PDF Summary:The Wealthy Barber, by David Chilton

The Wealthy Barber is David Chilton’s bestselling guide to becoming financially successful by following a handful of simple, easy-to-understand principles. These principles are illustrated using a fictional story about a teacher, an auto plant worker, and a small business owner who seek financial guidance from a barber who’s become wealthy by following the lessons he imparts.

Unlike some books on personal finance, The Wealthy Barber is not one size fits all: Chilton advises, for example, that you should only buy a house if it’s right for you, that day-to-day spending choices like whether to order take-out don’t matter too much if you’re implementing big-picture financial planning, and that not everyone needs life insurance.

Our guide compares and contrasts Chilton’s approach with those outlined in other popular personal finance books, such as The Simple Path to Wealth and The Total Money Makeover. We also provide background on developments in the financial and housing markets since the book was published.

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Because there are many different types of retirement plans, it can be helpful—and, if you’re self-employed, it’s a good idea—to consult an accountant, financial planner, or lawyer to help you decide which type of plan best suits your needs.

Retirement Savings Often Don’t Cover Long-Term Care

Chilton mentions medical costs in retirement, but he doesn’t discuss one of the biggest potential retirement costs: long-term care. People who suffer from a debilitating illness may require assistance with the tasks of daily living, in their own home or in a facility such as a nursing home. Paying for such care can quickly drain your savings; costs run in the tens to hundreds of thousands annually.

There are various methods of paying for long-term care, including long-term care insurance, personal savings and investments, health savings accounts, and Medicaid, which is only available to those living below the federal poverty line. If your retirement income and assets are substantial enough, you may be able to pay for long-term care costs out of pocket. If, on the other hand, you don’t have any retirement savings at all, you’ll quickly go into debt.

401(k) Plan

Chilton recommends a 401(k) retirement plan as the best choice for most Americans. (A similar option for teachers is the 403(b) plan.) In a 401(k) plan, your employer matches your contributions up to a certain amount every year, pre-tax. The law sets a limit on how much you can contribute to a 401(k) plan, but this cap is indexed to inflation, so it increases on a yearly basis. Employer matching may be as close as you can get to free money.

(Shortform note: While a 401(k) plan is a great choice for retirement saving, unfortunately it’s not available to many Americans. Only 67% of employers offer a 401(k) or similar plan at all, and of those, 18% don’t provide any matching. Those who do provide matching typically match an average of 4.5% of an employee’s contribution. And of course, you can’t have a 401(k) if you’re not an employee. Even without matching, however, there are significant tax advantages to a 401(k), and it has a higher contribution limit than a traditional or Roth IRA. As of 2022, the limit was $20,500.)

Individual Retirement Account (IRA)

To contribute to an IRA, you must have earned income. As with a 401(k), there is a maximum contribution amount. Your contributions are likely tax-deductible, depending on your income and on whether you or your spouse is covered by any other type of retirement plan.

If you withdraw money from an IRA prior to age 59 ½, you have to pay standard tax on that amount plus a 10% penalty tax. If you withdraw money from an IRA after retirement, withdrawals are taxed at your standard income tax rate.

As with any investment, you can invest your IRA in mutual funds (ownership investments) or in “loanership” investments such as CDs (certificates of deposit) and bonds. The former generally perform better, but Chilton says that an IRA is one place where the latter, more conservative approach can also work well, because your money can compound year after year, unencumbered by taxes.

Roth IRA

With a Roth IRA, your contributions are not tax-deductible, but withdrawals during retirement are tax-free. In other words, the main difference between a Roth IRA and a traditional IRA is the timing of the tax advantage.

In order to contribute to a Roth IRA, you must meet certain income eligibility requirements.

(Shortform note: The contribution limit for traditional or Roth IRAs for 2022 was $6,000.)

Keogh Plan

A Keogh plan is a type of retirement plan for people who are self-employed, either part time or full time. Like a traditional IRA, contributions to a Keogh plan are tax-deductible and growth within the plan is tax-deferred. You can contribute more to a Keogh plan than you can to an IRA; how much depends on which type of Keogh plan you choose.

