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?
Philosophy The Automatic Millionaire
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.)
Automatic Millionaire
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.
Criticism of The Automatic Millionaire
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.)
Should You Read The Automatic Millionaire?
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!
I agree this is a great book. It’s biggest strength is teaching you that investing is really easy. Just get started and keep going. A small investment is better than no investment.
Man have you been reading a lot of books lately! Nice review. I was pretty impressed with Mr. Bach at FinCon.
His ideas are pretty sound, though basic to many of use. Disciplined, automatic investing is the key.
I wouldn’t assume I’ve been reading books a lot lately. I just lump most/all of my book reviews for the year into one week!
The psychologists call the limited amount of self control “ego depletion.” If I don’t eat chocolate all day, my willpower is like a muscle. It gets tired. Then, at the end of the day that muscle is tired and I give in and eat a lot of chocolate. Hence, I agree with your first beef regarding the latte factor. Savers might get depleted and give in to the large purchase they should not make. “The Power of Habit,” by Charles Duhigg is an excellent book that expounds upon this automatic philosophy. Habits, like automatic investment, are about as powerful as it gets. I wanted to share this book on this post because Jim has given me so many good reading suggestions. You would like this one. Try pre-paying your mortgage by $100 each month and see what happens?
I read The Automatic Millionaire some years ago. While I remember a favorable impression, if you asked me I would not have said it influenced me significantly. But perhaps to provide credit where it is due, a lot of my personal approach to financial success looks suspiciously like Bach’s system. Well, actually with the caveat that I am more a “big rocks”planner than a “Latte factor” planner. I would also second WCI’s point that, while the philosophy of the Automatic Millionaire” worked for me when I was making relatively less in the military, it is not only possible but sensible supplement it with ownership (rental properties for me).
Thank you for the review! I definitely think there are real advantages to automating finance.
The idea that “buying is always better than renting” is so untrue that it turns me off to the rest of his book, even though I agree with his major premise.
A story: I’m a fourth year medical student. I’m also a non-traditional student, meaning I had a career prior to medical school. My husband and I bought a house in 2006 for $300,000. We are now selling it, eleven years later, as we will likely be moving for residency. It is worth… $300,000. That means we have LOST money on the house, as it hasn’t even kept up with inflation.
We will certainly not be buying during residency. There’s a strong possibility we won’t buy even once I’m done with residency, as the places we’re looking to live have a high price-to-rent ratio. There will certainly be far more factors considered when we make that decision beyond “renting is throwing money away”.
Not too bad for a house bought in 2006. We sold ours after 9 years still with a significant loss.
But you’re certainly right that buying isn’t always better. The longer you’re in it, the more likely it’s better though.
There is a saying in the single family home rental market that says “Live where you want, but invest where it makes sense.” It might very well make sense to rent a house in San Diego but buy a single family home in Memphis, Cleveland, or Indianapolis (to rent out). The cap rates are favorable in those markets, and provide good cash flow with perhaps a chance of some appreciation.
We bought our house in Silicon Valley in 2000. Price was $727k. This was at the tail end of the dotcom years and I thought the price s were insane. Prices rose $125k in 3 months and bidding wars often featured anywhere from 12-20 buyers. Yes this place is crazy.
Nearly 18 years later, Zillow tells me it’s worth $1.8M. Now THAT is insane!
So wwhen we finally call the valley quits, the sale will provide a nice little bump to the nest egg.
Location and timing.
Now I just hope prices stay strong for a few more years.
Agreed Billy-Bob. Location and timing are so important with real estate. My wife and I have built/renovated 4 homes in the past ten years. One of them netted us $600k, the others a little less. It DOES matter where you are buying a house. It DOES matter that you know the neighborhood in which you buy is popular. You gotta research this stuff.
A little luck helps too. I think this is one of those things that when we’re unsuccessful we blame bad luck and when we’re successful we attribute it to our skill. I’m sure the truth is somewhere in the middle.
