David Chilton sits down and writes a short book which encapsulates some wisdom about financial planning in an easy going, easy to understand story. This accessible guide to becoming financially independent goes on to apparently sell over 2 million copies in North America. When I first "discovered" the book in 1991, I became so enamoured with its message, I bought a dozen copies and gave one to every member of my family and then to several of my friends. It opened my eyes to some very common sense ideas which for some reason had escaped me.
The story of The Wealthy Barber involves 3 people in their late twenties who visit Roy the barber and get advice about financial planning. It turns out that Roy, just a common barber, is actually a millionaire. Now not your millionaire in the sense of a Donald Trump, but your millionaire next door. Just your average guy who has been astute over the years and not been a spendthrift. Slow and steady wins the race.
Each chapter consists of a visit and a lesson about how to handle one's affairs. The most startling and the most obvious lesson out the book is the idea of setting aside 10% of what you earn for long term growth. It is here Chilton states the aphorism (or is this an axiom?), "Pay yourself first." What? Yes, I can hear you saying that. What the author means is that your savings program is something you do first before all else, you pay yourself the 10%, set it aside then carry on with your business.
10%: Pay yourself first
Now I'm sure you're thinking to yourself, "So what?" but it is this personal discipline which is going to set you apart over the long run. Chilton gives a great example of how we can adjust to a lesser spending pattern without really being affected it. Let's say you get $100 a week. Rather than spending $100, you take $10 (10%) and set it aside. Eventually, your spending will adjust. Instead of blowing $100, you'll be blowing $90 but the important "and" here is that and you'll be saving $10. Imagine that at the end of the year, 52 weeks, you will have saved up $520. You will have only spent $90 per week but your spending, your tastes, your wants will have adjusted.
Now a hundred bucks may not seem like a lot of money but take that amount and imagine it multiplied by 5, 10 or 20. Now we're talking about some significant scratch. And that's where the wisdom of this simple seemingly dumb idea comes into fruition. Many times we're working from pay check to pay check worried about how we're going to make the rent, pay off the credit card and have enough left out for a night out on the town. Just picture that there are people who do all that and don't even have to work to do it. Wouldn't it be great to be part of that crowd?
"Yeah, yeah, yeah. Boring stuff. Whatever." Really? Imagine that you had $1 million and you invested it at 5%. Every year, you would get fifty thousand dollars. For doing nothing. Still think this topic is boring? That's $961 per week; $137 per day. For doing nothing. I don't know about you, but my ears sure have pricked up.
Here's a terrific example of how to get closer to that cool million. Take $2,400 and invest it but invest it with the idea of never touching it. Now let's say with a little luck we manage to get a great investment with a 12% annual return. At the end of year number one, we still have the $2,400 but we also get $288 in interest. We add the interest to the principal and add another $2,400 which gives us $5,088 invested. Another year, another 12% only this time it's 12% of $5,088 which equals $610.56. We leave that there for now a total of $5,698.56 and add another $2,400 to give us $8,098.56. Get the idea? Now keep doing that for 30 years; which doesn't seem like a lot of time if you're only 20 years old. Guess what? At the end of 30 years you would have $648,702.30. You have put in $2,400 times 30 or $72,000 but you now have 9 times as much money. Hey, is that anything to sneeze at? Pretty cool if you ask me.
Where would you get $2,400 per year? That's merely $46.15 per week for 52 weeks. Or that's $6.58 per day. Hmmm, when you break it down like, is it really so much money?
Another neat trick. If you can invest in something and it can yield you 10% per year, you can double your money in just a little over 7 years. Try it. Put in $100. Don't touch it. Let the interest roll over every year and at the end of year number seven, you will have $194.87, just a few bucks shy of double. Powerful stuff, no?
My Spreadsheet: Cashflow
Can you have fun doing what the Wealthy Barber recommends? Yes, it's easy but you have to make it visual. In reading over the book and reflecting on the difficulties of finding the discipline necessary to save, I realised that I lose sight of what I am doing. If I can't see the results; where's the inspiration to do it? The greatest thing I ever did for myself was to create a spreadsheet in which I track my cash flow and my investments. In comes my pay check, out goes my expenses. I could easily see where my money went, what my expenses were. But more than that, I could easily calculate the 10% I would pay myself and what that 10% would lead to.