(Shortform note: While various types of retirement plans exist, Chilton notes that millions of Americans nonetheless retire near the poverty line. More recent statistics show that approximately 8.9% of Americans aged 65 and over were living in poverty in 2019. In addition, approximately half of Americans ages 55 to 66 have no personal retirement savings at all. Gender and marriage affect whether a person has retirement savings: 60% of those who have never been married have no retirement savings, while this number is only 35% for those who have been married once. Women are about 3% more likely than men to have no retirement savings.)

Part 2: How to Save Even More Money

Once you’ve started investing 10% of your income for long-term growth and contributing to a retirement plan, says Chilton, you’re well on your way to financial success. Continuing to apply these two principles will provide you with a strong foundation for everything that comes next.

As you move through life, you’ll be faced with a series of financial decisions: things like whether to buy a home or rent, whether to pay for a vacation with credit or save up for it, and how to pay for your child’s college education. When it comes to these choices, surprisingly enough, there’s no wrong answer—but there are ways to increase the odds that you’ll accumulate more money as you go.

Only Buy a Home If It Makes Sense for You

Buying a home increases your assets and lowers your taxes. For most people, homeownership is an excellent investment. But Chilton points out that you should only buy a home if it’s right for you.

One situation in which it makes more sense to rent rather than own is when you simply can’t afford to purchase a home. Beyond the initial hurdle of coming up with a down payment, you might not be able to afford the mortgage payments, which are often significantly higher than rental payments. (This is due, in part, to the fact that people often size up when they move from an apartment to a home.) Whatever you do, don’t stretch yourself to your limit to afford a home.

And even if purchasing a home is within your budget, that doesn’t mean you should necessarily do it. If you choose to rent rather than own, investing the money you save by renting might even be a better investment than owning a home. Chilton writes that home ownership has its advantages and disadvantages.

Disadvantages of Homeownership

Among the disadvantages of homeownership is the fact that homeowners have to pay for things like property taxes, insurance, utilities, upkeep, and home improvements—and they also have to invest the time to stay on top of all of these things. In addition, Chilton notes that many homeowners never benefit from their home’s increase in value over time because they never sell their home. In other words, they never get a return on their investment.

Another important caveat about home ownership is that it’s not a solid financial plan on its own. Investing in a home must take place in conjunction with contributing to a retirement plan, investing in mutual funds, and other financial planning priorities.

(Shortform note: In addition to these disadvantages of homeownership, each of the risks Chilton enumerates with respect to real estate investing applies to owning your own home as well. Another disadvantage of homeownership is the high upfront costs beyond the home’s selling price and the interest rate on your mortgage. For example, you’ll probably pay between 2-5% of the purchase price in closing costs. Experts say you need to live in your house for at least five years to recover those costs.)

Advantages of Homeownership

While there are disadvantages to homeownership (and advantages to renting), Chilton claims that there are also many advantages to homeownership. First and foremost, your home is an asset that you can borrow against or, if it increases in value over the years, you can sell for a profit. Plus, there are tax advantages to owning a home.

Here are some of the primary advantages of owning a home:

• Mortgage interest and property taxes are tax-deductible.
• Most people can also exclude from their income any capital gains they realize when they sell their home (capital gain is the difference between the sales price and the cost basis, which is the amount you paid for the house plus any improvements you made).
• You can borrow against the value of your real estate (mortgage it).
• If you choose to rent your property, you can cover the costs of your mortgage with the rental income.
• If you own your home long enough, you pay off the mortgage and live rent-free.
• Although rent is often cheaper than a mortgage payment, in some cases your monthly mortgage payments are equal to or less than what you would pay in rent.

(Shortform note: While owning a home does have tax benefits, these benefits were significantly reduced for some homeowners due to a 2017 tax law that limited the mortgage interest and property tax deductions. If you took out your mortgage before December 15, 2017, then this law likely doesn’t affect you, and you can still take deductions for property taxes as well as for interest on up to $1 million of debt. If you took out your mortgage after that date, your deduction is limited to interest on $750,000 of debt, and your property tax deductions are capped at $10,000, which includes property taxes plus state and local income taxes or sales taxes.)

