How to become an Automatic Millionaire

As I mentioned in an earlier post, I’ve been enjoying quite a few audio books in the car this past month. In particular, I’ve been listening to audio versions of David Bach’s The Automatic Millionaire (TAM) and Smart Couples Finish Rich (SCFR).

I was hoping for some kind of major financial revelation in TAM, but what the four hours of anecdotes, catchy phrases, and motivational chatter amounted to were these simple points:

  • You don’t need to have a high income in order to become a millionaire by the time you retire. His example couple on disc 1 made only $53,000 a year combined, and they were retiring in their early 50s with two homes, two cars, and a boat all owned free and clear and more than enough in their savings and investments accounts to support them through their retirement years.
  • The reason most Americans aren’t millionaires isn’t how much or little they make, it is how much they (stupidly) spend.
  • If you can find a way to save (e.g. not spend/waste/squander) just $5-$10 dollars a day and put it in a retirement account, you can achieve this goal.
  • Ideally, you should put at least 10% of your gross income into a retirement account (401(K), traditional IRA, or Roth IRA) invested in growth stocks or mutual funds if you want to be self-sufficient/lower middle class when you retire.
  • Increase the amount to 20% or more if you want to bump your lifestyle up to upper middle class/affluent when you retire.
  • Pay yourself first (contribute to your retirement accounts before you do anything else)–always.
  • Stay out of credit card debt.
  • SAVE for even big purchases like vehicles and vacations and pay cash.
  • A home mortgage is the only acceptable form of personal debt (e.g. not related to growing or improving your business, which is not covered in this book).
  • Buy a house as soon as you can instead of throwing money away on rent.
  • Pay off your mortgage early by making one extra payment a year or switching to a bi-weekly payment schedule.
  • The key to succeeding is to automate as many aspects of your finances as possible, starting with a regular, systematic deposit into your 401(K) or IRA retirement account(s) and continuing all the way through your mortgage, bills, non-retirement investments, and regular savings.
  • Your Latte Factors are any regular, small, non-essential expenses or extravagances that eventually add up to much more money than you think. Examples given in the book are a morning grande latte and muffin from Starbucks ($5), protein bar and smoothie snack ($8), restaurant or take out lunch ($8), and two movie rentals in the evening ($5). That’s $26 a day. Multiply that by 20 working days a month. Faint when you realize you are squandering $520 a month ($6240 a year) that you could be putting into your retirement accounts.
  • Track every cent you spend for seven full days to discover your spendthrift Latte Factor if you believe you can’t possibly save $10 a day.

These are all very good points, but there was nothing new here for me. I love how-to books and classes that fire me up to take action, so it was kind of deflating to realize that I’d already done just about everything Bach was telling me to do and therefore had no immediate, financial-future-changing step to take. I didn’t even need to listen to the motivational/explanatory portions of the book meant to convince skeptical financial slackers that debt was bad and that this regular saving and investing stuff worked; Mommy Wang taught me this when I was oh, six years old and purchasing my very first savings bond with my carefully-hoarded birthday money.

The first of the two action steps I can still take is to cut back on credit card use even though I pay off my balance every month and switch over to using my debit card for most purchases. Of course, my propensity for buying things online makes this problematic because I do not like to have my debit card number, which links directly to my checking account, stored in some merchant’s remote database. If an error is made on a credit card purchase, I can always dispute it without any financial hardship or penalty. If an error is made on a debit card purchase, I am SOL when it comes to my checking account until things are cleared up.

The second action step I haven’t taken personally is purchasing my own home. The townhouse is in Chris’s name only, so my contribution to the mortgage payment is technically rent. I could pick up a property in my own name using my VA loan guaranty benefit pretty easily, but unless I rent it out, I can’t afford to chip in for the townhouse AND make payments on my own property, and Chris can’t afford to cover 100% of HIS mortgage on his own. With this step, I am in a holding pattern for now.

The information in the book may be old hat for me and most people reading this blog, but that doesn’t make it any less valid. Just because the steps Bach recommends seem painfully obvious and, well, “been there, doing that already” to me doesn’t mean that everyone will see it in the same way. I know many, many people my own age and younger who could benefit from listening to this audio book on the way to work. The only problem is that, like getting into physical shape, the desire to get into financial shape has to come from within.

10 thoughts on “How to become an Automatic Millionaire

  1. About the credit card usage – We have learned an interesting lesson with that. When we first got married, we ended up with a lot of debt, which we subsequently got out of by working our butts off and closing all the accounts, except one for emergencies. But here is the thing – we ended up having problems after a few years with big purchases (like buying a house) because they actually LOWER your credit score if you don’t carry a balance now and then and pay it off on time. Always paying off your credit card when it comes due does help a little – but after a bit of time it actually lowers your credit score.

    This is NO biggie if you are already in a house, and aren’t planning on buying a big expensive car – but if you aren’t, carrying a $20 balance here or there is actually something you have to do. But even if you are paying on a mortgage – without the credit debt and timely payment, they will lower your score.

