I recently read a book called The Automatic Millionaire by David Bach. This book wasn’t written to tell you some secret way to instantly make a million dollars. Instead, a way that you can slowly make yourself a millionaire over time. Bach says this is done by “paying yourself first.”
What it means to pay yourself first
“Paying yourself first means just what it says. When you earn a dollar, the first person you pay is you. Most people don’t do this. When most people earn a dollar, the first person they pay is Uncle Sam.” Bach goes on to say that you should take full advantage of pre-tax retirement accounts to pay yourself first. He says a good benchmark to save is between 10-15% of your gross income. Of course the more the better. Most pre-tax retirement accounts have maximum yearly contributions so if you can max your account out that would be ideal. Or you can start building your own Dividend Portfolio. Paying yourself first is really like funding your future. And the sooner you start the less worries you will have in retirement. Let your money start working for you by paying yourself first.
“The problem is not how much we earn…. It’s how much we spend!” The latte factor was created when Bach was teaching an investment course. Someone in the class said it would be impossible for them to save five to ten dollars a day. Bach went through her normal work day with her and the class and discovered that she spent roughly $5 per day on a latte and a muffin. And that she also spent roughly $6 per day on her lunch. Bach did some quick math and figured if she put just $5 a day into a retirement account until she was 65 (she was 23 at the time) she would have roughly 1.7 million dollars in her account. She exclaimed, “MY LATTES ARE COSTING ME NEARLY TWO MILLION DOLLARS!” Thus, the latte factor was born. In this case, it was a latte every day but it can be applied to anything. Saving just 5 to 10 dollars a day and investing it can make you a millionaire down the road.
What’s automatic about it?
Bach claims that almost everyone that he’s ever advised hasn’t been able to commit to manually investing their money for any extended period of time. There was an exception but he says it was extremely rare. Bach says you need to setup an automatic withdrawal from your paycheck and you will learn to live without the extra money. He also advises to start small and slowly take more out of your paychecks as you get more comfortable. But to make it automatic! So you no longer have to think about it. You set it up one time and then leave it or increase the amount.
I think many of you are already doing the things talked about in this book as I was prior to reading this book. I think it was still a book worth reading. It further enforces concepts crucial to early retirement and wealth. I would recommend this book to anyone who is planning for their financial future and I would highly recommend this book to someone who is new to the early retirement world.