Congrats to all the new grads! You’ve graduated, written your licensing exams, and have gotten your first job all in the past couple of months. Now you’re finally getting a paycheck. Exciting times! You finally have some disposable income, but what do you do with it?
Below you’ll find my top 4 takeaways from The Wealthy Barber Returns by David Chilton for new grads (and maybe a refresher for more seasoned PTs). Some of these tips may seem obvious or you may be doing them already and that’s GREAT! It’s the same as PT school, you have to master the basics before moving on to more complex systems and models.
1) On saving and spending
Chilton presents this simple equation for disposable income…
Disposable income = consumption + savings
Every dollar that we earn after taxes can either be consumed (spent) or saved. Spending is fun! Saving is boring. The idea is to find a balance. Spending is the instant gratification whereas saving is setting up for a comfortable lifestyle in the future. The reality is there is only so much disposable income to go around. The sentiment of “just save more” simply isn’t realistic for many people, seeing as there is only so much disposable income to go around. But if we switch our mindset to spend less, it can actually free up disposable income to save.
The example used by Chilton is oversimplified but gets the point across. If you’re currently saving 4% of your disposable income and a financial advisor suggests that you should be saving 10% based on future goals, that would be a 2.5x increase in the amount you are saving. That could be a big increase. Conversely, a 6.25% cut in spending might sound much more palatable.
1.00 = 0.96 + 0.04 vs 1.00 = 0.90 +0.10, by spending 6.25% less you end up saving 150% more!
2) Know where your money is going
Create an expense summary over the course of several months. I’ll repeat, know where your money is going. The only way to know where it is actually going is to track it. You can’t improve what you can’t measure! The dollars here and there add up over the course of a year. For example, a Starbucks coffee at $3/day adds up to just under $1100 a year! Now if you’re thinking you can’t possibly live without your Pike Place to start the day – that’s fine, there’s nothing wrong with that, but then maybe that means you find another expense of about equal cost that you CAN live without. Per Chilton the 3 areas of spending that seem to catch people off guard are 1) cars, 2) dining out, and 3) little things.
3) The sooner you start saving the better
Chilton talks about 2 fictional brothers. Brother A starts contributing the max to his RRSP at the age of 25 and contributes the max for 10 years then stops. Brother B starts contributing the max to his RRSP at 35 and contributes the max for 30 years. Both portfolios earn an 8% average rate of return compounded annually. At age 65 Brother A RRSP would be worth $629,741 while Brother B $489,383. The sooner the better and every little bit counts.
4) Equate money to time
Figure out how much you make an hour after taxes and equate your purchases to how long you have to work in order to make that purchase. This allows you to reframe the cost of the expense in terms of your time and effort and ask yourself the question “Do I really want to work “x” amount of hours to pay for this?”
