make sensible changes. Brown adds another. “Just like the dieter who finds himself eating less as soon as he starts monitoring his calorie intake, you will find yourself spending less of your money as soon as you start tracking what you are spending it on.”
“Leasing basically means that you rent the car.” I was prepared to disagree because I’ve heard people liken leasing to renting as a benefit because it’s a way to avoid the cost and hassle of actually owning a car. But Brown means it as a negative because you still end up not owning a car at the end of the lease.
I’d say that leasing gives you the worst of owning and renting. Leasing resembles owning in the sense that you’re still on the hook for maintenance costs. But leasing resembles renting in the sense that you have nothing to show for all your payments when the lease is up.
“Consumer Reports is a great place to find comparative data and objective information” on vehicles. Consumer Reports is certainly better than most publications when it comes to car information. But Phil Edmonston’s Lemon-Aid Guides that come out every year are an even better antidote to the barrage of car articles in newspapers, magazines, and online that are little more than extended advertisements.
In adding up the expenses of driving versus flying to a sunny destination, Brown includes the cost of gas but neglects other car-related costs. This is a common mistake. In my own case, I found the total variable costs of driving (including fractions of maintenance, insurance, and initial purchase price) were about triple the cost of gas. So, in the book’s example, the $500 for gas jumps to about $1500. You may prefer to drive anyway, but at least you should do it knowing the real costs of driving.
Saving while in debt
There can be good reasons for starting to save while still in debt. People need emergency savings. Some people need the feeling of making progress on savings at the same time as paying down debt. RRSP tax breaks for high-income earners are valuable even while you have a mortgage. I have no problem with those who choose to eliminate all debts aggressively before starting to save, but saving while still in debt can make sense too.
However, Brown offers a strange additional reason to save while in debt: “the interest on your savings will be compounding for a much longer period of time than the interest on your debt will be, which makes the math favour the savings plan.” This isn’t true. If paying off debt gives a higher return than adding to savings one year, this advantage will carry forward indefinitely. The only thing I can think of that would work against this would be a behavioural issue where someone would just run their debts back up with foolish purchases.
Mortgage default insurance
Given how hard it is for young people to build enough savings for a down payment on a house, Brown asks whether we should change the rules so that “first-time home buyers only need 10% down to buy their first homes without purchasing mortgage default insurance.” My answer is an emphatic no. Mortgage insurance costs should be driven by the actual risk of default and not some political goal.
Living within your means
Some criticize personal finance books for asking “you to reduce the quality of your life today so that you can save for tomorrow.” Brown says this “is a great big load of crap.” He follows this with an excellent explanation of how your life will become better immediately if you get control of your finances.
Borrowing to invest
“Do not allow anyone to talk you into borrowing money to invest.” He goes on to say that borrowing to invest is “a worse idea as you approach retirement” and a “terrible idea during retirement.” This is good advice for almost all people. It reminds me of the story of a 75-year old widow who was talked into borrowing to invest.
This book is mainly aimed at young adults. It uses an easy-to-read storytelling style that drives home important points about avoiding the biggest personal finance mistakes. I’m considering trying to persuade my own children to read it.