During Continuing Financial Education week each year I mostly review books that are new in the last year or so. Today I thought I'd step back and review a classic. David Bach gave the keynote speech at FinCon (and provided all the participants with a copy of his best-selling The Automatic Millionaire) this year, which reminded me about how awesome this book is. I've mentioned it before, in fact within the first month of this blog, and also have it listed on my list of recommended books, but I've never actually reviewed it on the site. I'd like to do that today.
The Automatic Millionaire was originally published in 2004, but I'm reviewing the “Anniversary Edition” published in 2016. It had already sold > $1 Million copies of the original and now it is updated and lengthened a bit. It is subtitled “A Powerful One-Step Plan to Live and Finish Rich.” In the introduction, he outlines his premise:
What if I told you that in just an hour or two that I could share with you a system that would slowly but surely transform you into a millionaire? What if I told you it was a proven system that you could set up in just an hour or two that would require no budget, no discipline, less than ten dollars a day of investment, and could be done over the phone or online, from the comfort of your home?
He outlines his philosophy later in the introduction:
- You don't have to make a lot of money to be rich.
- You don't need discipline.
- You don't need to be “your own boss.” (Yes, you can still get rich being an employee.)
- By using what I call “The Latte Factor,” you can build a fortune on a few dollars a day.
- The rich get rich (and stay that way) because they pay themselves first.
- Homeowners get rich; renters get poor. (Yes, this is still true.)
- Above all, you need an “automatic system” so you can't fail.
While I have nits to pick with nearly every part of his philosophy, his major contribution to the personal finance world is the automation of the process. The “Latte Factor” is so well-known that Bach has trademarked the phrase!
The Latte Factor
Bach introduces the philosophy in the first chapter, then in the second chapter moves on to his big idea- The Latte Factor. The idea behind the Latte Factor is that if we would quit spending just a little bit of money each day, such as the amount you spend on a Latte, that you can invest that money. Small amounts of money invested regularly and grown through the “magic” of compound interest add up to a lot of money over time.
I love the idea of watching what you spend. I totally agree that the less you spend, the more you'll have to invest. This chapter is REALLY about the fact that “defense” (what you spend) matters more than “offense” (what you earn.) No argument there.
I do have a beef with the Latte Factor though. My beef with it is that we only have a limited amount of willpower. If you use it up refusing yourself $5 purchases multiple times a day, you can't use it on the stuff that really matters- what I like to call The Big Rocks- housing, transportation, education, and vacation. If you'll drive a Camry instead of a Tesla, you can buy yourself a latte every day for a decade and still come out ahead.
But the general premise, that if you can exercise your financial muscles so you're spending deliberately only on those things that genuinely make you happier, is certainly true. Bach puts it this way:
Before we get into the details of The Latte Factor and the power it can have in your life, it's important that you understand one thing. In order to become an Automatic Millionaire, you've got to accept the idea that regardless of the size of your paycheck, you probably already make enough money to become rich. I can't stress enough the importance of believing this.
Pay Yourself First
The third chapter is great and is all about a technique that many White Coat Investors use. Since we got married, my wife and I have always had a monthly budget meeting where we discuss our spending plan and cash flow. But I've run into a ton of you that are very financially successful without ever doing this. How can that be? It's because you simply save off the top. You carve out a portion of your earnings and put it toward your retirement accounts and other investments, then spend the less. No need to budget! Pretty sweet huh. In this chapter, Bach spends 22 pages convincing you that this paragraph actually works.
Making Things Automatic
The remainder of the book is where Bach's contributions really excel. In chapter four, David teaches you how to invest automatically. In chapter five, he teaches you how to save up an emergency fund automatically. In chapter six, he teaches you how to pay off your house automatically (using a biweekly payment system so you make an extra monthly payment each year.) In chapter seven, he teaches you how to get out of debt automatically (like Dave Ramsey he basically advocates paying off the smallest debt first, although he makes you do a little more math before you realize that due to his DOLP system.) In chapter eight he teaches you how to pay tithing automatically. (He has a pretty broad definition of tithing- pretty much any charitable contribution.)
In the final chapters, he basically tells you to do this:
- Take your investments off the top, spend the rest.
- Direct deposit your paycheck.
- Build an emergency fund either with payroll deduction or automatic transfer
- Build a dream fund (or vacation fund) the same way.
- Put your credit cards on auto-payment on the same day each month.
- Pay all your bills automatically.
- Fund your charity of choice through small, regular, automatic transfers.
That's not so hard, is it? The strengths of the book are a clear, straightforward path to success. The stories of his clients are also incredibly inspiring. When you finish this book, becoming financially successful will seem easy and it's true- it really is that easy.
The weaknesses of the book come down to the nits in his philosophy. I've already discussed the Latte Factor issue. But Bach glosses over the fact that you are far more likely to become wealthy (and do it faster) on a high income and by owning stuff (like a business). It's not that the get-rich-slowly approach he advocates doesn't work. It does. But I would have liked to see some acknowledgment that there is another way. I would have also liked him to spend a little more time and effort on homeownership. After finishing his book, a financial novice would assume that buying is always better than renting, which just isn't true. Tons of Americans, including lots of doctors, have lost a lot of money due to picking up that belief from otherwise well-meaning people (like realtors and mortgage lenders.)
Overall, this classic book should be read by just about every investor, and as one of their first financial books. If you've read 10 financial books already, you can probably skip this one, but if you're just getting started in learning about this stuff, this is an undeniable classic.
Buy The Automatic Millionaire today!
What do you think? Have you read The Automatic Millionaire? What did you like or dislike about it? What are your thoughts on The Latte Factor? Comment below!