    This, of course, is something that makes me SO mad. :mad2: It’s extortion in my opinion. You must PAY for good credit? What a load of…… 👿 But, it is true. It’s something you should be aware of. That you will be penalized for being a TRULY responsible consumer. *sigh* But it’s only something you have to worry about if you are planning a big purchase.

    Fortunately, you only need a tiny bit of “debt” to do that, but… grrr.

  2. Kyra, don’t you think that closing all of the credit accounts except for the emergency card hurt your score more than not carrying a balance? When you did that, you essentially cut your available (but untapped) credit by thousands of dollars (the credit bureaus compare total credit limits against percentage of usage) and truncated the length of your credit history, and these are both factors that affects your credit score.

    I have two or three credit cards I never use anymore, but since I’ve had the accounts since I was 18 or so, have managed to qualify for high limits on them, and keep them in good standing, I just put the cards in my lockbox and allow my lengthy history with them to boost my credit score. I *could* charge up $50,000+, but I rarely go over $250 split between two cards each period….which I pay off completely monthly.

    :whistle:

  3. This is exactly the kind of thinking that reeks of “middle class employee”. This cannot make you rich. Of course, unless you want to aspire to be only “middle class”, then you should do this.

    Just to clear a few things up:

    1) Owning a home is not an “asset” when you first buy it. Okay, actually it is… for the bank. They are the only ones making money on your house is the bank. The “owner” is continuously pouring money into it year after year for something they are not going to “own” until the future. Also, an asset is something that puts money in your pocket, not something that costs money to run. Funny how the bank neglects to tell you this. But full home ownership is a very necessary step to acheiving financial freedom.

    2) Home ownership is not the only acceptable form of debt. Acceptable forms of debt are those that help you get rich. Like taking out a loan to grow your business… such as adding another factory or franchise so you can increase your profit margin. Then again, businesses in that position are usually transitioned to an LLC, not sole proprietership. You should probably re-word to say home and business/investment debt is the only acceptable form of “personal” debt.

    3) It seems like this “savings” advice is the same model pitched to babyboom folks who are expecting the government payout and pensions every month when they retire. Financial advisors are saying that baby boomers need at least $2 million to maintain a low key & easy life style after retirement. I don’t know if that is sane advise for us younger folk as we all know we’d better not plan to receive any government paychecks in our old age. If $2 million is what baby boomers need now, think of the money we are going to need to save for ourselves when the time comes. So what I am thinking is…

    4) Savings worked for the baby boom generation because they saved when wages moreor less kept up with inflation. Right now it’s not looking so good for is if we try to do that. We can’t successfully use that “savings model” because we can’t save fast enough to keep up with inflation if things continue to go the way they are now. We really need to start thinking about real investments too. Investment can be risky, but being unprepared is even riskier.

    5) A great book that got me thinking was “Rich Dad Poor Dad” by Robert Kiyosaki. He has other books in his series that I absolutely love too. he is a New York Times Best Seller and has been so for the past seven years.

  4. Sorry if my first post seems a bit incoherent. The ideas are there, but it has been a very late night for me. Happy Cinco De Mayo folks!!!:wiz:

  5. Phyllis – I’ve read Rich Dad, Poor Dad, too, and I do remember the author’s thoughts on what an “asset” truly is–and houses, boats, and cars do not count unless, of course, they are investment properties that you are renting out at a profit! 😉 My thought on home ownership is that it’s a good thing to strive for because a paid off home means you will always have somewhere to live and your money isn’t just disappearing into someone else’s pocket, but I will never count a home as part of my net worth unless/until I sell it.

    I believe that Bach’s “Automatic Millionaire” plan is a good baseline for everyone to follow. It is the bare minimum that we should all be doing in order to secure a comfortable, if not extravagant, independent lifestyle at retirement. And, to be fair, he does specifically recommend putting the 10-20% reserved for retirement savings into a tax-deferred retirement vehicle like a 401(K) or IRA and investing the money in mutual funds–again, nothing new to most adults with even an iota of financial knowledge. According to Bach, only the emergency rainy day fund money should go into a regular savings or money market checking account. Everything else should be invested in riskier but more potentially profitable investments.

    “You should probably re-word to say home and business/investment debt is the only acceptable form of “personal” debt.”

    Done. Good point! Bach didn’t really go into non-retirement investments or business ownership in the audio book since it is geared more towards getting the complete newbie to personal finance to set up the bare minimum needed for retirement, but I agree with you on this.

  6. Maggie, actually, no. We had a fantastic credit score regardless of closing all but one account. And we were fine and went on that way for several years. It was after about 6 years and we went ot refinance, that the score had dropped and the reason was never carrying a single balance. Not a dime. It was the credit bureau who informed us of the “problem” and explained that credit companies don’t WANT people who pay things OFF, just on time. They LOSE money on the people who pay things off, and it lowers our score.

  7. Don’t rule out modeling photoshoots. Lots of money to be made from that.

    75:1766

  8. The point of eliminating your debt is good, however closing all of the accounts will hurt your score. But having debt especially revolving credit card debt is such a hinderence on building wealth and becoming a millionaire.

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