Here's an example. I have a mortgage worth $100,000 at 6%. I am required to pay $8,000 per year which means in year number one, $6,000 is interest and $2,000 comes off the principal. At this rate it will take me 16 years to pay it off. At the end of 24 years, I will have paid back $190,368.85 in total. In year number two, if I make an extra payment of $1,000 it reduces the overall amount of what I pay back by $2,603.54 that is, more than my $1,000. With a spreadsheet, I can see this; I can calculate what my extra payment will do in the long run because my extra payment is directly reducing the principal, the principal upon which interest is generated. In fact, if I can make an extra payment of $1,000 in year number 2 and year number 3, I can reduce my overall mortgage by a full year and instead of paying back $190,365.85, I will pay back $185,401.65 in total, a savings of $4,967.20 for the extra $2,000 I spent.
The Wealthy Barber Returns
After over twenty years, Mr. Chilton has decided to pen a sequel which at the moment, is due out in the summer of 2011.
The Toronto Star has published an excerpt from this anticipated book. The message here is a good one and certainly blends in with the common sense advice of the original book: A warning to those who have more taste than money.
One of the finest pieces ever written on the saving/spending challenge was an essay penned way back in 1772 by the witty and wise French philosopher Denis Diderot. It was entitled Regrets on Parting With My Old Dressing Gown: Or, A Warning to Those Who Have More Taste Than Money.
In it, Diderot eloquently chronicles how his beautiful, new, scarlet dressing gown came to wreak havoc on both his mood and his finances. Soon after receiving the gown, it became apparent that his surroundings, though formerly very pleasing to him, were not in keeping with the gown’s elegance. He felt compelled to replace his tapestry, his art works, his bookshelves and chairs and finally even the beloved table that had served as his desk. Eventually, a poorer Diderot sat uncomfortably in his stylish and now formal study. “I was absolute master of my old dressing gown, but I have become a slave to my new one,” he lamented.
Chilton goes on to give a couple of personal, modern examples of how one simple purchase can lead to secondary purchases that when added up, exceed the original purchase. It seems silly but I myself can certainly identify with this. Buy a dress; you need new shoes and a purse. Buy a car; you need a new garage... Ha! Because the car won't fit in it. We all have examples of this and yes, they're funny but oh my gawd, can they be expensive.
In my blog Dumb Decisions I talk about a couple of my own boners, of deciding to do something without realising the implications of my decision. Get new prescription glasses without considering my clip-on sunglasses and end up having to buy a $100 set of custom clip-ons to replace the $30 set I already owned. Replace a broken thermostat not with the same model but with an "upgraded" model which not only costs more but is not the same size and the entire wall has to be painted to properly cover up the newly exposed wall. [groans] Can I take any of these goof-ups back? Nope, I'm committed and have to move forward which only costs more! And don't think it's just me; even big companies do the same thing. BP lobbies the U.S. government to avoid spending a half a million dollar for a safety system on their drilling rig the Deepwater Horizon. They have now spent over $20 billion in cleaning up the oil spill and that's not the end of it. Is this not a moment where you want to slap your forehead like Homer Simpson and exclaim, "D'oh!"
If you haven't read this book, get it immediately and devour it. It could just very well be the most important book you have ever read in your entire life. Common sense it turns out may not be so common. Chilton makes a statement in the introduction f his book I have never forgotten: the majority of Canadians will reach the age of retirement at the poverty level. Really? That is positively frightening.
An aunt who is now deceased was not the best financial planner. She ended up at the end of her life living off of a government pension of $900 per month. I know that $600 went to rent so the rest is what she lived on. [shaking my head] I still can't quite grasp such circumstances but I certainly do not want to find myself in anything remotely similar to that. Do any of you? Read that book!
Wikipedia: The Wealthy Barber
Wikipedia: David Barr Chilton
official web site
YouTube: David Chilton on The Hour with George Stroumboulopoulos
David Chilton is the author of 'The Wealthy Barber.' It came out in 1989 and became one of the biggest books in Canadian history, selling more that two million copies. Born in Kitchener, Ontario, Dave was fascinated with business and economics from a young age. After getting a degree in finance and working as a stockbroker for a couple of years, he decided to write a book on financial planning. The main character - 'The Wealthy Barber' - teaches his customers how to get rich slowly and stay that way. The basic idea - spend less than you make. With that message, Dave's become a popular public speaker. And he's kept writing, changing his focus from finance to food. He's helped publish two low-fat cookbooks 'Looneyspoons' and 'Eat, Shrink & Be Merry', both of which were national bestsellers.
A review by Andrew Forward, of David Chilton's book on building financial independence
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