David Bach has created a cottage industry out of conventional financial planning wisdom artfully packaged.  The Automatic Millionaire is the core of that pursuit, a practical, simple, conventional guide to financial planning wrapped around the concept of “automaticity.”  Essentially, Bach points out that you can become a millionaire by incorporating automatic deductions from your income into savings and 401k accounts, which, by the magic of compound interest, will grow over your lifetime into a decent nest egg.

How do you accomplish this? Well, Bach makes it seem easy, but essentially you need to adopt frugality as your core value: save instead of spend, and do without.  It’s not exciting, but it’s obviously effective so long as you don’t read the book after already running up $25,000 in credit card debt.  The key points of the book are as follows:

• It doesn’t take a lot of money to be rich, just a little money saved every week for a looooong period of time.
• Pay yourself first, the familiar advice that you need the discipline (Bach downplays the difficulty of this) to take a portion of your income and direct it to savings.  The automatic aspect of this is Bach’s focus, the idea that it is easier to do this if you set up automatic diversions of a portion of your bi-weekly paycheck to your savings or investment accounts.  He argues that you’ll get used to the diversion, and learn to live within the means of what you have left.
• Own your own house, and pay down the mortgage as quickly as possible to free up more money to eventually save (he advocates paying your mortgage every two weeks rather than once a month, to get an extra payment in every year).
• Incorporate the “Latte Factor” (a registered trademark, no less!) into your life, the idea that going without a $4 coffee every day can ultimately be a huge financial savings (i.e., $4 a day, times 365 days a year, is $1500 a year saved, over 30 years with compound interest is something like a gazillion dollars…).

The key insight, and main focus, of the book is the need for an automatic system of taking money out of your paycheck into your investment or savings account before you can touch it.  Bach argues that you don’t need discipline to save if the money is taken out of your paycheck automatically.  He further persuasively argued that time spent on budgeting is a waste, because most people can’t stick to it.  Rather than budget, set up a system so you never get your sweaty, greedy hands on your own money, but instead have it diverted to savings or investment to build your retirement accounts.  As Bach says, “Automation plus compound interest equals serious wealth.”

Another helpful part of the book is the explanation of the “rainy day fund,” the amount of money you put away to cover monthly expenses in the event that your family has no income coming in for an extended period.  Bach advocates figuring the amount you’re comfortable with on your own, by figuring out how much you need every month to maintain your lifestyle, and then figuring out how much you need in a money market reserve account to cover at least three, and preferably as much as twelve, months of expenses.

Bach’s book is a very good articulation of the “frugality” approach to financial planning, wrapped around the appealing notion of automaticity.  It’s also a good introduction to the various retirement savings vehicles that are available (IRAs, etc.), and the extent to which a reader is a novice to financial planning the book helpfully demystifies a lot of the concepts and provides phone numbers and links to other resources.

Takeaway

Real estate agents are not generally good budgeters or financial planners, and this is a great book for providing a foundation of sound financial planning.  The basic idea: don’t set a budget, but keep some of your money from getting to you so that you don’t spend it.  The other basic idea: buy a house, live it in for a long time, and pay it off.  That’s a pretty good message for us, and our clients.