|Complete Book Title||The Automatic Millionaire, Expanded and Updated: A Powerful One-Step Plan to Live and Finish Rich|
|Year Published||2003; Expanded and Updated 2016|
|My Rating||3 out of 5 stars|
“10,000 baby boomers reach retirement age every day, yet according to a study by the American Association of Retired Persons, the ‘typical boomer’ has only $1,000 worth of financial assets. We might call them boomers, but their finances are busting.”The Automatic Millionaire, David Bach, page 3
The Automatic Millionaire by David Bach was originally published in hardcover in 2003 and has been expanded and updated as of 2016. As the title suggests, the overarching theme of the book is to automate your finances which will put you on the path to becoming a millionaire. The primary principle is that you should pay yourself first with a target of 10 to 15 percent of your paycheck in a savings or retirement account. “You can’t spend what you don’t see” (page 19). The book also discusses that even if you cannot save 10-15% of your paycheck today, start with at least something; maybe that is just 1 percent and over time slowly increase it until you get to the 15 percent. The author mentions getting to a 20 percent savings rate.
That is the same advice I received when I was sixteen from my friend’s parents. That is the best advice I ever received and will agree with the author that everyone should automate their savings by having it immediately removed from your paycheck and put into a retirement account. Twenty-nine years later at the ripe old age of forty-five, I also feel like it is the worst advice that I have ever received. Not really, but yes. I think it isn’t nearly aggressive enough. Every young person should hear the words that they should try to get to a savings rate of 25 to 30 percent of their pay and if at all possible, get to 50 percent (especially when you get married and both of you are working). It sounds impossible, but if you really think about maintaining your current lifestyle as you advance in your career, etc. that extra cash could go straight to your retirement. If I had that advice many years ago, I could be retired today at forty-five. With the 10 to 15 percent savings rate and learning about the 401(K) and the 59.5 age for withdrawals without a penalty, that was always my target. I am on track to exceed that goal, but the point is that you will generally hit your goal that you set — so why not shoot for the stars such as retiring early at fifty?
In chapter 2, the author covers “The Latte Factor.” There are different opinions about this thought process. In favor of it, you can inventory your daily spending and look at the day, the week, the month, and the year to see where you can shave a few dollars here and there that could instead be put to work in your retirement account and over time, with the compounding of monies, will grow exponentially. Think about it. If you spend $5 on an item every day (maybe it is your Starbucks Latte, a pack of cigarettes, or your evening ice cream run) that is real money that isn’t going to work for you. By saving $5 per day, you could essentially be saving $1,825 per year. If you just invested one year of savings at the age of 20, that $1,825 would grow to about $27,000 by the time you are sixty (using a 7 percent growth rate). Imagine doing that every year for each of the 40 years — you would have added over $400,000 towards your retirement. Yes, that $5 daily item is costing you $400,000.
The counter argument is that it isn’t sustainable over the long haul and you should look at other areas to cut costs (i.e. no car payment, no credit cards, a reasonable house, etc.). I personally think there is a balance and depending on your income earning potential and the cost-of-living of your area, you should definitely take an inventory of your daily spending to find out where you can cut back and save for your future self. Yes, I’m a fan of “The Latte Factor.”
The book continues and gives additional guidance on paying yourself first and then automating all of your finances including your bills. This is something I started doing about 5 years ago. Previously, I had may retirement automated (pay myself first), my tithe, and my house automated. Then, every month I would log in to pay all of the other monthly bills – cell phone, utilities, trash, etc. The biggest fear that I had was two fold:
- Push Payment – if I setup my checking account to push the monthly payment, how would I account for the bills that fluctuate such as my energy bill. In order to prevent not under paying that month’s bill, I would ensure that I set it to overpay. It was a number of months later when I noticed that I had overpaid my gas company by $400 and had a credit.
- Pull Payment – I had a small worry that I would be underfunded in my account if there was an anomaly in the bill I wasn’t expecting as I keep my balance pretty lean (you know, I try to invest most of my money). Plus, who likes others pulling money from your account. But, there was a bigger worry. I was most worried about a security breach at the company that it could create a compromise to my other identities. I overcame this by ensuring I use a password manager that keeps every website with a different and difficult password.
In the end, I decided to automate everything with 90 percent of my bills being pulled by the source company. I haven’t written a paper check for a bill in over ten years and I haven’t logged in to do an online check payment in over five years. It’s quite liberating. I generally spot check things every 4 to 6 months.
The book then covers the various traditional retirement accounts and brokerage firms with some guidelines on what to invest your money in (i.e. stocks vs bonds) and the strategy such as how much in an aggressive growth vs growth vs income classification based on your age — it’s called The Automatic Millionaire Investment Pyramid. The book also discusses the preparation to automate for a rainy day by creating an “emergency basket of cash” and three rules of the emergency money.
“Some people worry about change, while others prepare for it.”The Automatic Millionaire, David Bach, page 141
The book finishes up with a discussion to automate your way to a debt-free homeownership, a debt-free lifestyle, and making a difference with automatic tithing.
“We make a living by what we earn – we make a life by what we give.” – Winston ChurchillThe Automatic Millionaire, David Bach, page 211
“Becoming an Automatic Millionaire is not simply about accumulating wealth. It’s also about relieving stress and worries about the future – about putting yourself in a place that enables you to enjoy life now as well as in the future.”The Automatic Millionaire, David Bach, page 211
Overall I thought the book was a good book. Probably geared more for those that are early in their financial journey and need some high-level guidance on how to get on the right path. I appreciate and love the overall premise which is to automate your savings to ensure that you are well prepared for retirement. My main struggle (and I want to acknowledge that I’ve been on this path for 25 years) is that I didn’t feel an intensity about it. It is very sound advice but I’m wondering how many people will put it down and continue to do nothing.
“According to the American Savings Education Council, 57 percent of all American workers have less than $25,000 in savings.”The Automatic Millionaire, David Bach, page 2
I would recommend this book (it will be tough for me to not recommend any book unless I felt the advice was completely wrong). I wouldn’t put it on my MUST READ list.