A year ago, we launched Moneyville with an excerpt from The Wealthy Barber Returns, the long awaited sequel to the bestselling book written 21 years ago by David Chilton.
The Wealthy Barber Returns has been in book stores for a few weeks and is already a bestselling Canadian title. Moneyville’s review by Ellen Roseman said many readers will find the message disturbing. Easy credit is killing us and we’re deluding ourselves about how we can stay in debt all our lives and still have a comfortable retirement.
We sat down again with Chilton to get his thoughts on how things have changed since the original Wealthy Barber was published. The good news is that we’ve started to save more, but the bad is that we’re spending even faster.
“The single biggest change in the last 20 years is that debt has escalated,” says Chilton. “And there are three reasons. Interest rates are low, so that you’re not punished so much for borrowing, lines of credit have made it easy to spend and average credit card limits have gone up.”
He believes our attitudes have also changed so that we aren’t as frightened of debt as we once were and at the same time have become consumed by consumption. “You want what you want when you want it,” he says. And lines of credit make it that much easier with money that seems almost free.
Chilton tells a story in the book about a woman who borrowed $60,000 from her credit line to help her son renovate his bathrooms. She assured Chilton it was nothing to worry about, because the reno only cost her $150 a month.
“I can afford it,” she said.
She reasoned that at her borrowing rate of 3 per cent, the $60,000 cost $1,800 a year in interest which worked out to the $150 a month or $5 a day. What’s the big deal? She was conveniently forgetting her principal repayment. The real cost was $150 a month, plus $60,000.
“That’s the thing,” Chilton says. “Many people with lines of credit have no plans to pay them back.”
Since these debts are usually secured by the equity in homes, they have essentially become reverse mortgages. Ater spending 25 years to pay off a mortgage, homeowners using their home as the security for new borrowing. What many don’t realize is that banks can call a line of credit at any time. They don’t because they’d rather have your monthly payment along with the debt. But they can.
These perpetual payments are robbing us of the ability to put money aside for retirement or into tax free savings accounts or even our kids RESPs.
“The issue is not about default,” Chilton says, “but not having enough money to save.”
Another worrisome trend is the attitude of young people towards saving and spending which is very much skewed toward instant gratification. Young people have access to debit and credit from an early age, much earlier than their parents did. “A lot of kids move out and want the same lifestyle as their parents right away, not realizing that it took their parents 25 years to achieve it,” he says.
And you shouldn’t look to your banker for help. The more they lend, the more profitable they are, so their incentive is make borrowing easy.
“Banks are businesses like any other,” Chilton says with a shrug. “Loblaws sell groceries, the Star sells newspapers, Dave Chilton sells books. Banks lend money.”
Chilton is a single parent, living Waterloo and has never had a line of credit. To be fair, unlike many of us he doesn’t really need one. Nor has he ever used a cash machine or a debit card. He pays wherever possible by cash because it makes the purchase real. He says the only reason he has a credit card is that he has to have to have one to travel – you can’t book a hotel room or airline ticket without one.
Looking to the broader economy Chilton sees governments facing on a larger scale what we face as individuals. The developed world has been living beyond its means and it has caught up to us. The developed world’s solution has been to lower interest rates to encourage more spending and the accumulation of more debt.
“I’m surprised we haven’t learned our lesson,: he says. “Solving crises with ever cheaper money leads to worse problems down the road. We’re going to have to put up with slow growth, which another reason why living within your means is a good thing.”
In the meantime he advises some simple remedies when you feel the urge to spend or peer or kid pressure makes you want to pull out some plastic. It’s all about four liberating words: I can’t afford it.
According to Chilton it’s an easy step to regaining control. Instead of trying to keep up with the Jones’ let them keep up you.
