“The Wealthy Barber” by David Chilton

wealthy

This is probably the best book on personal finance I’ve read so far. It is extremely comprehensive, covering frugality, budgeting, investments in stocks/funds/bonds, real estate management, you name it. It’s also presented in a narrative tone so it doesn’t feel like reading a textbook. I will definitely be using it as a resource in the future. I also plan to read the sequel, The Wealthy Barber Returns, sometime in the future. This is worthy of anyone’s bookshelf.


Distillation

LESSON 1
Everyone’s bad at budgeting. It’s hard and it doesn’t make you much fun.
The golden rule: invest ten percent of all you make in long-term growth

Pay yourself first: arrange to have 10% of your paycheck go to a separate account so that you never even see it. From there it can go to your investments.

 

Don’t buy common stocks.

A stockbroker is usually no better at choosing stocks than the average Joe. They’re just salespeople, and stock-picking is just a game.

Mutual funds are better than individual/common stocks because they are diversified funds that contain multiple different stocks.

Mutual fund tips:

  1. Return rate must be solid
  2. Buy a diversified global fund that covers multiple industries
  3. Avoid trying to time the market
  4. Make sure your fund has low commissions
  5. Stay away from funds that use complicated strategies


Monthly deposits to an investment portfolio allow you to purchase more shares when their prices have dropped, meaning your portfolio will be worth more when the price goes back up (dollar-cost averaging). The key is to add to your portfolio every month regardless of price.

 

Real estate is a good secondary investment, but only after you’ve built up a nest egg using mutual/index funds.

This diversification also offers more stability, because you are less dependent on either market.

 

LESSON 2 – Wills and Life Insurance

When a person dies and no will is available, the state will divide up assets regardless of the wishes of the deceased.

Even if you’re single, you should have a will and life insurance, because the value of your estate may not be enough to settle all your affairs if you die.

 

LESSON 3 – Planning for Retirement

It’s a myth that retired people spend less money

More free time = more hobbies

Reduction in expenses like a mortgage is made up for by increasing medical costs

Retirement savings must also include enough to offset inflation

Social Security will be a safety net, not an income replacement

Even a person with a good retirement program (pension) should save for two things:

To make up for shortfall between last working year’s income and the retirement income

To offset the damage of inflation

Contribute to an IRA as early as possible, to allow for more accumulation of interest

Lesson 4 – HOME OWNERSHIP

Paying rent is not “throwing your money away”, any more than buy clothes or food is.
Assuming mortgage payments are comparable to what you would pay in rent, the cost of owning your house is essentially the cost of the down-payment.

Mortgage interest is tax-deductible, as well as property taxes paid

You can generally exclude capital gains from selling your home.

A relatively small investment (a down payment) can grow dramatically of real estate grows in price even 6% a year

Mortgage payments are a means of forced savings

Most people die still owning their own homes, so they don’t reap the benefit of the investment.

What your home is worth has no financial significance if you aren’t going to sell.

 

SAVINGS

It’s hard to budget because, through rationalization, wants become needs.

A dollar saved is two dollars earned.

Comparison shopping for better deals is the same as getting a raise.

Saving a dollar on a purchase is like saving two dollars in after-tax income

Most people will do anything for extra money, but not to save on purchases.

If you can’t pay a credit card bill, borrow money from the bank to pay it, because it will be at a lower interest rate.

The convenience of credit cards will make you buy more stuff.

Use forced savings for purchases in addition to retirement.

Use CDs, but shop the market.

Saving-to-buy lets you live within your means, plus it feels great when you finally make the purchase.

 

INVESTMENT and INCOME TAX

Any excess income should be used to pay non-deductible debt (car loans, etc.)

Investing in CDs or other funds is not smart if you have high-interest debt

To pay a 12% car loan, one would need a 20% CD because it would be 12% after taxes

This number is even higher for credit cards

A good after-tax real rate of return (return of investments minus taxes and inflation) is ~3%

This can also be considered the amount you gain in purchasing power

Always pay off the highest interest loan first

You can deduct the interest on your first two mortgages.


 

Associate Link: Buy “The Wealthy Barber” on Amazon

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