"The Automatic Millionaire" (Conclusion)

The last section of David Bach's book is brief, but, in my mind, it is a solid conclusion. Entitled "Your Journey Begins Today!" this section simply gives a "pep talk" to those who might have read the book and thought, "That works for some folks, but not for me."

Bach takes a moment to remind the reader of the most important step to any financial plan: "You just need to start" (226). How true that is! For the rest of this short section (it is only four pages), Bach reminds the reader of the different chapters and asks you to re-read whichever will get you going (or going again).

For me, the best part of this book is the opening story, about the McIntyres. It's one of those "if they can do it, I can, too" type of stories.

Buy or Don't Buy: My Recommendation

I have read Automatic Millionaire cover-to-cover on more than one occasion. I am glad I own the book and it is helpful.

My personal feeling is that someone just starting out needs to read Dave Ramsey's Total Money Makeover first. For my money, that book is more practical and helpful.

That being said, if you have read Ramsey's book and still need a little encouragement, The Automatic Millionaire can deliver. You will obviously find some differences in the books, but you will also find help in both.

So, my recommendation is to buy Dave's book first, but make sure you add Bach's book to your library eventually.

"The Automatic Millionaire" (Chapter 8)

If you have followed this series on David Bach's book, you have noticed that now, just about everything is "taken care of" financially. All debt payments, the mortgage, retirement--it's all being automatically drawn either directly from the paycheck or from the checking account.

However, in this last chapter, Bach addresses one more aspect of life that is a financial decision: giving back.

When I first saw the title for this chapter, I was a bit upset. It is "Make a Difference with Automatic Tithing." While this is another discussion, I don't believe in tithing. I believe in giving. I believe we are under New Testament obligation to give, but that we are not told to give a specific amount. Also, I had trouble with the idea of making my giving "automatic." Bach goes so far as to say that your tithe should be automatically deducted from your paycheck, just like the mortgage.

While I still don't agree with all the aspects of this chapter, after some consideration, I turned around a little. Why? Because Bach is writing a book "for the masses," and he still makes giving a priority.

Admittedly, he speaks of giving to a charitable organization or church (and he leans towards charities), but, still, Bach helps us understand that giving is an essential part of any financial plan. He ends the chapter by reminding the reader that some of the wealthiest people of all time gave, and did so before they could really afford to give!

My recommendation is to give, but don't "automate" the process. Take each week and think of how the Lord has prospered you. Give accordingly.

While I don't agree with the entire chapter, there is still quite a lot of worthy information if you are interested in giving money to a specific charity. Bach takes a brisk look at different ways to accomplish this worthwhile goal.

"The Automatic Millionaire" (Chapter Seven)

In this, the shortest "action" chapter of David Bach's book, the author simply gives some tips on how to use your new automatic system to get out of debt and then stay that way. Getting and/or staying out of debt is a major step in becoming a millionaire. As you know, if you don't have to pay Mastercard, Visa, and other cards, you have freed up money each month, and you are not paying interest.

How do I get out of debt? Bach offers five steps, but, before doing that, he reminds us all of how bad credit card debt really is. If you are like the typical American family, you have $8,400 in credit card debt (and only credit card debt!). If you pay just the minimum and never charge another thing, you will pay over $20,000, and you will be paying it off for over 30 years! (pages 195-196)

With those things, in mind, how do I pay off those cards quickly? Here are Bach's five steps:

1. Stop Digging. It's pretty simple when you think about it. If you don't have credit cards, you won't build up debt on them! Dave Ramsey recommends cutting up your cards (which I did a long time ago). Bach never makes a statement quite that bold, but he does recommend that you never go shopping with a credit card in your pocket.

2. Renegotiate the Interest on Your Debt. A lot of people don't even realize you can do this. Check the fine print to find out how much interest you are really paying, then simply call the company and ask for a lower rate. If they act like they won't do it, tell them you will be closing the account and moving (transferring) the money elsewhere. If they won't go lower, ask to speak to a supervisor. If that person won't go lower, transfer the money. Another way to accomplish this, is to move all your debt to one card (or account, since, hopefully you'll get rid of the actual card). Many companies will take a higher amount and give you a lower rate.

3. Pay for the Past; Pay for the Future. Here is where I disagree with Bach. He says that you should continue to put money into retirement and pay off the debt. He says that you will see progress in both areas and that will be a great motivating factor. I disagree. I would rather get rid of the debt as quickly as I possibly can. Either way works, as long as you stay focused.

4. DOLP Your Debt Our of Existence. "DOLP" stands for "Dead on Last Payment." This is basically the same idea as Ramsey's Debt Snowball, but is a much more math-intensive way of doing it. Here are the steps (quoted from page 206):

• Make a list of the current outstanding balances on each of your credit card accounts.


