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Friday, November 16, 2007

"The Automatic Millionaire" (Chapter Four)

"Now make it automatic."

That's the overriding theme of this chapter, and the idea from which the book gets its name. David Bach is a firm believer in putting as many things on "autopilot" as possible. In fact, for the rest of the book, nearly every step includes the idea of making it automatic.

If you work for a company that will move money from your paycheck before you ever see it, get in touch with them and enroll in a 401(k) plan, but make it automatic! As we mentioned in the last chapter review, Bach also says that, whatever percentage you think you can put away, add one or two percent to it. After just a couple of weeks, you won't miss the money, anyway!

The chapter also contains a very easy-to-understand comparison of the traditional IRA (Individual Retirement Account) and the Roth IRA. As with most financial gurus, Bach teaches that, if at all possible, one should work in a Roth, but only after taking a company match in a 401(k) plan.

This quite lengthy chapter (it's 54 pages in length) also takes the time to show you the names and contact information for some companies that can help you get started with an IRA.

There is one major "plus" to this chapter. Bach takes quite a bit of time to share with the reader the importance of compound interest and of getting started as soon as possible. As you, no doubt, know, compound interest, over time can make thousands of dollars worth of difference if the same amount is invested. A chart on page 97 shows what investing just $100 per month will grow into. If you invested $100 at 10% for 20 years, you would have 76,570. However, if you invested that same $100 and only got 9%, but started 10 years earlier, you would have $184,447! That's almost twice as much, despite making less in interest!

I feel there is one major "minus" to the chapter, too. Bach is a firm believer in the "pyramid" way of investing. He says that, over time, one should move money from investment to investment, getting a little more "safe" (or conservative) as time goes by. For my money, I agree more with Dave Ramsey on this one. If you will take you time and do your research, you can keep your money in good stock mutual funds for your entire life and still be quite safe.

This chapter is long, but it is informative. While I feel that Bach gets off the subject just a bit (or, maybe, he just tries to explain too much about investing in one chapter) the overarching theme is still to pay for your retirement automatically. If you decide that you can write out checks every month, if you are like me, you will fail. "Something" (whatever that is) will "come up," and keep you from putting money away regularly. Save yourself from yourself and make it automatic.