It’s true that the longer you’re in it, the more buying makes sense. Once I’m a few years into being an attending and am sure that it’s a job/location that is going to work out long term, we’ll reconsider the buying option. That’s just “reconsider”, though — the three places we’re looking at living long-term all have price-to-rent ratios well over 30, so it may not make sense even then. We’ll run the numbers (probably several times) once we get to that point.
Just wondering…How much would have paid in rent over the years for the same size house in the same location? How much were payments for the house over time? Add maintenance costs which you would not have paid in a rental house. Subtract taxes saved due to mortgage interest. What’s the delta?
In 11 years, you would certainly have paid down the principal owed on the mortgage. After selling the house, how much would you receive at closing? Would you actually get money out of the house at closing? If so, factor that forced savings into your judgement regarding the financial benefit of owning versus renting your home.
Add in the intangible of being able to paint and remodel the house, as you wish, versus the constraints of living in rental property.
It is a complex equation, but I think that all things considered, you might be happy that you owned your house.
Buying for most is the way to go Just sold my home fpor a 500K TAX FREE GAIN after 40yrs
most homeowners come out ahead in the long run
40 years? How much did that ‘big gain’ lag the market over that time. I’d wager you barely kept up with inflation.
I’ve always had trouble sticking to a defined budget and I definitely am a pay yourself first person.. I started doing the automatic investing thing on my own before I heard of Bach. At one point I even had my residency split my direct deposit into parts; Vanguard, HSA, student loan, bank (but then of course I went over my HSA limits because I goofed on the math).
Now I have everything go to the bank first. Then Vanguard, HSA, student loan, and CC billl get automatically paid at set intervals. Rent, utilities, etc… are all set up on auto pay. Everything else is mine to spend (within reason).
A nice tip to keep track of spending is my AmEx will email or text me every set automatic interval (every Monday in my case) to show me my spending.
I agree with Bach. Much of investing and saving isnt finance, its psychology. Paying yourself first automatically is a great way to save without knowing. I recently signed up for Personal Capital and was shocked that across all our investments that we were close to $100k in investments, and I’m not done training yet.
Don’t sweat the budget thing, Pete. I have never had one and reached FI with minimal effort. The automatic investing is key. I now “pay myself last.” By that I mean I deposit only a monthly “spending allowance” into my checking account. All else gets transferred to investments. It isn’t a fixed investment percentage. All dividends and investment income get reinvested too. It would work out to a huge savings percentage but it isn’t fixed, conscious, or painful in the least. https://www.physicianonfire.com/last/
I would have to agree that this book is an absolute classic. I read it several years ago when I graduated from dental school. The biggest takeaway for me was the concept of making savings automatic and living on what was left over. Before I read this book, my spouse and I would argue over money because I was always wanting to come up with a budget. She hated the idea of living on a budget and never wanted to do that. So I decided to automate our savings and we have lived on the extra and we haven’t fought about money since.
For doctors, the daily latte isn’t going to get you. It’s the monthly club fee, cleaning person, yard person, etc, etc
I agree it isn’t literally the Starbucks that prevents doctors from reaching their goals. On the other hand, it isn’t paying for services that will break them. If you can pay a worker $20-$50 an hour to outsource your household service tasks while you work or build a side gig, you should do that. You come out ahead financially in the long run – since it is more of an investment than an expense. Benjamin Graham never mowed his own lawn.
You’ve got to be at least a little careful with that reasoning.
First, you have to adjust it for taxes. If you only make $100 an hour, paying someone else $60 an hour with after-tax dollars is not a winning proposition.
Second, you can only work so much at your primary job without burning out. If you’re exchanging primary work for mowing the lawn, that may not be wise. But if you’re exchanging TV time for it, you’re probably coming out ahead.
Third, doing at least a little manual labor every now and then is good for your body and soul. If nothing else, it’ll remind you of how good your life is. When your idea of “work” is sitting there talking to people and then typing stuff into the computer, you can get out of touch pretty quickly with a bricklayer, landscaper, or even a general contractor.