David Chilton advised millions of Canadians to 'pay themselves first' in his best seller, The Wealthy Barber, in 1989. In the book, Chilton lamented the fact that Canada's educational system didn't teach its students anything about personal finance. It's a point that still pains the stock broker turned author.
Canadian Real Estate spoke with Chilton to discuss how buying your first home is a critical step in this lesson about securing long-term financial freedom.
Canadian Real Estate: In the book, your character, Roy Miller, the barber from Kitchener, Ont., criticized the fact that personal finance and real estate wasn't taught in our education system. How much has it improved since then?
Chilton: There are more high school business courses now than back then. However, it's still a problem. I'm not finding people much better informed now than they were 20 years ago.
Canadian Real Estate: The Wealthy Barber described home ownership as the ultimate forced savings plan. How would you alter this advice today?
Chilton: I bought a home when I was very young and I'm very much pro-ownership. It provides more than the investment returns: it's about lifestyle and peace of mind.
Today, I would emphasize that when you buy a home, pay off the mortgage as soon as you can. That's something I wish more people would push. In Canada, where there's non-deductible interest, paying off that debt makes a great deal of sense. It reduces stress, it frees up cash flow, builds pride in ownership - that's a lot of good things tied to one idea. Yet, you don't get a lot of the financial advisors focusing on mortgage reduction.
Pay weekly if you can, shop for the best rates and don't assume the bank is your best mortgage option. It feels comfortable, but you may do better elsewhere.
Canadian Real Estate: In the book, one of the cautions about real estate was the possibility of values decreasing. This has certainly been the case over the last few months. But historically, real estate has shown tremendous gains. What would Roy say about this today?
Chilton: It's a better time to buy now than it was a few years ago. Houses were rising at a level significantly beyond the level incomes were rising. That's not sustainable over an extended period. You have to have affordability.
Canadian Real Estate: Roy advised people to make sure their house fits their needs and wants, and also to fill the requirements of a good investment: location, proximity to schools, public transportation and shopping. That still holds true today, doesn't it?
Chilton: It's common sense, yet a lot of people still don't think about it much. We tend to extrapolate our current emotions and think we're going to stay there forever. But realistically, people at some point are going to move, so you've got to be thinking, 'how many of the next group of buyers are going to be drawn to this?' That's where those variables really come into play. Street appeal, proximity to schools, all those things - they matter.
Canadian Real Estate: Put your Roy hat back on for a minute: what would be your Top Tips for first-time home buyers?
Chilton: Number one, for sure: don't overspend. I see that over and over again. They reach as far as they possibly can, and they make themselves house-rich but cash-poor, and they have trouble maximizing RRSPs and making other payments. They don't realize home ownership can be expensive, whether it's the property tax or insurance or upkeep. I see many people buying a little more than common sense, and frankly, basic arithmetic would dictate they should.
People love bigger homes now, but the extra square footage comes at a price, obviously. I live in a very small house - a 1,400-square-foot house. It's extremely small, and I still have a room that I never go in. For the most part, this trend toward 3,500 square-feet and 5,000 is kind of whacky when you think about it.
If there's one positive result of the market shock we've been through, it's that a lot of people are re-evaluating things. On conspicuous consumption, they're examining their behaviour and asking 'Did I need all that stuff? Did I need all that space? Did I need to spend all that money?'
I've been lucky in real estate. I live in Kitchener-Waterloo, and the local economy has been great for job growth, and all that has led to real estate value rising. For the most part I've done well.
Canadian Real Estate: You and no doubt many other of Roy's, er...your, students of The Wealthy Barber.
David Chilton is a financial advisor, speaker and writer in Kitchener, Ont.