It’s always interesting to observe what’s happening in the world of personal finance when you begin to read through the latest self help books. In an effort to show the reader how valuable Dave Chilton’s ‘sequel’ to the original The Wealthy Barber can be, lets focus on some of the recent stories and experiences I have discovered over the past few weeks.

Learning From Others

A few weeks ago, I stood in a coffee line at a snack bar in an outlet mall. The lady next to me was grasping an attractive rolling suitcase. I told her that it looked new and was a nice colour. She said: “Yes, it is nice looking, but I have no idea why I bought it. I don’t really need it, but I just could not resist the price offered by the outlet store.” Her husband stood next to her with a look that could kill.

A financial case study in one of the national newspapers, depicted an affluent couple that collectively earned in excess of $270,000 in gross income. Appearing to be the quintessential story of success, they owned a trophy home, and spent lavishly. Trouble is, they needed to deal with an uncertain retirement. Part of the problem: $118,000 in car loans !!  And that’s for TWO cars.

A friend of mine recently admitted (quietly) that he had finally spent more money in keeping his cat alive, than he did acquiring one of his automobiles.

In yet another case study, one family fell prey to their emotions and placed an unconditional offer on a larger home. Their mortgage increased from $145,000 to well over $300,000. Mom’s reasoning: “I hated to put my family’s happiness on hold”.

Roughly 160,000 eligible seniors do not receive their OAS benefits; 55,000 eligible people do not receive CPP benefits; a recent survey suggests that only 5% of people with disabilities hold registered disability savings plans – 44% are unaware this government program even exists.

And now, keeping the above in mind, lets take a look at Dave Chilton’s (Dave) book, ‘The Wealthy Barber Returns’ (WBR).

Book Layout

First, there are a few things I’d like to note about how Dave structured the book itself. One, the chapters are nice and short. Probably for two reasons: he has to deal with today’s short attention span and; if you can’t make the point in 2-4 pages or so, you’re probably over-complicating the message. Two, there are no checklists or chapter summaries in the book…anywhere. Hence, you actually have to read the book to (hopefully) learn the lessons. Three, there is no index at the back. My opinion is that if you want a relevant index, use a highlighter and marking pen when you discover the salient points. That usually means you’re learning something. The fourth point is that there is very little math displayed in the chapters. And lets face it, nothing frightens most readers like the image of a logarithm! Finally, Dave treats the book as a folksy conversation with the reader, with the bonus of a good sense of humour. He can be very diplomatic while explaining just how illogical (and ignorant) we can be to be with regard to financial management.

Back to The Basics

Dave constantly reminds us that it all starts with the most basic understanding of mathematics: when spending exceeds income, the result is a big negative. Nothing complex. Nothing new. And yet, the vast  majority of us still don’t seem to want to learn this. Perhaps this is what led another financial writer, Gordon Pape, to exclaim: “When it comes to finances, many of us are at a kindergarten level.” Sometimes I think Gordon is simply too optimistic. Is it any wonder that so few people believe they are properly prepared for retirement, when they are in debt up to their eyeballs, and they are in the late stage of their lives. At one point, Dave expresses his own exasperation by entitling a chapter ‘My Frustration”. Sometimes you can’t even lead a horse to water.

To Have and To Hold

We love our possessions…and we know how to store them in our bulging closets and dusty basements. There is a fine line between need and greed, and we just seem to cross it on a regular basis. Sometimes it’s to satisfy our lust for a deal or, more often than not, to impress our fellow man. We’ll seldom admit it, but the process can just be another chapter in our quest of ‘keeping up with the Joneses’. Face it, there will never be a shortage of products and services that provide us with superficial differentiation. Until the human race is universally recalled and put through a badly needed re-design, we are going to remain slaves to our impulsive, human wiring. It’s remarkable that we often fail to embrace the courageous response of  ‘I Can’t Afford It’ because we assume we’ll lose self respect and/or friendships (a good chapter covers that specific four word response).

The Tempt’n Temptations

No, I am not talking about a great Motown group – rather, the above relates to the convenience tools that have changed our buying habits. They include credit cards and the ubiquitous ATM. No doubt, technology makes it so much easier to close that transaction, acquire some easy cash and become even less cost sensitive. Yep, just tap that card n’ go !