• Divide each balance by the minimum payments that particular card company wants from you. The result is that account's DOLP number. For example, say your outstanding Visa balance is $500 and the minimum payment is $50. Dividing the total debt ($500) by the minimum payment ($50) gives you a DOLP number of 10.


• Once you've figured out the DOLP number for each account, rank them in reverse order, putting the account with the lowest DOLP number first, the one with the second lowest number second, and so on. [Page 206 has a table that shows you small example; using three credit/charge cards.]

5. Now Make It Automatic! You knew this was coming, didn't you? Automatically pay your debts from your paycheck (or checking account) until the debt is gone. When it is gone, call that company and close the account completely, then automatically pay off the next debt, paying all you can each month to get it gone (including the money you were sending into the first debt).

Now, you are debt free, your house is being paid off quickly and you have money going into retirement. There is still one more step, though.

"The Automatic Millionaire" (Chapter Six)

Poor people rent, while rich people own their home. In fact,

According to one survey of consumer finance published by the Federal Reserve in January 2000, the average net worth of renters was $4,200 vs. $132,000 for homeowners. In other words, homeowners were more than 31 times richer than renters! (page 160)

No doubt you have been told that before. It is true, at least to a certain extent. Rich people aren't rich because they have a house payment for thirty years. They also didn't get rich with a massive mortgage on a huge house they really could not afford.

The next step in David Bach's plan is to automatically pay off your house. How do you do that? It's not as hard as it may sound, if you follow Bach's plan. There are really just two steps!

1. Buy a house, but buy a house you can afford. From pages 162-165, Bach lists 6 reasons to own a house. These six reasons are worth your time. Bach then takes the time to walk the reader through different kinds of loans and companies that can help you understand more about this massive purchase.

Also in this section, Bach discusses the question, "How much can I afford." While the numbers are a bit odd, he says that a person can afford to spend up to 29% of their income if they have debt (unless the debt is out of control), and up to 41% if there is no debt. Personally, I think both of these are a bit high. I am not comfortable paying more than 25% of my income for a house, because there will always be other costs!

Unlike Dave Ramsey, who recommends getting a 15-year fixed mortgage, Bach says it is okay to get a 30-year mortgage. BUT, only if...

2. Pay off the mortgage quickly and automatically. How do you accomplish that? There are three ways that Bach recommends, all of which equal about the same thing:

First, you can enroll in a bi-weekly payment plan. In other words, you will pay on your mortgage every two weeks instead of each month. How does that help? Run the math. There are 52 weeks in a year, so you make 26 payments. That equals thirteen months!

Second, if your company does not offer bi-weekly payment, you can just send in an extra payment at the end of the year, and ask the company to apply the entire payment to the principle amount of the mortgage.

Third, you can pay "extra" on your mortgage. If you do this, Bach recommends paying 10% extra each month.

No matter which of these you choose, Bach recommends you do them automatically if possible. Once you have paid a bit extra for 3 or 4 months, you will no longer "miss" the money.

Finally, how much of a difference does this make? A house, when purchased correctly, is a great investment, but keeping the mortgage for three decades greatly hinders that investment. Paying just a small bit extra can save you tens-of-thousands of dollars over time! By way of example, Bach uses a $250,000 mortgage. If you paid for 30 years at 8% you would pay $410,388.12 in interest alone! However, if you paid every 2 weeks and had the same terms on your mortgage (30 years at 8%), you would pay $119,000 LESS!

Owning a house, when you are financially ready, is a great decision, but having the mortgage around forever is a terrible idea. Follow these steps and you can greatly help yourself truly OWN your home more quickly.

"The Automatic Millionaire" (Chapter 5)

NOTE: I'm sorry it's been so long since our last update in this series. I really don't have any excuse for the delay, and I apologize.

Chapter five of David Bach's book is entitled "Automate for a Rainy Day." As you might expect, this chapter deals with building an emergency--or "rainy day"--fund. The chapter even contains a purpose statement: "This chapter answers two basic questions: How much money should you put aside in order to protect yourself from the proverbial 'rainy day,' and where should you put it?" (pages 135-136).

Nearly every financial planning book contains this step, because, no matter how much planning we do, things go wrong. There are emergencies. Sadly, these emergencies often sidetrack people's financial goals and lead them back into, or further into, debt. If we have a plan, though, we can avoid such a serious setback.

Bach, as Dave Ramsey does, uses "months" instead of "dollars" to figure out a rainy day fund. On page 136, he writes a short "sleep well at night" test. Here it is:

My monthly expenses currently total $_________.
I currently have $___________ saved in a money market or checking account.
This equals _______ [insert number] months' worth of expenses.

