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The Automatic Millionaire

I just finished the book, The Automatic Millionaire, by David Bach. This is a great book for everyone to read. If we readers actually do what the book suggests, we would all be able to retire in a much more comfortable financial position.

Here are the big ideas from the book.

  1. The only way to improve your financial security is to arrange to automatically save 10-15% of your income before you even have a chance to spend it.
  2. Automate as much of this process as you can.

Save small amounts regularly

Saving small amounts regularly is all you need to become an automatic millionaire.

If you save just $10 a day, and add the interest of 10% annually, in 30 years you would have almost $700,000. In 40 years, that number could be over two million dollars! David Bach argues this is little more than the price of a latte.

Pay yourself first => Automatically

The goal is to put 10-20% into savings automatically before you see it. You cannot spend what you don't see. (This is what the government does for taxes.)

Remember, the rich get rich (and stay that way) because they pay themselves first.

Do this by setting up automatic payments to your savings accounts.

Prefer saving in a tax advantaged account

If you take advantage of a pre-tax retirement fund (like a 401k, 403b, SEP) or a tax advantaged account (like a Roth), and automate the process of this step of paying yourself first, then you will likely grow your money and savings even more!

Pre-tax Version Post-tax version
Wages 70000 70000
Retirement Savings 6500 6500
Taxable wages 63500 70000
Tax rate (15%) 9525 10500
Take Home 53975 53000

Over 30 years, the extra $975 (with 5% growth) = $64,777.88 in additional savings just by using a pre-tax retirement fund!

Fund your “rainy day” emergency account => Automatically

Set up an emergency savings savings fund. The goal is to have 3-9 months of savings that you can live on if you need it. Once you have your emergency savings, don't touch it!

I have heard the advice to only tap into your emergency savings fund if the need meets all 3 of the following criteria:

Fill your emergency savings fund automatically. Have your bank transfer a percentage or amount monthly with every check until it is full.

Put your money in the right places

Don’t just automate how much you want to save, but send it straight to the right places.

For example, here’s how you could allocate 10% of your income each month:

Become a homeowner and pay it off Automatically

Own the place you live. Renting is more expensive in the long run. Invest in homeownership

Homeowners get rich, renters stay poor

Pay off your mortgage by using biweekly payments (or pay extra 10% monthly)

The other option is to add 10% to your monthly payment towards principle, which, mathematically, should be about the same.

Separately, the advice I have heard about home purchasing is to:

Pay all your debts => Automatically

Pay all your monthly bills and credit cards automatically. Pay off your debts as fast as you can. Try not to carry debt.

Give to charity => Automatically

Set up an automatic charity account today to start feeling rich. The act of giving leads to the feelings of happiness and meaningfulness.


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