The Best Introduction To Personal Finance I Have Ever Read

Wealthy Barber is a classic Canadian personal finance book first published in 1989 that has sold over 2 million copies in Canada. The author, Dave Chilton has come out with a fully updated 2025 edition of the book, full of top notch personal finance advice on investing, spending, estate planning, and insurance. I have read the book twice now. And in this video, I'm going to go through the points that I think everyone needs to know. I'm not affiliated with Dave or his company. I may be a little biased because this channel is mentioned in the book and my testimony is on the back cover. I know that was a bit of a humbler bag, but come on. It's it's pretty cool. I met what I wrote there on the back of the book. This is the best and most approachable introduction to personal finance that I have ever read. I think this book is a great read for anyone and an excellent gift for someone. You want to share good financial planning principles with, or, you know, you could just send them this video. No, but also by the book, sorry, Dave, I'm Ben Felix, chief investment officer at PWL capital, and I'm going to tell you why the wealthy barber is a book worth reading. The wealthy barber is written as a story with character development, unique personalities, and lots of dry humor. It starts with a Canadian couple, Matt and Maddie, who decide they want to learn about personal finance. They ask Matt's parents for help and they get referred by them to their local barber, Roy, who we find out is himself financially successful, despite not having an abnormally high income or having received a big inheritance, he is the wealthy barber. Roy is also an excellent personal finance teacher having helped many people over the years, including Matt's parents. The book follows Matt and Maddie's visits with Roy as they learn about personal finance, they're joined by Matt's overspending, but successful entrepreneur sister, Jess, his best friend, Kyle, Saurav, a newcomer to Canada who lives in Roy's apartment building and some of Roy's regular customers who hang out in the barber shop. And they all contribute to the discussions. This writing style conversational with lots of back and forth on questions that readers likely have makes the information approachable for anyone. All right. As much as I do like the writing, I'm not just here to praise the book. I want to give you its main lessons. Again, I'm sorry, Dave. I do hope people still read the book. The first lesson imparted by Roy is you can do this. There's absolutely nothing we're going to cover that you're not capable of fully understanding and implementing successfully. You can start managing your own money very well, quite soon. For many people, that is a huge lesson finance and numbers more generally can be intimidating, but becoming good at managing your finances is not a mathematical endeavor. As Roy says in that first conversation, none of the important financial planning concepts are complex. This is such an important point. Roy is absolutely correct that smart investing and financial planning are easy to understand. They're not always easy to execute due to human psychology, but they should be easy to understand. If you can't understand an investment product or financial planning strategy, there's a good chance that you should avoid it altogether. In their next conversation, Roy introduces his golden rule, save and invest at least 10% of your net income for the future. This rule is powerful due to the nature of compounding saving and consistently over time eventually results in the returns from your investments, far exceeding your ability to save compounding is both powerful and poorly understood. Humans are just not wired to process exponential growth, which is exactly what compounding results in. Roy then explains that to be truly useful, the first rule needs to be paired with the second rule. And according to Roy, the three most important words in personal finance. Pay yourself first. Roy explains that saving is hard, putting money away for your future self, who feels like a bit of a stranger is competing with spending on your present self. Who's dealing with immediate needs, a rising cost of living, the addiction like psychology of spending money and our innate desire to keep up with the people around us. Not to mention all the businesses doing everything they can to influence you to spend your money on their products and services, paying yourself first, putting a portion of your money into long-term investments or savings for some of their shorter, medium term goal before you have a chance to spend it takes away that temptation. Roy explains that while taking 10% or more of your income away seems difficult to do, once you start, you realize that a lot of your spending was on things you didn't really need. As Roy concludes the lesson, Sorov chimes in to summarize, save first, spend the rest good, spend first, save the rest bad. Now I do feel compelled to say that many economists would disagree with this advice. It could make sense to save a less early on in life and more later when your income is higher. And similarly, it could make sense to save more or less in a given year, depending on your income and spending needs that implies spending first