On the rare occasion that I pick up a book (I know, I should read more actual books), I tend to read about personal finance. When I do, I’ll try to write a review as part of this irregular series.
| For my Dad, personal finance was synonymous with one book: “The Wealthy Barber”. I know that a lot of Canadians feel this way. The book itself is outdated because the edition I have is nearly a decade old. That’s probably why the book’s author, David Chilton, released a sequel – “The Wealthy Barber Returns”. I don’t own a copy of the newest book, but I’d be happy to review it (*hint* to the publisher!) |
Nevertheless, the original remains a source of timeless financial wisdom. This blog is pretty big on timeless finance. Whoa, that’s the name of the blog. So I finally sat down to read the book. Here’s what I thought of it:
+Pro+ The lessons are important and simple. These cover key topics like saving money (starting an automatic plan to hide 10% of your paycheque), insurance (“buy term and invest the difference”), and tax avoidance (invest in RRSPs/TFSAs or 401ks/IRAs). The advice, with three exceptions noted as a “Con” below, is all very excellent and will serve readers well.
+Pro+ The book is written as bantered prose, rather than pure non-fiction, resulting in an experience that’s much more fun than the typical PerFi book. The dialogue degenerates into rigid verbosity at times, but there’s no way to write compelling dialogue about dollar cost averaging.
+Pro+ The author rightfully rips into our notorious irresponsibility for our abuse of credit and failure to defer gratification. Members of Generation Y can definitely learn something from the stern warnings that the author gives to GenX and the Baby Boomers.
+Pro+ The book describes financial planning as: “the proper handling of cash flow and assets to meet your objectives.” This rings true in the context of any timeframe – whether you’re planning for next month or your retirement. The book cuts through the jargon and tells you ‘financial planning is simple’, unlike the patronizing advertisements from big banks and insurance companies which say ‘financial planning is too complex; pay us ridiculous commissions and we’ll guide simpletons like you’.
+Pro+ The author critically assesses certain ‘professions’ (used loosely), such as insurance agents, financial advisors, and realtors. He points out that these ‘professionals’ have their own self-interests – which they may serve at the cost of their clients’ best interests. This truth directly contravenes the propagandist lies that are foisted upon the masses by lobbyists like the Canadian Real Estate Association.
+Pro+ David Chilton offers a sensible, balanced approach to the topic of home ownership. Most personal finance books are pro-home ownership. And by pro-home ownership, I mean hardcore ownership advocates. Most PerFi authors are wilfully blind to the risks and costs of home ownership. When there’s a bubble (like we have in Canada), you shouldn’t buy housing; particularly in Vancouver and Toronto, but elsewhere in Canada, too. From what I’ve seen and read, the only famous personal finance authors in Canada with a ‘balanced’ approach to this topic are David and Gail Vaz-Oxlade. He doesn’t thoroughly assess the shortcomings of housing, but he was writing at a time when the real estate wasn’t bloated by perilous debts, toxic assets like CMHC’s ”non-prime” mortgages, and pervasive speculative excess. I get the feeling that David would advise against buying a condo in today’s market.
+Pro+ The book is a proponent of the “correct” method for paying off debt, rather than the snowball method. This proves that, in 1989, some people had common sense. Unlike Dave Ramsay’s snowjob advocates.
| Questrade is Canada’s best brokerage. 1 cent commission per share ($4.95 min, $9.95 max). $50 in free trades. |
-Con- “The Wealthy Barber” gives three pieces of advice with which I take significant issue:
1) The book says that “a dollar saved is two dollars earned”, but claims that the “10% rule” is vastly more important than counting pennies. Essentially, thriftiness is given a tip-of-the-hat but deemed unimportant in the grand scheme. Fact: economizing is a critical component of the road to wealth. A lazy attitude toward frugality is endemic to the poor financial planning that resulted in the US financial crisis. It’s also created unsustainable debt levels in Canada. The author emphasizes the ‘automation’ of savings because, for lackadaisical people, budgets are doomed to fail. Not true. To modify a cliche: if you fail to budget, you budget to fail. Your long term savings objectives will be in constant jeopardy. David is right that the ‘latte factor’ is not the be-all-and-end-all of personal finance; but it does ebb away at your financial success.
