Friday, July 31, 2009

The Wealthy Barber, by David Chilton

I've continued my search for a good book on financial planning to recommend to my children; Chilton's book was recommended to me.

The conversational, parable style might work for some folks, but it didn't much amuse me. The key points, however, are solid.

I won't recommend this book, but will net it (and similar books) out in just the 655 words that follow:
  1. Pay yourself first by setting aside 10% of your income as automatic savings (i.e., payroll deduction or the like to remove any opportunity to treat it as discretionary funds). What to do with the money? Chilton likes dollar cost averaging to (low expense rate) money market funds; seems reasonable to me. (Consider Vanguard.)

  2. If you have dependents, have a will. This seems pretty obvious; if you're in Texas, I recommend Keith Gamel do the paperwork for you. (Once she passes the Texas bar next year, I'll recommend another attorney; no offense to Mr. Gamel.)

  3. Life insurance, maybe. If you don't have dependents, you don't need it. If you do have dependents, you only need it if you have debt, or if you want to provide for those dependents. If you want it, you only want term insurance -- anything a life insurance agent thinks is bad is probably good (i.e., if their compensation is minimized, your efficiency is probably maximized).

    Term life insurance is focused insurance - it doesn't help you save, it isn't an investment, it simply pays out on your demise. Check out professional organizations (e.g., ACM, IEEE, NRA) as well as established insurance firms for quotes. The amount: pay off your debts, provide for sufficient funds to accomplish your post-death wishes (e.g., significant other can pay their bills, offspring can attend college, dog can lounge in a silk covered pet bed, whatever), and don't forget the impact of inflation (i.e., you might want to slightly over-insure for that) nor the declining needs of your dependents (e.g., as kids age out, or the need for significant other to vacation on the Riveria declines as he/she finds a replacement loved one).

    If you lack debt, your finances' liquidity would cover the tax pain of your estate, or you just don't give a damn about what happens when you're dead, then save your money.

  4. Plan for retirement. In other words, in addition to the 10% you pay yourself first, add on an IRA (or Keogh), and a 401(k) or 403(b). This is easiest if you qualify for your investment (e.g., in an IRA) to be tax deductible as you make it (the earnings are tax deductible in any case). The investment structure: focus as usual on low expense investments, consider dollar cost averaging into financial instruments, devise an allocation that meets your requirements for sleep (e.g., more or less risky, realizing that the more the risk the more the return, within reasonable - don't fall for the Madoff ponzi scheme craziness - bounds).

  5. Home ownership - or not. Renting makes fine sense; home ownership is emotional. If your ownership expense (mortgage, taxes, maintenance) is roughly equal to what it would cost you to rent an equivalent property, you're probably in fine shape if you want to own. A home shouldn't be your primary investment asset.

  6. Avoid credit card debt; avoid debt. Don't pay credit card debt, which isn't to say, "be a deadbeat," but rather, pay off your credit card bill in full each month, never pay credit card interest ever, and if you can't handle that, cut up your credit cards.

    Credit card debt is undoubtedly the most expensive debt short of borrowing from a loan shark. Its only advantage is that the credit card firm won't break your legs if you don't pay. Either way, the interest will break your back.

    While on this theme, strive to avoid non-tax-deductible debt in general. It is costly. Think carefully about the difference between what you want and what you need; doing so will often allow you to save an amazing amount of money.
Chilton has one of his characters quote Syrus (p 59): "Many receive advice, few profit by it." The six steps above are great advice for my kids (and probably many others) and saves them reading several books; all they need to do is execute on it.