The numbers can be estimated, because most of us have a pretty good idea how much those are. Tragically, for many of us, the second number is $0!!!

The next step, after realizing that you need money to handle emergencies is to follow Bach's "Three Rules of Emergency Money."

1. Decide how big a cushion you need. Bach sets the minimum bar at 3 months' worth of expenses. He goes beyond Dave Ramsey by suggesting that some people may even need as much as two years' worth! The main thing is that it is enough (1) to cover a certain number of months, and (2) to help you sleep at night.

2. Don't touch it. Bach mentions that many people start saving their fund, only to have an "emergency" all the time! Notice what Bach says, which is worthy of reading and remembering:

What's a real emergency? Be honest with yourself. You know what a real emergency is. A real emergency is something that threatens your survival, not just your desire to be comfortable. (140)

3. Put it in the right place. While Bach doesn't think we should put the money in something like stocks or bonds (because it has to be liquid), he also points out (with a GREAT story, I might add) that we don't need to bury it in our backyard or stuff it under our mattress. You should earn at least some interest on this fund, because you need at least a small hedge against inflation.

Bach's suggestion is to "shop for a rate like you'd shop for a car" (143). His primary location for a rainy day fund is in a money market account, but some pay terrible interest and others have a lot of fees. If you are frugal, you will shop for a car very carefully, trying to get the best deal. The same should be true of a money market fund. Just a small percentage difference, over time, can pay off in a large way.

Over the next several pages, Bach walks the reader through the process of setting up an account and answers several important questions which are worthy of your reading. He even lists several places that have money market accounts that are fairly easy to use.

He then mentions using US Savings Bonds as a possibility. I disagree with him here. While buying bonds has become easier (you can do it online), they have a terrible rate of return and, in my mind, you are helping the government use debt!

Finally, Bach mentions the question, "What if I'm in debt?" In other words, if you aren't debt free, do you need to build up an emergency fund. Bach differs from Dave Ramsey here slightly, bu the principle is the same. Whereas Ramsey says you should start off with $1000 in your emergency fund, Bach says you should work toward building up one months' worth of expenses, then go back to paying off debt aggressively. To me, either is acceptable and both are reasonable.

Of course, Bach says over and over that you should automate the savings into this account. In other words, when you set up your rainy day account, make sure you set it up to automatically come out of your paycheck (or your checking account) at a specific time each month.

With these steps out of the way, Bach has you paying off your debt and building up your emergency fund at the same time. While that's not my favorite way of doing it, the benefits are there, if you can stick with the program.

"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.

"The Automatic Millionaire" (Chapter Three)

If you think the "Latte Factor" is used several times in David Bach's book, the principle introduced in chapter three is used even more. In many ways, this step in his "automatic" plan is the basis for everything else.

Now that you have found something (or several somethings) in your budget on which you "nickel and dime" yourself into the world of being broke, you can change that. Stop (or greatly curb) your spending on that item. Now you have freed up some money to pay down debt, and build wealth.

The key, according to Bach, though is not just to cut out those small expenditures, it's to make sure you "Pay Yourself First."

By "first," he means "first!" Even before the government. If you work for a company that will help you by putting money out of your paycheck where ever you tell them to, you can easily do this. Simply call or email those in charge of this and ask them to put a certain percentage of your check into a retirement account.

Notice that Bach recommends a percentage, not a specific amount. The reason is really quite simple. If you get a raise, the amount you are putting away for retirement goes up proportionately with that raise.

You may say, "I'm already in debt and living paycheck-to-paycheck! How can I possibly put even 1% into retirement." The answer is this: you have cut your spending by finding your latte factor. Now you can live on less. Also, after just a couple of weeks of doing this, you will be amazed at how you don't even miss the money.

Finally, Bach recommends putting away more than you think you can. Challenge yourself. If you think you can only put away 2%, make it 3 or 4. If you think you can do 5%, make it 7 or 8. Again, after a few weeks, you won't miss the money anyway. And you will be taking advantage of compound interest over time. Also, if your company matches your retirement, make sure you are putting at least the amount they match away. If you fail to do so, you will be missing out on "free" money!

MY TAKE: Obviously, this "order" of doing things is not the same that Dave Ramsey would recommend. We have not even starting getting out of debt (officially) yet. Bach believes in doing both at the same time so that you will see little victories in both categories. While I agree with Ramsey on this one, Bach does make an interesting argument.

