REVIEW: The Automatic Millionaire, By David Bach “A Powerful One-Step Plan To Live and Finish Rich”
FROM THE BACK:
“Do you want to live rich and retire richer? Rich enough to do what you want to do when you want to do it? Rich enough to stop worrying about money? Rich enough to make a difference and help others?”
Sure, we all do! – Sounds like an infomercial. David Bach makes big promises in this book. The first couple of pages are full of wonderful promises like following his system will make you a millionaire, and his system doesn’t require discipline or a budget. How real is all this? Read on…
The book begins with a story about Bach teaching a finance class (I think it was of the continuing education sort, found at many high schools) and meeting a millionaire couple. The couple was the exact opposite of the millionaire stereotype. They looked very middle class and never earned much more than $50,000 a year, yet they had amassed well over a $1,000,000 at age 52. They tell David that they did it by paying themselves 1st with a 401(k) plan, and living well below their means – avoiding debt like an illness. This then becomes the basis of David Bach’s Automatic Millionaire System.
The heart of the book (and the system itself) is comprised of 6 major points:
- The Latte Factor
- Pay yourself first
- Make it automatic
- Automate for a rainy day
- Automatic debt-free homeownership
- Automatic debt-free lifestyle
Let’s examine each one at a time.
The Latte Factor.
This has become David Bach’s stock in trade. It is a very catching way to say, “find and cut unnecessary spending”, and in the sound bite culture of today it plays well. He offers the genesis of the phrase in a compelling example using a student’s daily habit of buying a non-fat latte and muffin before class everyday. He walks the reader through the math of just what that $5 a day habit costs in a week, month, year, a decade. It should definitely start you thinking about your spending habits in a new way. It did for me! By the way, it might not be a latte – that’s not the point. The point is there is probably something in your usual spending that you can do without or at least cut back on. It might be cigarettes, a bottle of wine, beer at the grocery store every week or lunch out with co-workers, etc…
Pay Yourself First.
Bach’s point here is a simple one: Use the money “found” from step one and pay yourself first. He does make one important point that many “Pay Yourself First” proponents rarely mention. Specifically, most people don’t truly pay themselves first – they pay the government first. This is due to the withholding tax (enacted in 1943, to help fund the war effort for WWII), which allows Uncle Sam to take a big chunk of your paycheck before you even see it! The only way around this governmental obstacle to wealth (legally) is through the use of pre-tax retirement accounts such as 401(k)s, 403(b)s, IRAs and SEP IRAs as a means to truly pay yourself first.
Make it Automatic.
This is the backbone of the failsafe aspect of this plan. When it happens without your involvement, it will happen with more success. This has never been easier to do. With more and more financial institutions offering electronic fund transfers (EFTs), you can setup an automatic payroll deduction and have that money go to your 401(k) before you ever see your paycheck – just like Uncle Sam does with the withholding tax! It’s easy, and incredibly effective. Like Ron Popeil says, “Just set it, and forget it!”
Automate for a Rainy Day.
This is an extension of Making it Automatic. In this section he talks about routing that automatic deduction to a high interest savings account for emergencies, or rainy day spending.
Automatic Debt-Free Homeownership.
This is applying the same methodology to your mortgage. By making one extra payment per year (or paying every 2 weeks instead of every month) you can pay off a 30 year fixed rate mortgage in little more than 20 years.
Automatic Debt-Free Lifestyle.
This section is all about avoiding and eliminating debt.
- Step 1. Say no to debt (avoidance)
- Step 2. Renegotiate current interest rate(s) on the debt you already have.
- Step 3. Consolidate your debt into fewer monthly payments, preferably at lower rates as well.
- Step 4. Take what you would pay yourself first (10%) and split that into half to pay down debt, and half to save for the future. The point here is that you still make progress on both debt and savings over time, which has a tremendous positive psychological effect to keep you motivated.
The key point here is that getting out of debt is automatic, not instantaneous. I followed similar steps myself, which you can read about here: 7 steps to getting out of debt.
Philosophy behind the book:
The stated philosophy behind the book is one that most people can easily get into:
- You don’t need to make a lot of money to be rich.
- You don’t need discipline.
- You don’t need to be “your own boss.” (Yes, you can still get rich being an employee)
- By using what I call the latte Factor (R), you can build a fortune on a few dollars a day.
- The rich get rich (and stay that way) because they pay themselves first.
- Homeowners get rich; renters get poor
- Above all, you need an “automatic system” so you can’t fail.
For the most part, the philosophy outlined above is a good one, though a bit simplistic. Don’t get me wrong, I love simplicity (I like it so much I chose to make that the first word in this blog’s name) but I think it implies more than it can deliver. I think that the Automatic Millionaire System is an effective one for building wealth, but I think Bach throws the word “rich” around an awful lot. If people think they’re going to amass a Warren Buffet like fortune, they are in for a rude awakening. Still, the Automatic Millionaire is an incredibly simple, effective and failsafe way to build wealth over the long term.
The book is laid out in an easy to digest format of short, pointed sections and bullet lists. This makes for a really quick read. David Bach also provides a lot of resources for finding and researching investment companies, banks, stocks and bonds.
Final Analysis.
David Bach’s claims sound outrageous, but they really aren’t. In fact, if anything they are rather pedestrian and not especially meaningful. For example, a $1,000,000 30 years from now will not be the same as $1,000,000 today. In fact, you would need approximately $2,806,793 in 30 years to have the same purchasing power as 1 Million today, assuming an inflation rate of 3.5%.
In this light, the claims of amassing 1 million dollars in 30 years from the latte factor and compounding interest not only seem reasonable, they seem down right inadequate! Of course, it’s still better than nothing and so it’s worth doing… just don’t think it’s the easy road to the high life.
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