Book Review: The Automatic Millionaire
While on a Christmas vacation at a family member’s house, I noticed The Automatic Millionaire (2003 - by David Bach) sitting on a shelf. I had heard of it before, so I decided to give it a read. Here are my thoughts:
(2003 - by David Bach) sitting on a shelf. I had heard of it before, so I decided to give it a read. Here are my thoughts:Some main points from the book:
- Make saving automatic (pay yourself first)
- No budgets necessary
- Eliminate wasteful spending (Latte factor)
- Rich people buy houses - poor people rent
The Good
The basic premise of the book is sound: to build wealth, invest a certain percentage of your paycheck before it arrives in your bank account. By investing automatically, you eliminate the possibility (and temptation) of spending the money on other purposes.
To make saving “automatic”, he advocates designating at least 10% of your pre-tax income to a retirement account such as a 401(k) or 403(b). Most people tend to only take 4-6% automatically from their paychecks (if they do so at all!), so the idea is that you won’t miss the extra monthly contribution. Over time, the extra amount will compound into a significantly higher nest egg than you would have had before. As long as you are not a complete idiot with the remainder of your money, no budgeting is necessary.
Naturally, you can set other tasks on autopilot, such as automatic monthly transfers to an on-line savings account.
Another valid point Bach emphasizes is to curb wasteful daily spending - also known as the “Latte Factor.” The idea here is simple - keep track of your daily spending for several days in a row and ask yourself if the items you buy are truly necessary. Do you really need a muffin and soda at ten o’clock every morning? Maybe you can bring a snack from home instead. The money that you save can be invested instead and will compound over time.
Becoming aware of the “Latte Factor” is similar to an idea I heard concerning weight loss. If you want to lose weight, start by writing down everything that you eat in a typical day. The results may surprise (and shame!) you. Instead of cutting excess weight, the “Latte Factor” is about cutting excess spending.
The Bad
Some of his advice is repetitive, full of fluff, or just plain stupid. For instance, while I agree that having a mortgage can be a good investment, the recent catastrophic explosion of the housing bubble proves that real estate carries much more risk than Bach acknowledges (hey, it was written in 2003). As we are witnessing, the advice of mortgage = good, renting = bad does not necessarily hold water. I bought a home in early 2006 and am already worried about putting it on the market later this year.
Furthermore, while Bach rightfully advocates paying off a mortgage early, his main method of doing so is just silly. He is a big fan of automating bi-weekly mortgage payments with additional principle added to each payment. The problem here is that setting up such a process often costs somewhere between $300-600! To add insult to injury, many banks will allow you to split your monthly payment into two or more parts, but will only credit your account once a month! Who’s earning interest on that money in the meantime? Let me give you a hint: it’s not you.
A far simpler (and better!) way to pay off a mortgage faster is to make one payment a month, but contribute at least 1/12 extra cash as principle with each payment. By doing so, you will add at least one full extra mortgage payment per year, cutting years off the repayment schedule.
Final Thoughts
If you already have some financial chops, this book is a quick read. I have no formal education in finance beyond junior high economics class, yet I still polished this book off in roughly two hours. It reads more like one big blog entry (on a sixth-grade reading level) than a piece of sophisticated literature, which probably explains its “national bestseller” status. Original content is seriously lacking, and if you are an avid reader of personal finance websites and blogs, you can safely skip this book.
The Automatic Millionaire is not without merit, though. It would make an ideal gift for a young person just entering the workforce. If nothing else, it serves as a good reminder to re-assess one’s investment strategy and examine one’s daily spending. I’m just a poor grad student now, but when I start my first professional job later this year, I will start my pre-tax retirement allocation at 12% and (hopefully) try to work my way higher.
I have The Automatic Millionaire to thank for help with that decision.
Useful Links:
Does your pay disappear as soon as you as you get it? Solve potential bankruptcy problems with cheap credit card and cheap loan.
If you enjoyed this post, please consider leaving a comment or subscribing to the RSS feed and get future articles delivered to your feed reader.
Comments
No comments yet.
Leave a comment