The Wealthy Barber by David Chilton was first published in 1991.  It’s a basic financial guide, told in a narrative style, about three young people who seek financial advice from the town barber.  Yes, you read that correctly, a barber.

The story follows a young teacher as he learns, along with his sister and a friend, the basics of saving, investing, wills, insurance, real estate, retirement, mortgages, and income tax.  The lessons are given in one month increments, as the students visit the barber for haircuts.  The culmination of their learning is that each one has started on the path of financial independence.

Chapter 1: The Financial Illiterate

The author admits that he failed a basic financial planning test from a magazine, and intends to seek his father’s advice.

Chapter 2: A Surprising Referral

His father recommends that he visit Roy at the barbershop for better advice than he can provide.

Chapter 3: The Wealthy Barber

The three friends visit Roy, the Wealthy Barber.  They receive an introduction as to what awaits them.

Chapter 4: The Ten Percent Solution

Roy advises to pay yourself first, before you can spend it.  Invest 10% of your income for long-term growth, in an equity mutual fund.  The fund should be global, invested across many different industries.  Use dollar cost averaging to mitigate risk.  Don’t overlook the magic of compound interest.

Chapter 5: Will, Life Insurance, and Responsibility

The students are shown the problems of dying without a will, as the state will distribute your estate according to strict laws.  Roy recommends seeing a good lawyer for the details on wills, living wills, revocable living trusts, and naming an executor.  Wills should be kept up to date, and include a net worth statement to ensure that no assets are missed.

Roy insists on having adequate insurance coverage.  Maintain the proper amount of life insurance for loved ones.  Insurance is basically financial protection for your dependents, or income replacement insurance.  Carry enough to offset inflation, and don’t forget future lump sum obligations such as college tuition.  He recommends buying term insurance rather than whole life, and investing the difference in the premium cost.  Make sure the insurance is renewable and convertible, and opt for non-participating insurance.

Chapter 6: Planning for Retirement

Roy tells the students not to count on Social Security to be anything more than a safety net, but to ask for a Personal Earnings and Benefit Estimate Statement.  They should also consider rising medical costs, dependent parents, and inflation.

Pensions are becoming rarer, with inflation indexing rarer still.  He recommends IRAs, but is split in regards to investing in mutual funds versus CDs.  He recommends that whatever they choose, they should start investing now.

He cites the example of twins, at age 22, who take different investment paths: one twin invests $2,000 each year for 6 years and stops; the other doesn’t start until the 7th year, and invests $2,000/year for 37 years.  At age 65, both would have the same amount:$1.2 million.

Roy also explains Keogh, SEP, 401K and 403(b) plans.

Chapter 7: Home, Sweet Home

Roy enlightens his students with his insights on home ownership:

• The reason most homeowners say that their house is the best investment they’ve ever made is because it’s usually the only investment they’ve ever made.
• Paying rent is not always throwing your money away.
• There are many tax-related benefits to owning a home, such as writing off property tax and mortgage interest, and the one-time capital gains exclusion.
• The interest saved by shortening the length of your mortgage.

He also cautions about the housing bubble, an eerie prediction from 1991 that applies to the 21st century:

“Over the last several years, a few factors have combined to cause the prices of houses in many areas to skyrocket…higher disposable income is being spent on housing…the baby-boom generation…is fueling an increase in the demand for housing.   And…people are no longer averse to borrowing heavily…The consumer-debt rate is alarming.”

When he’s called a doom and gloom prophet, he responds:

“As long as they can service the debt, there is no problem.  But two things can happen that can lead to an inability to carry that debt.  One: rising interest rates…Everyone…is in debt up to their eyeballs…the mountain of debt will someday lead to higher interest rates…the second…Economic woes: layoffs, shutdowns, lower incomes…You remember how a recession works.”

Chapter 8: Saving Savvy

Roy gives some lessons on saving, such as:

• A dollar saved is two dollars earned - while a two-dollar raise often nets just over a dollar in disposable income, a two-dollar savings nets you…two dollars.
• Credit cards are antithetical to well-managed finances - credit cards are a destructive force that allow you to spend money too easily.
• Save up before purchasing an item - you’ll get more satisfaction from a purchase by knowing the discipline and sacrifice that went into saving for it.

Chapter 9: Insights into Investment and Income Tax

Roy talks about the courage to buy when others are selling.  He again warns about the coming housing bubble:

“The halcyon days of guaranteed easy money in real estate are coming to an end.”

He also states that successful investors have an eye for value, and that you should do some research before making any investment decision.  Roy also restates the tax-deferred benefits of retirement plans, mortgage interest, and property tax.

Chapter 10: Graduation

Roy addresses the need for emergency funds, but recommends only a few thousand dollars as a cushion.  His reasoning is that most of your catastrophes are covered by insurance or a line of credit at your bank, reasoning obviously developed before the current credit squeeze.

College education can be funded by U.S. Savings Bonds, prepaid tuition plans, or an equity mutual fund for the long run.  He also identifies grandparents as a source of college tuition.

He reiterates the importance of health and disability insurance, as one in four people have a chance of being disabled for a one-year period.

The chapter ends with the three students receiving diplomas.

Rating: 4 out of 5 barber poles

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