If you choose to buy a home, Chilton advises that a fixed-rate mortgage is usually a better choice than an adjustable-rate mortgage. With a fixed-rate mortgage, your costs stay the same, while your income is likely rising over time. If mortgage rates go down, you might be overpaying, but you’ll probably still be able to afford your payments—and you can always refinance. If mortgage rates go up, your rate will stay stable. You’ll never find yourself in a position where you have to sell your house because you can’t afford the mortgage (unless it’s due to circumstances unrelated to the mortgage, such as a job loss).

Minimize Your Tax Bill

Chilton’s recommendation for minimizing your tax bill is to make investments such as homeownership and retirement plans that provide tax breaks. Another way to maximize your deductions and minimize your bill is to hire a tax consultant. If your financial affairs are straightforward, it won’t cost you much; if, on the other hand, they’re more complex, hiring a consultant will be more warranted.

Other tips for reducing your taxes are:

• Refinance by taking out a home-equity loan (which has tax-deductible interest) to pay off the balance on consumer loans (which have non-tax-deductible interest). This way, you’ll owe the same amount in loans, but all of your interest will now be tax-deductible.
• If you’re self-employed or have your own business, there are many normally non-deductible expenses that become deductible as long as they are incurred for business reasons. Examples include your car, computer, travel, home office, and phone.

(Shortform note: There is no shortage of additional tips available in books and online for lowering your taxes—everything from earning as much tax-free income as possible (by, among other things, selling your home, saving money for your children's education, investing in municipal bonds, or contributing to a health savings account) to taking advantage of tax credits, to reducing your tax rate.)

Live Within Your Means

Besides homeownership and minimizing your tax bill, another way to save money is to live within your means. Chilton says that this doesn’t have to mean careful budgeting. If you implement big-picture financial planning, day-to-day spending choices like whether you buy coffee or order take-out don’t matter too much.

While you don’t have to pay attention to every cent, there are some steps you can take to help you live within your means.

Save Up to Buy Big-Ticket Items

Don’t borrow excessively to buy big-ticket items like cars or expensive products. Instead, save up until you can afford them. The best way to do this is by taking a certain amount off the top of your paycheck every pay period and investing it in guaranteed products like CDs. You don’t want to invest it in riskier products like stocks because you know you’ll need it relatively soon and can’t afford to lose it.

(Shortform note: When it comes to cars, some personal finance books go beyond this advice and tell you specifically which vehicles to buy: used cars. In The Millionaire Next Door, authors Thomas J. Stanley and William D. Danko indicate that wealthy people usually buy cars that are two or three years old, because they understand that new cars are overpriced. In fact, most car buyers spend 30% of their net worth on a car, whereas millionaires spend only 1%.)

“A Dollar Saved Is Two Dollars Earned”

It’s better to save money when making purchases than it is to earn the same amount in income, because your income is subject to taxes and deductions. As Chilton puts it, “a dollar saved is two dollars earned.”

For example, if you save $300 by buying an item on sale, it’s the same as if you had earned a $600 bonus. It’s not worth killing yourself at work to make more money when you could do better to shop around for the best price before buying expensive items.

(Shortform note: Other personal finance books agree with this approach. For example, in The Millionaire Next Door, Stanley and Danko claim that high-wealth individuals are often frugal and bargain-conscious, buying items on discount or at factory outlets.)

Don’t Carry Credit-Card Debt

It’s never a good idea to carry credit card debt. The interest rate on credit card debt is much higher than it is for standard consumer loans. If you can’t pay off your credit card balance, borrow from the bank—the interest rate will be much lower on the bank loan.

In fact, Chilton advises against using credit cards at all, as they make it too easy to spend money you don’t have.

(Shortform note: Like Chilton, many authors advise against using credit cards, as well as counseling more generally against buying things you want, but don’t need (which credit cards facilitate). In Your Money or Your Life, Vicki Robin and Joe Dominguez explain that the marketing industry was born when factories in the early 20th century were producing more goods than ever before, and companies needed a way to convince people to buy things they didn’t need. They argue that this culture of over-consumption not only causes people to live beyond their means, it also depletes the planet of finite resources and accelerates climate change.)

Understand Your Spending

Although it’s not necessary to budget meticulously, Chilton says it’s helpful to write down your monthly expenses periodically to see where your money’s going. That way, you’re not spending too much on the wrong thing, and you can make any adjustments that seem warranted.