and saving the rest. But as a general rule to get people engaged with long-term thinking, saving and investing, pay yourself first at a rate of around 10% of your net income is a solid foundation. It's certainly better than not saving at all. And as you adjust to having a little less cash in your budget, it builds the reflex to carefully consider the difference between spending needs and wants, which most people probably don't do enough of. I'll come back to that later with some useful wisdom from Roy. The next session with Roy covers investing. First, Roy prompts the group to consider why investing is important. They collectively offer several correct reasons, including to fight off inflation, funding your future financial goals, and harnessing the power of compounding. Roy offers up a nice catchphrase to explain what he thinks successful investing looks like. Be an owner, not a loner. He's drawing the distinction here between stocks and bonds. A stock is a piece of ownership in a business, while a bond is a loan to a company or government. In general, stocks are riskier and have higher expected returns than bonds. Roy explains that stocks must have higher expected returns than bonds because they are riskier to own. With stocks, you're participating in the potential upside and potential downside of the financial performance of real businesses. Some businesses do really well, while many do poorly in the long run. Bonds are much safer because you get roughly the same return, whether the company's financial performance is good or bad, and if it's really bad, leading the company to shut down, bondholders often stand to recover some value, while stockholders do not. Government bonds are even safer. Roy explains that in the long run, stocks are a bet on human ingenuity. Being an owner, a stockholder, lets you participate in the ongoing human innovation that our whole economic system is based on. It is hard to disagree with Roy here, and I have done videos on the merits of 100% equity portfolios, but it's also true that the volatility of 100% equity portfolios is too much for some people to handle. Asset allocation decisions should be made based on your ability, willingness, and need to take on the volatility of stocks to earn higher expected returns. The group is listening intently to Roy here, but they voiced their concern that they don't know anything about stocks or the stock market. Kyle, Matt's best friend, even explains that some of his friends lost a bunch of money picking stocks during the COVID boom, like Peloton is one example that he gives, which came crashing back down to earth. Roy explains that you need no knowledge to invest successfully in the stock market. He even goes as far as saying that for 99% of people, more financial knowledge makes them worse, not better at investing. I would qualify this a little bit. Certain knowledge, like the idea that most people can't beat the market and that index funds are sensible investments for most people is extremely useful knowledge. Knowing how to follow the performance of individual stocks or the direction of interest rates is probably not useful. And I agree with Roy here, likely to do more harm than good. People often tend to sabotage their own returns by overtrading, timing the market and investing in stocks that grab their attention, all of which lead to lower returns. And those problems are exacerbated when people who think they have some knowledge, follow the market closely. Roy goes on to explain that successful investing requires minimal investment knowledge because simply buying all of the stocks or a close approximation of it is the most consistently successful investment strategy in history. It beats the vast majority of professional investors and the vast majority of individual stocks. It's next to impossible to consistently separate winning and losing stocks before the fact, but doing so is not necessary because all of the together, including both the winners and the losers have historically had more than enough return to propel most people successfully toward their long-term goals. This approach works because while lots of companies are losers in the long run, the winners tend to win big. The most you can lose in a stock is 100% of your investment, but when you own a big winner, you can gain far, far more than that. We can't identify those winners and losers before the fact. But owning all of the stocks in the market means that you will always hold the big winners. This effect, which is called skewness is what makes owning the market so difficult to beat. This is also part of the explanation for why professional money managers consistently fail to deliver market beating returns. The other reason is their high fees here in Canada. We still have a huge portion of our investment assets in high fee funds that aim to beat the market. Well, as expected, very few are actually successful. Roy admits that he too, at one time had invested in actively managed mutual funds, but he eventually saw the light after underperforming consistently between the skewness and stock returns and the high fees charged by the managers hoping to beat the market, trying to beat the market as a losing game. This again leads to the simple conclusion requiring little knowledge to simply buy the market. The