02: The Automatic Millionaire

The Automatic Millionaire

David Bach

The second book in the Investing Book Highlight series is The Automatic Millionaire by David Bach. For someone thinking about how to get started in saving and investing, this book informs you how to automate almost everything you need to do to put yourself on the path to becoming financially independent. The steps are addressed in a sensible order and there are some practical worksheets that allow the reader to concretely see how they are doing or what they can do. Bach states toward the end that, "having an automatic plan should not only change your future, it should also change your present." To that end, it can take some of the stress out of your life and make it more enjoyable.

The Automatic Millionaire via YouTube

TOP TEN JOTS

10. The fact is that very few of us are born to budget. Human beings don't want to be controlled. We want to be in control.

• Bach suggest that you don't try to put yourself on a strict budget instead instill in yourself that you are already making enough money to start saving and investing.
• If you start with the mindset that you already possess the ability to save and invest then you won't have to worry about spending within a budget.The responsibility shifts to you and thus you inherit the control. The caveat here is that it is easier said than done.

9. The emergency fund

• This fund unlike the Pay Yourself First fund is spendable but should only be spent  when something threatens your survival for instance your health or home.
• Bach recommends that at least 5 percent of your net pay be automatically deposited into this account until you have a cash cushion of three months worth of expenses. 
• In a 2019 article from Money magazine, the goal had been reduced to 6 weeks of net income but saving more is usually better.

8. Arrange to have a portion of your pay automatically taken out of your paycheck and put into an untouchable savings account.

• Bach suggest that a good rule of thumb is 10 percent but your goal should be 12.5 percent of your pre-tax pay.
• The untouchable savings account where you Pay Yourself First should be one that allows you to take the greatest tax and income benefit for you. This means that a regular bank savings account is not the place to park your money for the long term and Bach provides many alternatives.

7. The key to buying a home is owning it free and clear.

• Bach advises that owning a home gives you a sense of freedom and security by knowing that it, which is probably your greatest asset, is yours to keep.
• He also recommends that instead of paying your mortgage monthly, you try to pay half every two weeks since it can lead to a 30 year loan being paid off in 25 years if implemented at the start.
• The following partial table from Bach's The Automatic Millionaire illustrates the biweekly payment point.

6. Reduce your debt, especially credit card balances.

• Being in debt means that you are usually paying substantial interest on your balance if it isn't paid in full. This type of trickery makes the credit card company rich while you stay poor.
• Bach's prudent advice is that you split your Pay Yourself First money in half and use half to pay off your debt.
• Getting rid of excessive credit cards can be done with Bach's DOLP, which stands for Done On Last Payment, to insure that you cancel your credit cards and don't end up taking in new debt.

5. Set yourself up for success

• Like Clason's advice from The Richest Man in Babylon, it is important to plan and prepare to give yourself the highest probability of success in becoming an automatic millionaire. In Bach's view, having all your financial transactions become automated is the best way to have yourself get out of your way.

4. The more you give, the more comes back to you.

• Philosophical in nature, Bach implies that implementing tithing in a small role will benefit you tremendously by making you feel great about yourself. And who doesn't want to feel great about themselves.
• He also points out that "money often flows faster to those who give" which may mean that your accumulation of money will be quicker.

3. Diversify your investments

• The popular convention for asset allocation is buying into stocks and bonds. The younger you are the more stocks you can own since time is on your side and over the long run it usually has better returns than bonds. 
• With an increasing amount of low fee Mutual Funds and ETF (Exchange-Traded Funds) indexes available, making a choice is becoming more complicated but if you stick with a few that have a long successful track record then it increases your chances of beating the market returns. These fund indexes usually track a category of stocks such as the S&P 500, Utilities, Technology, etc.
• If you are comfortable and feel the need to invest into individual companies be sure to do as much research on it as if you were buying an expensive electronic item and not because you got a tip from a friend.

2. How much you earn has almost no bearing on whether or not you can build wealth.

• Contrary to what many people think, your spending habits have a greater influence than earning power for the increase of your wealth. People that make more money often spend more money so the savings that could be realized is not achieved.
• Bach's often noted anecdote is the Latte Factor. The trick to getting ahead is watching your small spending habits and then applying changes so that it can lead to you having extra money to put toward your Pay Yourself First fund.

1. The time value of money

• Time is your best friend when it comes to investing and can lead to significant differences in how much you end up with.
• Bach puts it succinctly "Over time, money compounds. Over a lot of time, money compounds dramatically."
• The following table from Bach's The Automatic Millionaire is all the proof you need.

What do you think of Bach's ideas? Please comment below. If you have already read it, please let me know which were the most important for you.