Chatting with the Wealthy Barber

I recently had David Chilton, author of The Wealthy Barber, come to Toronto to speak to my clients.  His message was very timely because the one main point he makes with his book is that to achieve financial success, you must always spend less than you make. This is the lesson my parents always instilled in me.  I received a copy of The Wealthy Barber when I was 13 years old.  I’ve read it many times since then and attribute much of my fiscal discipline today to the lessons from that book.

Dave Chilton told me that he will not be reprinting The Wealthy Barber when the current print run expires.  His new book The Wealthy Barber Returns does not piggy back The Wealthy Barber story, but leverages the brand.   The Wealthy Barber was written 20 years ago but the basic principles of financial discipline and common sense will always be true.

And sure enough, it is basic common sense that people have lost that has contributed to much of the financial mess, not only in the United States, but here in Canada too.  I will never forget my meeting with new clients in February of 2007.  A husband and wife in their early 40’s came into my office from a referral of another client of mine.  They wanted a financial plan but after two hours of meeting and questions, I determined that they really just wanted to make a last minute RRSP contribution and felt ‘obligated’ to have an investment plan.  As I questioned them more about their financial matters and discussed their goals with them, they both told me that they were financially secure because they had $750,000 cash.  As I pushed further, I realized that they were talking about a $750,000 secured line of credit, secured against their $2million home.  There was still a mortgage of $400,000 AND the $750,000 line of credit had been 80% used to support their lifestyle!! 

I realized at that moment that there was something drastically wrong today if people think that a line of credit is actually THEIR money.  A line of credit is a loan from a bank on which interest is charged and must be paid.  It can be secured, usually against equity in your home, or can be unsecured for a higher interest rate.  If you default on paying the interest on a home equity loan then your home is at risk, simple as that.   This couple honestly felt that they had $750,000 cash to spend.  It is time for us all to rediscover the virtues that Dave Chilton tried to hammer home, 20 years ago: “Pay down debt, be thrifty, save for a rainy day, dollar cost average, live within your means”.  So many people collectively chose not to follow this common sense, and at the same time, money was very cheap and available which created a toxic mix! 

It seems like you can’t go anywhere or read anything that doesn’t lament over how bad the economy really is.  Is this the worst fundamental recession since the Great Depression? Sorry to disappoint you, but we’re not at 25% unemployment, the banks have not closed their doors to deposits and withdrawals, and yes, companies are still making money.  It is a lack of confidence, not a lack of economic fundamentals that plagues our economy today.

This year, we all learned what we cannot control: the stock market, the bond market, the economy — almost everything. However, we can control our own responses and actions. We do not have to pay attention to the media which really has no interest in our well being and is only concerned with selling advertisement space on the TV screen or in newspapers.

Here is some positive news that would not be appealing to the media because the headline would be too optimistic:

• Corporate  valuations are low which means they are cheap compared to their revenues.
• Oil prices are lower
  – Banks are becoming more prudent and stricter in their lending practices – no more subprime.
• Bad investment lending companies have been removed – Lehman Bros, Bear Stearns.
• Global political efforts are being made to help the economy.
• Lower interest rates are very good for those with variable mortgages or lines of credit.
• Increases in dividends for strong companies.
• New US president wants to expand jobs and infrastructure spending, as do other government.

Like Dave Chilton, I also feel confident that the market will bounce back, but the short term is unknown and fear is driving the markets today.  The principles that will get us all through this and make us stronger for the future, are simple: watch your debt, control your needs and wants, and spend less than you make.  Most importantly for us parents, teach your children these virtues not only by words, but by actions too.  Monkey see, monkey do.