good news is that there are low cost investment vehicles called index funds that do aim to buy all of the stocks in a broad market index. A broad market index is a grouping of stocks that has been assembled to represent an entire stock market. In Canada, we even have asset allocation ETFs, which give you a globally diversified portfolio of index funds. Roy suggests that those asset allocation ETFs are a good option for many people, and I agree with them. The group also raises the point that while being an owner, not a loaner may have made sense in the past, the future is perilous. We have global warming, Russia and Ukraine and divisive politics, all making the outlook for the global economy look weak at best, making being an owner, being an investor in the stock market, less compelling now than it may have been in the past. Roy does something here that I love. He brings up history. Roy reads a headline that he keeps laminated on his counter. And I'm going to repeat it here. It is a gloomy moment in history, not in the lifetime of any man who reads this paper has there been such grave and deep apprehension. The United States is beset with racial industrial and commercial chaos drifting, we know not where, and Russia hangs like a storm cloud on the horizon. Of our troubles, no man can see an end. The group assumes this is from a current paper, but Roy explains that it's from Harper's magazine in 1847. I learned this lesson early on in my career. When you look around at the state of the world, it always, always, always feels like some unprecedented disaster is unfolding before our eyes, making it feel like a particularly bad time to invest in the market right now. The reality is that it always feels that way wars, threats of war, discouraging economic data, natural disasters, and a ton of uncertainty about the future are persistent realities that doesn't go away. And yes, that makes investing risky. But the very nature of that risk is why we expect to earn positive returns in the long run. If there were no risk, we would expect to earn the kind of returns that you get from a guaranteed investment certificate, which are much lower. With index funds and expected returns out of the way, Roy goes on to explain Canadian account types, including the RRSP and TFSA. RRSPs and TFSAs are like containers that investments can be held in. The RRSP is a pre-tax savings account, meaning that contributions are made with pre-tax dollars. This is implemented in practice with a dollar for dollar tax deduction when you contribute to your RRSP, reducing your taxable income by the same amount. When you eventually withdraw from your RRSP, the withdrawals fully taxable as income. The TFSA is an after-tax savings account, meaning that contributions are made with dollars you have already paid income tax on. And accordingly, there is no tax on withdrawals. That's all pretty straightforward, but Roy offers the crew an illustration comparing the two account types that I think everyone needs to understand. Say you have a 30% tax rate and contributed $5,000 to an RRSP. 3,500 of those dollars are your after-tax dollars, and 1,500 are deferred income tax dollars. The RRSP allows you to invest those future tax dollars. It allows you to defer income tax. Invest that at 8% for 30 years, and you have just over $50,000. Then withdraw it at the same 30% tax rate, and you have just over $35,000. Now let's look at the TFSA. Only after-tax dollars can go into the TFSA. Following the $5,000 pre-tax RRSP contribution, the TFSA will get a $3,500 after-tax contribution since the TFSA does not offer tax deferral. Invest that for 30 years at 8%, and you have just over $35,000. Exactly the same as the after-tax outcome for the RRSP. This shows something important and often misunderstood. When your income tax rate is held constant, your after-tax dollars in both the RRSP and TFSA grow tax-free. Many people see the eventual tax bill on RRSP withdrawals and think it was a bad deal, but the RRSP and TFSA give you an identical after-tax outcome if your tax rate stays constant. It gets even better because it's common for people to have a higher tax rate while they're working and contributing to the RRSP, and a lower tax rate in retirement. In that scenario, the RRSP offers an advantage over the TFSA. It is true, as Kyle points out in the book, that pulling dollars out of your RRSP at a higher tax rate effectively results in a penalty for having used the RRSP rather than the TFSA. Now, the problem, as Roy explains, is that we do not know with certainty what our future tax rate will be. This does introduce some uncertainty about the optimal account choice today, but it's still possible to make sensible decisions using the RRSP in years where your income is high relative to what you expect it to be in the future and using the TFSA when it's low, or if possible, just max out both. Next, Roy moves on to home ownership. He first explains that it's critically important to consider the total cost of ownership when buying a home, not just the mortgage payment, but the property taxes and inevitable ongoing maintenance costs, not to mention the potential for the mortgage payment to increase if interest rates increase, an issue faced by many Canadians in recent history. Given the currently high property