This book is a fictitious conversation between Roy (the wealthy barber) and his friends: David, Sue, Tom and Cathy.
Roy became wealthy while working as a barber. He was able to become wealthy because he had ambition, he sought help from a mentor, he read many personal finance books and he invested his money wisely in mutual funds and real estate. Now as a barber, he gives financial advice to his clients while cutting their hair.
David, Sue, Tom, and Cathy decided to go to Roy’s once a month to get a haircut and to learn about personal finance. The book is the summary of several months of conversation between Roy and his friends.
The advice is easy to understand and it can be put into practice by practically anyone. I agreed with 99% of it.
Roy’s first piece of advice is to pay yourself first. You should put 10% of your income into managed mutual funds. He goes on to explain what mutual funds are and how they work.
I believe that the first step you should do to improve your financial health is to pay your high interest, unsecured debt. A regular credit card interest rate is about 12 to 18% while an average return of a mutual fund is about 6 to 8%. I believe that before putting a single dollar into any kind of investment, all high interest debt should be paid.
Let’s imagine that you have a 6% debt and you also have an investment opportunity where you can earn 6%. On the surface, it seems to be about the same, but it is not. You should put all your effort in paying down your debt instead of investing any money. The reason is that if you get a return of 6% on your investment, you have to pay taxes on that earning; while you don’t have to pay taxes on the savings you get from paying your debt.
Roy advises you to find a good mutual fund manager and invest your money into an actively managed mutual fund. However, research has shown that most actively managed mutual funds underperform the market. I advice my clients to purchase index funds instead. The reason is that index funds are cheaper to manage (they are managed by computers) and they have minimal marketing expenses (they don’t pay commission to financial advisers); whereas actively managed funds pay the high salaries of many researchers and managers, high marketing fees in the form of generous commissions to financial advisers, and high overhead such as fancy offices in expensive neighborhoods. The end result is that index funds generally outperform actively managed funds by 1 to 2% per year. Over many years, that small percentage difference could represent an enormous amount of money. A side note: Whenever you see a financial adviser, ask them how they get compensated and be aware that there will be a bias towards recommending investment products which pay high commissions.
Wills, life insurance, and responsibility. Everyone should have a will, even if the person is single. I write my will every year and I send copies to the people mentioned in my will. I have several debts and assets and I want my executor to know how to dispose of my assets, pay my debt and distribute the remainder to family and friends. I have sent copies of my will to my family and friends and if ever they have a question, they can ask me now instead of trying to guess my intentions after my death.
Roy recommends as well to write a living will. Shame on me, I have not written one, but if I ever become incapacitated, I don’t want to be a living vegetable. I don’t wish to be kept alive by artificial means.
As far as life insurance is concerned, Roy recommends to get term insurance which would produce enough financial support for your dependents if you die. Everyone is different, have different desires and needs, but in my opinion the goal is to provide support. You don’t want to make it seem as if your family won the lottery. Also, as your wealth increases, you could also consider self insurance. Let’s say you have one million dollars in assets, in this case you probably don’t need life insurance. Your dependents would inherit the one million dollars if you die.
I have always been a big believer in self insurance. There are so many inefficiencies when you buy a term insurance. First of all, insurance companies are there to make a profit, they are not there to protect you. Their team of actuaries and lawyers will write the contracts so that the company will always be the winner. Secondly, when you pay insurance, you also pay taxes to the government. That is money that neither the insurer nor the individual gets to see. Taxes is a leakage created by the government.
The next section is Saving for Retirement. According to Roy, saving for retirement should be in addition to saving 10% of your income. Here Roy talks about RRSP accounts. This part seemed confusing to me. Already saving 10% is difficult, but if you contribute the maximum to your RRSP, that would be an additional 18%. This means that a person should save a total of 28% plus the insurance expenses. I believe most people would find it difficult to save that big a percentage. This is where the help of a money coach could become useful. (Contact me if you need help)
To buy or to rent a house? The answer is: “It depends.” It depends on so many variables. Roy discusses several scenarios in which it would be better to buy a house and a few more scenarios in which it would be best to rent a house. Hopefully, one of these scenarios applies to your situation or if not, that the conversation helps you determine whether you would be better off owning or renting.
How to be frugal. Roy didn’t put too much emphasis on being frugal, as long as all the other objectives are being met. Nevertheless Roy encourages penny pinching, looking for specials, discounts and other techniques to spend less. He tells us that one dollar saved is two dollars earned. The reason is that when you earn money, your money has to go through so many deductions before it gets to your pocket, deductions such as income tax, Social Security, Pension plans, union dues, and so on. But, when you save a dollar, the savings is all yours. You are not taxed when you find great deals.
Saving money on taxes. In addition to having your retirement money in RRSPs, Roy suggests seeking the help of a professional accountant to educate you. At the same time, Roy suggests to trying to buy tax related books so that you can always be aware of the latest tax deduction and credits. He claims that you will be well compensated for the time invested reading about the tax system. It is my belief that anyone who is interested in personal finance, should try to do their own income taxes. When you do your own income taxes, you get a better understanding of your tax situation, and every year you can make improvement which will optimize your tax situation.
Registered Education Savings Plan (RESP). Roy did not speak about RESPs for the education of children. The reason is that the book was written in 1989 and RESPs was created in 1998. I find RESPs to be an important part of personal finance. One of the people he was advising (David) was planning to have a family. The scene was propitious to talk about RESPs. RESPs are registered savings plans for education. The major advantage of an RESP is that the savings grow exempt from taxes, and in addition, the government of Canada contributes to the account up to $500 per year through the Canada Education Savings Grant.
Tax Free Savings Account. Another important tool for saving and reducing taxes are TFSA. As the name says it, it is a savings account (or investment account) where the interest, dividends or capital gains are 100% tax free. The TFSA came into effect January 2009.
This book was easy to read. The language was straightforward and the dialogue was easy to follow. My only reservation is that the book was first published in 1989 ( 26 years ago ) and some of the material seems outdated. Nevertheless, I recommend reading this book. Your time will be well spent and if you apply most of the lessons you will be as wealthy as the wealthy barber.
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