2) In the chapter about ‘miscellaneous’ lessons, it’s stated that there’s no need to keep an emergency fund (i.e. a liquid account with 6 months or so of living expenses). The Wealthy Barber rhymes off simplistic examples of emergencies – for example, your roof gets blown off of your house – and then provides trite reasons that an emergency fund is not useful. For the “roof” example, he says that insurance will pay for the damage to the house. That’s a well-and-good theory, until your insurance company refuses to pay your claim. Insurance is only the right to sue; it is not true protection. Why? Insurance companies often act in bad faith. For example, Pilot Insurance (now “Aviva Insurance”) paid out a one million dollar penalty for attempting to defraud and bankrupt a family whose house burned down, instead of paying out the rightful claim. This is just an example. Keep an emergency fund. It will protect you against a plethora of problems – it will ‘even out’ the rough patches in life, protecting you from turning to expensive sources of credit.
3) The book fixates to a bizarre extent on mutual funds. This was most certainly forgiveable when the first book was published in 1989. Mutual funds were, at the time, the sole vehicle with which an average investor could diversify. But in the early 2000s, there were improved options. The author promotes the myth of “brilliant” mutual fund managers who generate consistent market-crushing rates of return. In the long run, this is a myth. No fund manager is worth an obscene 2.5% annual management fee. The book has been updated multiple times and should therefore reflect the new reality: we live in a world of Index Funds and Questrade (Canada’s best discount brokerage). Perhaps this has been corrected in the new book. Further, the book gives almost no advice on true value investing, because it emphasizes capital gains. I buy to collect dividends, not sell my stocks every time they go up. The author equates stock picking with a casino game – well of course it’s a game of roulette if you’re just speculating on capital gains!
-Con- While the lessons are simple, a sophisticated reader will glean little or no new knowledge from this book. To the author’s credit, this was presumably intentional. Our society would be greatly improved if everybody had just the basic financial literacy expounded in this book. Thus I haven’t incorporated this into my score.
-Con- The book doesn’t explore the role of ‘active’ investments in becoming wealthy (other than some basic advice on rental real estate). Mutual funds will not generate the same returns as direct business ownership.
The Bottom Line
As I alluded earlier, this book is classic. It’s one of the finest examples of Canadian personal finance writing.
My overarching criticism is that this book is out-of-date; obviously I can’t knock this older book because I’ve yet to read “The Wealthy Barber Returns”. It would be interesting to see how the new book deals with TFSAs, since these tax-sheltered vehicles didn’t exist when the original books were published. Geez, sure wish I had a copy of The Wealthy Barber Returns to review! *SECOND HINT*
I think the general lack of financial literacy in Canada underscores a significant social problem. If families talked openly about money, (1) we’d have less debt and more assets, and (2) we wouldn’t need to read books for basic personal finance knowledge.
The style of writing is approachable and it deserves credit for presenting personal finance advice to demographic groups that have otherwise shunned it. The book – with above-noted exceptions – gives commonsensical advice. I was going to rate it an 8.5 out of 10, but considering my Dad liked it enough to get a signed copy, I’ll give it a 9 out of 10.
| If you’re interested in purchasing this book, please consider using my affiliate link such that I’ll receive a commission (in the order of pennies). These kinds of contributions will help me keep this hobby revenue-neutral (i.e. pay for my web hosting and domain). |
Nice review. I loathe reading anything that isn’t merely for pleasure. (Ok, so shoot me I like teen fiction and fantasy novels.) I did however manage to read this one without much trouble. Definitely worth reading.
Joewood,
I am about the same age as David (I am a financial advisor). Like David pay yourself first is great advise.
However his book (1st) is full of holes.
Page 34 “Cathy, if you invested $2,400 a year, say $200 a month, for the next thirty years, and averaged fifteen percent return a year…” 15% you got to be kidding!!
His understanding of taxes how the government works like maxing out your RRSPs hurts when it comes time to retire.
Since 2005 as one example where the government introduced Clawbacks for OAS.
Here is another one back in 1985 the combined contribtion rate for CPP was 3.8% today 9.9% . Yes CPP is safe as long as the rates go up or its gets harder to collect.
