I know what you’re thinking, ‘The Automatic Millionaire? This must be some kind of scam or one of those get rich quick schemes!’ Please do not judge this book by its cover. It is all about taking the slow and steady approach to wealth by automating your personal finances so you don’t have to worry. My older brother gave this to me as a gift and it is one of the best gifts I have been given. The Automatic Millionaire is the first personal finance book I read and its principles have set me up very well financially from a young age.
Written by David Bach, an entrepreneur and financial author, The Automatic Millionaire is aimed at those who are trying to build their savings, those who want to retire early, those who do not want to continue living paycheck to paycheck. It contains lessons that can be learnt and implemented at any age.
Chapter 1 introduces you to a couple referred to as the automatic millionaires. They are in their fifties and have always earned an average income. They describe how by taking the slow and steady approach they have been able to pay off their mortgage, own a rental property and retire in their fifties. Many people think it is impossible for them to be in this position, however this chapter is eye opening and shows you how this is within your reach. The following chapters explain in detail how the automatic millionaires came to be in such a fantastic financial position.
Chapter 2, ‘The latte factor’, puts into perspective how much buying that latte from Starbucks every morning actually costs you over the year. Even if you don’t drink coffee, most people have an expense similar to ‘the latte factor ‘, this could be cigarettes, bottled water or alcohol just to name a few. The chapter provides an example of how you can be half a million pounds better off after a few decades if you were to invest this money instead. The average annual return on interest used by David Bach is 10%, I think this is a little optimistic, but even with a more realistic return of 6-7% the value of investment will still be substantial. It’s also explains the value of compound interest, the earlier you start, the less you need to invest to meet your goal.
Chapter 3 teaches how to pay yourself first. The theory is that budgets don’t work because people are trying to save after paying all their expenses. However The Automatic Millionaire flips this idea on its head and suggests saving first (i.e. paying yourself) before all expenses. Primarily the reason most people work is for themselves and their family, so why not pay yourself first? Even before the taxman, pay yourself by paying into a pension. When you pay yourself first you have no choice but to spend less than you earn. I think this is a great way of thinking about your finances, it’s about putting you and your family first.
Chapter 4 is about automating your finances. Whether you pay yourself by paying into a company pension or by paying from your own account into an investment account, you should make it automatic. This way you will not have to think about it, set it up once and that’s it, the money is out of sight and out of mind so you can’t accidentally spend it and go over budget. David Bach also briefly touches on general asset allocation, inducing cash, bonds and equity. You can get a starting point of asset allocation and a general understanding from this book but it doesn’t provide a depth of knowledge.
Chapter 5 emphasises the importance of a rainy day fund. David Bach suggests that a rainy day fund should cover three months expenses as a minimum. But does go on to suggest your rainy day fund should be as much as you need to sleep well at night. I would completely agree with this, ultimately this book is about setting up your personal finances so you don’t have to continually think and worry about them, so even if you need twelve months expenses to sleep well at night, then aim for that. The Automatic Millionaire also provides a suggestion of having a lower rainy day fund for those that are in debt because the interest you’re paying on debt is no doubt higher than your return on savings.
Chapter 6 talks about the benefits of having debt free home ownership, property can be a great investment. This is difficult for many people in today’s housing market, but perhaps by thinking like an automatic millionaire this goal could be brought into reach? The main benefit is saving or even investing the money you would have otherwise used for mortgage payments. By paying every two weeks rather than every month you can bring this debt free home ownership date forward and avoid paying thousands of pounds in interest. However, with current interest rates at rock bottom I think it is worth considering investing money rather than paying off your residential mortgage.
In chapter 7 David Bach talks about leading a debt free lifestyle and the real cost of credit cards. The interest on credit card can add up to a substantial amount if they are not paid in full each month. The Automatic Millionaire provides steps you can take towards paying off your debt.
Chapter 8: There is more to life than money. I really like that David Bach ends the book with this chapter. Money will improve your life but not necessarily give your life meaning. David Bach suggests giving a small percentage of your income to charity, not only does this help others, but it feels great to give.
I would recommend The Automatic Millionaire to people that are new to personal finance and especially to those that are living pay check to pay check. Give it as a gift to a younger relative so they start out on the right foot. The Automatic Millionaire is very easy to read and can be read over a weekend. It explains concepts such as compound interest in a very easy to understand format. It can change your way of thinking and emphasises how you are doing this for you and your family.