The Automatic Millionaire (Chapter Two)

Most people believe that the secret to getting rich is all about finding new ways of increasing their income as quickly as possible. "If only I could make more money," they declare, "I'd be rich." (page 31)

Chapter two of David Bach's The Automatic Millionaire takes aim at our wallets; or, more precisely, how we spend what is in those wallets.

Maybe nothing from this book, or from Bach's entire system, is more famous than "The Latte Factor." Subtitled Becoming an Automatic Millionaire on Just a Few Dollars a Day, chapter two shows the reader how little decisions can cost us BIG when it comes to retirement.

Many times building wealth isn't about making more money; it's about avoiding spending what you already make. That's one of the reasons we have several articles on this blog about living a frugal life.

But, really, that $5 you spend on snacks every day isn't hurting you, is it?

To put it mildly, yes it is! If you saved $5 each day, instead of spending it on snacks (or cigarettes or coffee or whatever), and you invested it for 40 years, you would have around...

$1.2million!

Still enjoying that Starbucks latte?

The simple point is that, if we will make decisions about the small things in our lives, the big things will usually take care of themselves. If you find yourself thinking, "I don't have any money left over to pay off debts [or invest for retirement]," then you need to look at your budget and really think about your spending habits.

Do you insist on having name-brand clothes? Must you have the name brand food items from the grocery store on all items? Do you buy a soda and candy bar at break time? Do you have the largest "package" on your cable or satellite TV?

If you do any of these (or other similar things), you may be costing yourself a huge retirement.

Near the end of the chapter, the reader is taught to track his/her spending for a day (or a week). Track every penny. You may be surprised where your money actually goes. Even if you have a written budget, this is a worthwhile exercise. It helps you truly understand if you are sticking to that budget, or if the budget--or your spending--needs to be altered.

What is your latte factor? How can you change it, so you can pay off debts and retire comfortably?

"The Automatic Millionaire" (Chapter One)

What a fascinating way to start the book! We all like stories, and this one is interesting and told quite well. David Bach's first chapter, "Meeting the Automatic Millionaire," may not contain a lot of practical advice, but it is the best chapter in the book. While I have read the book 3 times, I have read chapter one probably 4 or 5 more.

The chapter is simply a story. It is the story about how David Bach got the ideas for his plan; and those ideas came from a couple that he never would have expected them from.

Mr. Bach was teaching financial classes, but was still living paycheck-to-paycheck. He was what Dave Ramsey calls, "A broke finance teacher." One afternoon, though, that all changed. Jim and Sue McIntyre came into his office--not for advice as he had thought--but, rather, to show David that if he would just apply what he taught, he'd be rich.

These two people, nearing retirement, didn't make a ton of money (combined around $50,000 average), but owned two six-figure homes free and clear and didn't owe a dime on anything. In fact, as David looked over their stuff, it came to his mind that these two normal Americans had a net worth of just under $2million!

The rest of the chapter simply tells what they did to achieve such amazing levels of financial success. I won't go into detail because it really principles became the ideas for each chapter of the book.

Suffice it to say, if these two normal folks can be wealthy on a regular salary, anyone can! As I said before, this chapter is my favorite, and it is so motivational. If you don't have the book, this chapter is worth the price of the book. It will help us "normal folks" want to do what the McIntyres did.

"The Automatic Millionarie" (Introduction)

For our third book review on this blog, we turn to another best-seller. David Bach's The Automatic Millionaire is an intriguing book that I have read more than once.

At the outset, I will tell you my biases, both for and against this book. You will probably notice that they will come up several times in this brief series.

First, the negative. I don't fully agree with Bach's strategy. While some of what he has to say is wonderful, and I will praise a couple of his principles several times, I don't like his lack of focus. I follow Dave Ramsey on this one: do one thing with total focus until it's done. Bach likes to divide our focus into more than one thing at times, and I don't like that.

The positive--besides the principles I like--is that the book is extremely readable and brief. I have read it three times, and actually read over half of the book in one day (without even reading all day) last year. It is one of the few financial books I enjoy reading.

Introduction

The book begins by promising to help in a practical way, and promises to do so in a short amount of time. Like many books, this volume does not give you "hot stock tips" or other such financial information. It, rather, changes our attitude about money.

After laying out some practical points ("You don't have to make a lot of money to be rich," for example--page 7), Bach gives is overriding theme, and the one for which the book is named:

If your financial plan is not automatic, you will fail! (7)

If you can remember that point, you will do well with this book. It comes up in every single chapter, and makes the book simple to understand.

The introduction is short, but it does grab the reader's attention. If you don't have a copy of The Automatic Millionaire, you may purchase it from the link below. While you may or may not agree with everything Bach says, the book is definitely worth the price of a used copy.