Wednesday, August 24, 2005

The Wealthy Barber, 3rd Edition

The Wealthy Barber, by David Chilton, discusses issues personal finance, retirement, savings, and insurance in a "novel" way. Rather than dispensing with advice like most personal finance books, Chilton's slim 224-page book is told through as a story.

The book is narrated through the eyes of Dave, a married school teacher probably in his late 20s. With the upcoming birth of his first child, Dave decides it's time to get his financial life in gear, and solicits his father for advice. His dad refers him to the Roy, local barber, who's sound financial know-how has made him the "wealthy barber." Each month Dave, his friend Tom, and his sister Cathy, visit the wealthy barber for a discussion that focuses on various aspects of financial planning. Each month's visit is a separate chapter in the book.

The first month's talk with the barber lays out the best secret for wealth, "the Ten Percent Solution." The idea behind this is to "pay yourself first," automatically moving 10% of your take home pay to a well-researched mutual fund that has exhibited a solid track record of strong growth. The idea is to save this money over a long stretch of time and let the powers of compound interest help grow that 10% contribution into a formidable nest egg. This fund, though, is not earmarked for retirement. Rather, it's there to be used later in life, to buy that vacation home or luxury car. The wealthy barber argues that one will hardly notice a change in lifestyle if they pay themselves 10% first. (And he's largely right, in my opinion; we easily spend 10% of our take home dollars on frivolous crap that we forget about by the end of the month.)

After discussing the Ten Percent Solution, the barber's next lesson is on wills and life insurance. Roy highlights the importance of a will to keep one's estate out of probate court and to ensure that the estate is bequeathed to those the deceased's intended. The barber also points out that a living trust is not something the average American needs, since it really is only useful for those that have multi-million dollar estates. Life insurance is also covered in depth, including how much to insure one's children (just enough to bury them), how much insurance parents should have, and even the important of insuring others who your income depends on (such as a business partner).

The remainder of the book covers other common topics for personal finance books, such as using tax deferred and tax free retirement savings accounts, whether or not it makes sense to own or rent a home (it's nice to see that the barber doesn't blindly recommend to own, as is often the case in today's manic home buying market), and other such morsels of information. One particular gem found in the retirement section that was a new idea to me was aimed at young, but conservative investors. For those folks who are decades away from retirement but still feel unsure about putting their money in a vehicle that may lose value, Roy suggests the following: place your retirement funds in a bank CD (or a series of staggered CDs) so that you receive interest payment each month. Then, rather than reinvesting that interest back into another CD, roll it into a well-researched mutual fund that's performed well over the long term. This way you have the security of knowing your retirement capital will never diminish, along with benefits of a (historically) faster growing investment vehicle. I found this idea to be particularly intriguing, and hadn't seen it previously.

On a personal level, I found myself nodding my head in agreement while reading the vast majority of the book. The only major point with which I disagreed was on the topic of budgeting and consumer debt. The wealthy barber argues that while he thinks budgets are an important part of fiscal health, he doesn't think they're essential because people who start a budget rarely stick to it. Furthermore, he contends that if you follow the Ten Percent Solution that you need not tell every other dollar how to behave via a budget. In addition to the lax views on budgets, the book doesn't make nearly a big enough stink against consumer debt. The barber doesn't come out and say, "Go ahead and charge up your credit card," but he does make comments that makes it sound as if he sees nothing wrong with someone have a few grand in credit card debt. In other words, no where in the book will you find a vehement argument for paying down your credit card balances, while you will find rather nonchalant comments where the barber talks about carrying a balance due at the end of the month.

The ideas espoused by the wealthy barber closely mimic those put forth by Dave Ramsey, which is why, I think, I enjoyed this book so much. The only major difference between David Chilton and Dave Ramsey's views is in budgets and consumer debt - whereas Chilton is rather lax of both issues, Ramsey is adamantly for budgets and against debt. (I find Ramsey's stance on debt and budgets to fall more in line with my personality and view on finance. )

The method by which Chilton's financial advice is dispensed is unique and helps hold the readers interest. Sure, the characters are one-dimensional and their dialog is a bit corny - they make a lot of un-funny jokes and references to the Detroit Tigers - but it works out well, in large part because the three "protagonists" - Dave, Tom, and Cathy - each represent a different archetype:
  • Dave is a young, married guy with a child on the way. He works at a school so is eligible for a 403(b) retirement plan. He bought his first house recently.
  • Tom is single and works in a factory that offers a 401(k) program. He rents, but recently purchased some rental property with a business partner.
  • Cathy is self-employed and lives in a condo. She's single, likes to travel, and is in a bit of consumer debt, we are led to believe. She makes about twice as much as Tom or Dave.
These three characters give Chilton plenty of room to explore the various insurance concerns, housing advantages, and retirement options available to different people. In addition to Roy the barber, there are also some secondary characters who are the "regulars" at the barber shop. They offer their own take on Roy's advice every now and then, which might reflect the attitudes of certain readers.

Overall, this book is well written and recommended. It's probably best suited for those new to the study of personal finance, but even one who's particularly savvy in personal finance might find a gem or two in this book. Like most personal finance books, the English used is very simple. Therefore you can whip through this rather short story in a couple days.

The Weathly Barber, 3rd Edition : ISBN 0761513116 : Published By Three Rivers Press, November 25, 1997.


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