prices in Canada, Roy describes some of the levers that people can pull to make buying a house more of a possibility. The first one is to buy a cheaper home. That may be obvious, but it's worth saying it's not necessary to buy a house that fits the maximum amount the bank will lend you and smaller homes cost less and are easier to maintain. There are terms to describe spending so much on a house that you can't enjoy the rest of your life, including house poor and cash stration, which are both self-descriptive and states most people would want to avoid. The next levers includes some good rationale for not stressing too much about having a 20% down payment using the FHSA, the first home savings account and the RRSP home buyers plan to increase the amount you have available due to the income tax deductions gained from using those tools, taking out a mortgage with a 30 year amortization rather than the more common 25 year amortization to lower the payments on the loan, finding a partner before buying a home, living with your parents to save up for a down payment, paying off any outstanding consumer debts to make you look better to the bank when they assess your ability to borrow and earning more income. I'm not going to go into detail on all the points here, but each one of those does have an in-depth discussion and a thoughtful discussion in the book. Roy's final point on housing and where this channel gets a shout out is that renting is not throwing your money away. A renter who saves the cashflow cost difference between renting and owning and invests in the stock market can be reasonably expected to match the wealth of a homeowner. The group then shares some stories about friends who have had large unexpected housing expenses, and they collectively start to see Roy's point. Owning a home comes with a constant flow of unexpected costs. So constant that they should not in fact be unexpected at all. The basement leaks, the air conditioner stops working, a tree has to be removed. I just had to do that at my house. The chimney's crumbling. If renters are diligent about saving and investing the cost difference between their rent and the owner's mortgage, property taxes, and all of the unexpected expected costs of owning, they can be expected to at least match the wealth of the owner. I have shown this in past videos using both reasonable assumptions for the future and actual historical data for Canadian cities, Roy does emphasize a point that I agree with. Most people who rent will not save and invest diligently. They will undersave and invest in ---- coins, penny stocks, and expensive financial products. Those are my words, not Roy's, that underperform the market. Additionally, lots of people, including some of Roy's students in the book have an emotional desire to own, but Roy suggests here that Canadian society has conditioned us to believe that homeownership is a desirable objective and that it's worth reflecting on whether it is really a desirable objective for you. There are additionally lots of psychological benefits to renting, like fewer responsibilities, more predictable costs, and general lifestyle simplicity. There are valid points on both sides, but Roy's point is that renting is a viable option for housing from a financial perspective. It is not throwing money away. And it may be the best path for some people to follow. Music to my ears. Roy's next lesson on spending is incredibly important. People spend money for the wrong reasons, reasons not aligned with their values and goals. Roy explains that a lot of spending is the result of faulty brain wiring. People often spend money to impress the people around them, even if not consciously. And in addition to that, we are not good at delaying gratification. The point Roy wants to hammer home is that most people would cut back on some of their spending if they were more aware of where their money goes. And even small changes in spending can be a big boost to your savings rate. Roy's first tip here is a tedious one, to create an exhaustive multi-month spending summary. The group agrees that this sounds like a miserable task, but Roy says that over his many years of experience teaching people about personal finance, these spending summaries have proven vital for many people to get on top of their personal finances. Arguably even more importantly, and interestingly, Roy says that he is 100% sure that doing a spending summary has positively impacted people's happiness levels. The reason is that it makes people realize where they're spending on things that don't bring them value. And it helps them to make sure they are getting value from the things they are spending on. As Roy describes it, you want to maximize the joy units you're getting for each dollar of spending. If you can find spending that is giving you some joy units, like lunches out, but when added up over the course of a year, those dollars could have afforded something with a higher joy unit impact, you might realize it makes sense to reallocate your spending. Small numbers make a big difference. For example, saving only $11 per day for a year results in over $4,000 of savings. More if you account for any return, even a small one earned on those dollars. Roy brings up a famous quote from Ben Franklin to drive the point home. Beware