(Shortform note: Many other personal finance books do recommend careful budgeting, including The Barefoot Investor, The Total Money Makeover, and The Millionaire Next Door. The latter states that more than half of all millionaires create monthly and annual budgets, and 62% of millionaires know their annual expenses for basic needs.)

Keep a Modest Emergency Fund

Chilton says that, contrary to some advice, you don’t need four to six months of income in an emergency fund, but it is a good idea to keep some money on hand for emergencies. This is especially true if you’re a homeowner—you never know when unforeseen expenses might crop up.

He says keeping too much in an emergency fund is a waste because you could be investing that money or using it to pay down debt, rather than being taxed on it and earning low rates of return. Only people with unpredictable income or little job security should keep more than a modest amount in an emergency fund.

(Shortform note: As Chilton notes, other authors recommend a much larger emergency fund. In The Total Money Makeover, for example, Dave Ramsey says you need a fund big enough to cover three to six months of expenses, to protect you in the event of a job loss or medical bills.)

Use Excess Cash Wisely

If you have excess cash (for example, from an inheritance), Chilton says the best investment decision you can make is to pay off any debt with non-deductible interest, such as car loans and credit-card balances. Make sure you always pay off the debt with the highest interest rate first.

If you have excess cash and you have no debt (and you’re implementing Chilton’s other financial principles), spend your money!

(Shortform note: Chilton advises paying off debt with excess cash; other personal finance books recommend that you pay off debt first, before you do anything else. In The Barefoot Investor, for example, Scott Pape recommends eliminating debt by taking steps such as listing all of your debts, renegotiating your interest rates, and paying off your debts one at a time, starting with the smallest.)

Save Money for Your Children’s College Fund

If you have kids, you may want to start saving for their college fund. There are many valid options for how to do so, but Chilton says a solid choice is making a monthly payment toward a mutual fund for your child, just as you do for yourself.

Like all investments in mutual funds, this approach works best if you start early, when your child is young. When your child is within a few years of college, look for a good time to redeem the funds (don’t wait until the last minute or you may be forced to sell when the market is down). There are limits on how much a child can earn in investment income without being taxed; an advantage of mutual funds is that the dividends they pay are usually under these limits.

Some other options for saving for college include US Savings Bonds, prepaid tuition plans, and education savings plans, or education IRAs. US Savings Bonds are guaranteed by the federal government, use an adjusted interest rate, may receive preferential tax treatment, and are exempt from state and local income taxes.

With prepaid tuition plans, you pay for tuition years before your child goes to college; the price is based on variables such as the state’s estimate of how much tuition rates will rise in the future. The advantage of this type of plan is that if tuition costs go way up by the time your child goes to college, you will have saved money. One disadvantage of prepaid tuition plans is that students have a limited choice of schools—these plans usually only cover public universities within your state.

With an education savings plan, or education IRA, you make contributions up to a certain amount in a tax-deferred account.

(Shortform note: In The Total Money Makeover, Ramsey recommends saving for college using an education savings plan, or Educational Savings Account (ESA). He says prepaid tuition plans just break even with inflation, while savings bonds and whole life insurance for babies generate returns of only about 2-5%. An ESA funded in a growth-stock mutual fund, however, can achieve much higher rates of return.)

Part 3: Protect Yourself and Your Loved Ones

If you’re expending the time and effort to become financially successful, you’ll want to ensure that you and your loved ones are provided for in the event of loss. Make sure you have sufficient life, health, and disability insurance, and be sure to make a will.

Purchase Life Insurance, But Only If You Need It

Because the purpose of life insurance is to protect your dependents in the event of your death, Chilton advises against buying life insurance if you’re single and you don’t have kids. Even if you do have dependents, you still don’t need to buy life insurance if your “living estate” (your assets minus your liabilities) is sufficient to provide for your spouse and children, pay off your debts, and pay for funeral expenses.