(NOTE: a recent study indicates that Tablet owners are more likely to make impulsive purchases than other online shoppers – in fact, tablet users spend three times as much time on catalog apps vs the associated web sites !! That Jobs guy truly was a genius. Isn’t it ironic that we are so well connected today, and yet financially remain as disconnected as ever ?)

Aside from technology, Dave also points how our financial institutions have changed into marketing machines. Whether it’s a line of credit, another new credit card, Sunday business hours, or a new form of savings account, our banks are fighting for every last dollar from each client. Those banks! Their marketing departments know full well how to communicate with an ignorant client – and consumer ignorance is highly profitable. On top of this, Dave emphasizes that there are simply too many other ‘influencing’ temptations out there, whether it’s the retail world, HGTV or the smiling loan officer at your favorite bank. Couple this with today’s entitlement attitude and the need for instant gratification, and you’ve got an accident waiting to happen.

The Details are In the Debt

Dave’s devotion to the subject of spending and debt management is both timely and relevant. Given that the ratio of credit-market debt to personal disposable income reached 149% (that’s not a typo) in Q2 2011, his discussions around mortgages and home ownership are especially noteworthy. I appreciated the paragraphs where he focused on the concept of Total Cost – it baffles the mind that people fail to see all of the related costs associated with the ownership of cars and houses. Oh, did I mention that Dave said we have to pay the principal portion of our loans back, too ?

In the original Wealthy Barber, the primary character, Roy Miller, explained the value of maintaining a summary of expenses for a few months, simply to get a handle on where the dollars are going. Dave revisits this important spending analysis in WBR, emphasizing that such discipline also enables the individual to prioritize the allocation of scarce resources. And, yes, it all starts with the Pay-Yourself- First philosophy that also served as a driver in his first book.

Kids, Cats, Cars, Cottages and Calculations

An advisor once told me that if you wanted to create an explosive situation with a client, you should try to talk rationally about the above four subjects as they relate to financial management. As an example, Dave nails it when he puts pet ownership in perspective: “our pets live more comfortably than half the earth’s population for heaven’s sake”.  People generally have no idea as to what things truly cost, and just how well they are really doing. And more often than not, emotions cloud the issue.

Long term cottage owners frequently believe they’ve discovered God’s gift to compounding…at least until their advisor loads the data into a financial calculator and proves to them that even their GIC’s yielded a much better after-tax, compounded return. Whether it’s the basics like the Rule of 72, or even the workings of an investment loan, too many of us simply have no idea of HOW to push the numbers. Want proof ?  Dave’s review of the classic TFSA vs RSP vs Mortgage payment conundrum is a great example. He does ‘fall of the wagon’ at this point by introducing some math charts – and yes, you’ll have to read the explanations a couple of times to really grasp his analysis and message – but it’s a great investment of the reader’s time to understand the analytical process and logic he goes through.

Great Minds

Dave closes out his book with a few pages of thoughts and opinions, all of them useful. He acknowledges quite a few writers and their work, in an effort to show that one book simply cannot cover the entire financial planning topic. I especially liked his recommendation to read the financial case studies provided in the business section of the Saturday editions of the two national newspapers. Collectively, they are a gift that few people open.

Who Is The Book For?

In a word, everyone. Rich, poor, middle income…anyone can benefit. As I see it, people tend to progress through four stages when it comes to financial management (I call it the four A’s). First, they become aware that something isn’t quite right – like when they start to refuse to open their monthly credit card statement. Second, once they realize that something is causing their anxiety, they acknowledge their plight and begin to take steps to deal with the issues (that can include the realization that expense tracking is not optional). Third, as they begin to (hopefully) phase into a rational stage, they start to take action. That can include self-analysis, honest conversations, strict spending control and searching for a trustworthy, financial professional. Once they are on the path to recovery, it’s then important for them to adjust to the changes that impact their lives. Adjustment implies that financial management is not a static process.

The Wealthy Barber Returns is a valuable tool in working through these four phases. If Dave’s passionate conversation can get the reader to progress to at least the acknowledgment phase, then it has done it’s job as a tool in improving one’s knowledge and providing some motivation to succeed. You can’t deal with a horse’s desire to drink if you can’t even convince him to approach the water. Let Dave help you start to pull your reins in the right direction.

Highly recommended.