of little expenses, a small leak will sink a great ship. The next lesson is on wills, life insurance, and responsibility. Nobody likes thinking about dying, but as Roy explains, if you don't think about it, your estate will be distributed based on your province's intestacy laws, the laws that determine what happens when someone dies without a will. The problem is that those laws are often at odds with what you would have wanted to happen if you had taken the time to plan for it. It's important to consider what exactly you want your estate to achieve and have a will drafted accordingly. Roy suggests going to a professional, but acknowledges that some of the online will platforms can also work if you have a simple situation. Personally, I would go to professional, especially if you have any complexity in either your assets or your estate objectives, Roy emphasizes the importance of choosing an executor. The executor is the person responsible for carrying out the will's instructions, but it is not a small job and should not be taken lightly. Roy's last point on wills is that it should be reviewed at least once a year, and he also mentions that when you get your will done, you also need to draft power of attorney documents. Powers of attorney give legal power to someone you have chosen to make decisions on your behalf in the event that you become incapacitated. There are two main types, power of attorney for property, which lets someone manage your money and other assets, and power of attorney for personal care, which lets someone make health and lifestyle decisions on your behalf. It is worth noting that these have different titles across the different provinces in Canada. Similar to an executor, choosing the right person or people is important. Finally, Roy moves on to life insurance. He explains that while life insurance is extremely valuable in the right circumstances, it is always a cost. You want to make sure that you have an insurance need before you buy life insurance. Life insurance provides financial protection for your dependents in the event of a premature death. An insurance need means that other people that you care about would be unable to maintain their lifestyle in the event of your untimely death. The most common example would be your spouse and children, particularly in cases where you were the primary income source for the household. This insurance need tends to decrease over time as your assets increase. Roy does walk through how to quantify your insurance needs in the book, but I'll let you read that in the book. The final point that Roy makes on insurance is one that everyone needs to hear. Most people will only ever need a renewable and convertible term life insurance. Term life insurance pays out the face amount of the policy if the insured dies. It has a level premium for a fixed term, like 10 or 20 years, and the insurance expires or renews at a higher premium at the end of the term. The alternative is cash value life insurance, which combines term insurance and a savings component where a portion of the premiums you pay go toward building up a cash value inside the policy. That's why it's often referred to as cash value life insurance. The savings component means that you're paying higher premiums overall, often a lot higher for the same amount of coverage. You do also get the savings component, but Roy explains that buying term life insurance and investing the difference is typically going to be a better option for most people most of the time. I tend to agree with Roy here. To finish off in the insurance topic, Roy discusses disability insurance. For young people with little financial assets, their biggest asset is their ability to earn income in the future. Life insurance protects that future income in the event of an untimely death, but death is not the only way that your ability to earn income can be disrupted. In fact, disability is much more common. When someone becomes disabled, they may lose the ability to earn income and even become a liability to their family. Matt mentions in the book that he's covered through a group plan at work, but Roy correctly cautions that many group plans are insufficient. One big point to look out for is whether the policy covers you in the event that you can't fulfill the duties of your own occupation or of any occupation. Own occupation disability coverage is the gold standard, and you also want partial disability coverage, cost of living adjustments, and for the Typically, that means getting additional disability coverage, even if you do have a group plan. This is not an area that you want to skimp on. Okay. I left lots of good stuff out since this was already a long video, but I hope this summary was useful. This is a great book. If someone asked me for an accessible book to read as an introduction to personal finance in Canada, this would be at the top of the list, even for me. Well, most of the facts in the book were not new. The way that they were communicated gave me a lot to think about. I'll put a link to the book in the video description. It's not an affiliate link. I gained nothing from you buying it. Thanks for watching. I'm Ben Felix, chief investment officer at PWL capital. If you enjoyed this video, please share it with someone who should read the wealthy barber.