If you don’t fall into either of these categories, you should purchase life insurance. To determine how much to buy, first consider everything your dependents will need to live comfortably in your absence—for example, your debts paid off, funeral expenses paid, college expenses for your kids, and sufficient income for your spouse. Then purchase an additional amount of insurance coverage to factor in account inflation. For example, if you want to ensure that your spouse receives an annual income, you’ll need to account for the fact that any set amount will be worth less and less as the years go by.

Chilton explains that there are two main types of life insurance. Term insurance lasts for a specific period of time, and pays out the amount of the policy if the insured dies. This is basic life insurance, and it's relatively inexpensive.

Cash-value life insurance is a combination of term insurance and a forced savings program. The savings is invested for you and can be paid out if you cancel the policy. The premiums and commission rates are higher on this type of insurance, and rates of return are often lower, partly because the insurance company has to cover expenses and make a profit. In addition, up-front costs are high, and the term component costs more than it would outside the “bundle” of the cash-value policy.

The primary advantage of cash-value life insurance is that the savings portion of the policy is allowed to grow tax-free until withdrawal. However, this advantage is often negated by the disadvantages.

Chilton’s advice is to buy the cheaper term insurance and invest the money you saved, because you can probably make more by investing it on your own than a cash-value policy could by investing the savings portion of your policy for you.

You should also make sure that the term insurance you buy is renewable and convertible. Renewable means that when the term expires, you can renew the policy without having to take a physical to prove you’re insurable. Convertible means that if you need insurance past the time when you’re allowed to renew the term policy (usually 65 or 70), you can convert the face value of the policy to any cash-value plan sold by the insurance company without proving renewability.

(Shortform note: There are many different life insurance products with a variety of features and benefits. You might want to consider enlisting the services of an insurance broker who can help you search for life insurance (and other types of insurance) across several insurance companies. Whether or not you use a broker, make sure to shop for insurance carefully by comparing rates and selecting the policy that works best for you and your family. An important consideration is whether to include a long-term or chronic care rider in your life insurance plan. As discussed above, long-term care can be extremely costly; one method of planning ahead is to address the potential expense in your insurance policy.)

Make Sure You Have Sufficient Health and Disability Insurance

Of course, in addition to taking care of your loved ones, you should also take care of yourself. Make sure you have sufficient health and disability insurance. Chilton says most employer group disability policies are inadequate, so you’ll probably need an individual policy.

Although many people don’t think they’ll ever need disability insurance, statistics show that a 30-year-old’s chances of becoming disabled for a one-year period or more at some point in their life are one in four. Disability insurance is a way to insure your greatest asset—your earning power.

(Shortform note: When it comes to choosing disability insurance, you can select a short-term policy, which pays out for a few months to a year, or a long-term policy, which pays out for as long as the disability lasts. In addition, some disability policies define disability as “own occupation” and others define it as “any occupation.” The former provides coverage if you are unable to perform the occupation you were trained for, and the latter provides coverage only if you are unable to perform any reasonably suitable occupation.)

Make a Will

Last but certainly not least (in fact, you should do so as early as possible), Chilton stresses that you should make a will. Why is it important to make a will? In the absence of a will or revocable living trust, the court will pay off the deceased’s debts, then divide what’s left according to strict state laws. The laws do not take into consideration the wishes of the deceased or the needs of their survivors. Nor do the laws take into account anyone who does not have the requisite legal relationship to the deceased, such as common-law spouses, business partners, or charitable organizations.

A good lawyer can help you develop an estate plan. Before seeing the lawyer, decide how you want your estate to be divided, and choose an executor (the person or institution that will carry out your will’s instructions). The executor should be someone who’s the same age or younger than you, who lives nearby (so they don’t have to travel far to wind up your affairs), and who’s honest and reliable.

Finally, Chilton says, keep a net worth statement of everything you own and everything you owe, along with a copy of your will, at home and in a safety deposit box so that it’s easily accessible to executors.

(Shortform note: A will is the most basic part of an estate plan, which can also include a financial power of attorney, a health care directive, and a trust.)

After each financial lesson in The Wealthy Barber, Roy the barber asks Dave, Tom, and Cathy to bring him proof that they are taking his advice (for example, a copy of their lawyer’s bill to draft a will or revocable living trust). By the end of the book, all three have made big strides toward eventual financial success and are able to “graduate” from Roy’s financial school with flying colors.