Go to http://www.servicecanada.gc.ca/eng/isp/cpp/contribrates.shtml
If you want a good book to read pick up LEAP by Robert Castiglione
Want to have more money to spend in retirement, take on less risk, and have better protection?
Read the book .
He covers inflation
Taxes
Technological Changes
Planned obsolence
Financial Expenses
Lost Opportunity costs
Interest-Rate declines
Stock-market declines
Interest charges and loans
Lawsuits
Also explains insurance (like whole life) why the media does not understand how it works etc.
Cheers,
Brian
The original novel contained extraordinarily blindly optimistic assumptions on rates of return. In fairness, the 80s had seen government bonds with 10%+ returns. “Twas the times” as they say. Obviously, given all the money being printed, the housing bubble, and the fact that the stock and bond markets have been moving in unison, we are in a very different world than 1989. I’m in the process of reading his latest book; it seems a lot more fitted to the modern world but I’ll save that for the review. I will definitely consider reviewing LEAP sometime; I will put it on my “check the library” list.
RRSPs generate taxable income which is at a higher marginal rate due to OAS clawback as you point out. Do you think however, that given recent adjustments to the OAS system, that it will be available to anybody with a pension upon retirement? Also, is it really wise to rely on, essentially, a welfare program in retirement? I think it’s incumbent on me as a citizen to prepare for retirement. CPP, as you note, is very expensive. I’ve paid craploads into it and I’m not even 25; I can only imagine that you’ve paid in an obscene amount. Obviously you expect it to be there. If they raised the age on CPP I think there’d be a lot of justifiable outrage — we’ve contributed to it after all! But OAS is just funded out of government revenue and it’s meant to alleviate poverty (like the GIS but OAS is not only for the truly destitute). Also, if you don’t have a pension and you max out your RRSPs when you’re, say, 25, you’re deferring a *ton* of taxes and tax-free growth until your retirement. I guess I just don’t understand why any alternative is superior to the RRSP for the *average* situation (although as somebody with a defined benefit pension, I can’t contribute much to RRSPs anyway).
I know this is slightly off-topic, but because you mentioned it, I feel it’s fair game.
Cue rant about insurance……
There is no way in your right mind anyone today should ever rely on home or auto insurance to provide ANYthing. I am convinced that 99.99% of the time, actually trying to use your home or auto insurance to do what it is in principle designed to do will wind up costing you more than it gets you. The modern home & auto insurance policy & industry have become such bloated, dysfunctional animals (not entirely the fault of the insurers themselves, I’d be remiss if I didn’t throw greedy lawyers and claimants under the bus too) that their benefit to you, the insured, is marginal at best and frankly can be harmful at worst.
Hole in your roof? Damage to your car? Make sure you ask some real good questions before considering making a claim (and make sure you ask them in a “what if” way, because if they even FIND OUT something happened, nevermind making a claim, they’ll come after their pound of flesh). If they can find any way to avoid paying your claim, they will. And make no mistake about it, even if they pay, they WILL get their money back from you over time anyway through increased premiums.
I know it seems counterintuitive to fork ouf $5k of your own money to fix your car or house while you are paying for insurance, but it is almost universally the more financially-prudent decision, long term. The law says you have to have insurance, so pay the bare minimum you can in order to meet your legal obligations, and then do as Joe says and have a rainy day fund of your own, and use it rather than your insurance wherever possible.
Insurance in its simplest, conceptual form is a stellar idea. What it has become today is not nearly as useful.
For sure Danno. It sounds like you’ve dealt with an insurance company’s lies at some point. I’m in your club. They’re as dishonest as the day is long, the whole lot of them. Insurance is, as you note, a risk management technique in that it “pools” the risk. I have no problem with a company “pooling” risk at a profit. But now, as is the case in Ontario with auto insurance, they fight for pathetically insufficient payouts and they don’t make claimants whole. They do this structurally, such as when they lobbied and successfully got the province to reduce the minor injury limit to the lowest in Canada ($3500), and then they raised rates exorbitantly anyway! And they do this individually, by bullying, stalling, obstructing, ignoring, etc. If you ever need to make a significant claim, get a lawyer the minute they don’t pay out, and then add the increasing lawyer’s fee to your claim with each letter you write to them. I’m sick of these scumbags pushing people around.