The Automatic Millionaire Summary
This book – The Automatic Millionaire is published in 2006. Author – David Bach. Although it is 10+ year old book, but the strategy and concept about personal financial management that mention in this book is still very useful in today.
Doing the hard work in our job or business, we also need to acquire the skill of mastering our personal finance so that we can keep the money we earn without making bad decision.
Today I summarized few important things that mention in the book, which are:
In this chapter the author mention that we need to aware where we spend our money in our daily life. A small expenses daily will accumulate and become large amount of money.
This is example like a cup of latte a day. Says a cup of latte is $3.
Buying it daily for working days equal to $3 X 5 = $15. Then in a month, it is an expenses of $15 X 4 = $60!
For a $60, maybe you can invest it or save it for your starting up business.
If we save the “latte fee” for a year, that’s mean a $60 X 12 = $720 of saving. For those new trader, $720 is quite a good sum of money to get started and learn from the market.
It’s more then a latte
This latte factor is not just apply into the fact that you buy a latte or a drink. The “latte” could be other things that cost you money daily or monthly..
Some example will be like member subscriptions, memberships of site or memberships of gym that you are rarely go to.
The expenses that is too small to caught your eye. Like a small holes at the bottom of your bucket, the water inside the bucket is your money. You will less likely to notice the water is flowing out of your bucket.
If every month you complain that you cannot save enough money to invest, trade or starting a business, and you didn’t realize that your bucket have a hole. Then NOW is the time to get it fixed.
If you can’t manage the number you spend when you earn little, how can you manage the money when you earn more?
The Automatic Millionaire always pay themselves first!
So as you need to do.
Paying yourself first when you receive your salary. This that simple.
But what is the situation different when we pay our bills and expenses first?
Actual the main different is in the psychology part. When we pay our bills and expenses first, we normally don’t know how much we will want to save at the end. When we don’t know how much we want to save, then we tend to save not much or nothing.
By paying yourself first, we will tend to decide HOW MUCH we gonna save first. How much will be our Freedom Fund. By deciding this and set aside the Freedom Fund, we can know how much exactly we can save.
The percentage of saving
How many percent of the salary we should pay ourselves? The author mention is a minimum of 10%. But when you want the retired earlier, i mean like 10, 20 years or even earlier, you need to save above 30% to half of your salary.
When you save above 30%, your saving is 3X of others. It is not including of the compound interest with the money your saved. Says if your salary is $100. When you save $30 out of $100 monthly. That’s mean a $360 will be saved in a year compare to others’ $120. If your return of investment is average of 8%, that’s mean you have a $388.80 compare to the others’ of $129.60!
This is a lot. If your salary is $5,000, that’s mean $18,000 is what you can save compare to others $6,000 a year. Of course, for you to do that, you must cut your big bills of. Example like expensive car loan or the “latte”.
Money saved, then?
Of course, just saving cannot make you to be rich, you will also need to learn how to invest, or use the money (not all and know the risk) to build a business. For the trader, trading is also one of the way (risk management is very important here)!
Remember, decide an amount that you want to save in every month. Then…
Automate your saving. Let it automate and directly transfer the saving into the account that you will hardly “touch”, the “freedom fund” account Open a saving account with the debit card set aside.
This is the biggest “secret” of The Automatic Millionaire.
Set your account of receiving salary to automatic transfer to the “freedom Fund” account monthly after the date you receive your salary. This process will automatically been done before we even have time to think of it.
This is the best strategy for the people who feel they have no discipline. For others feel they have the discipline also need to do the same things. Because you can increase your free time to do others things like focus on your side hustle without many of the to-do list item.
This concept give us a lot of the free time and simplified our life. Since we are living in the information age, we have the advantage to enjoy the free service and have more time to do the important things. If it’s in the old ages, the automatic process would be very difficult to apply. It also need alot of service fees or others requirement.
But now, all the things is online, so by simply a few clicks in your PC or smartphone, you will instantly set up the automatic process.
Save your time
This is the same as the automatic bill paying process. Time is gold. With the extra time monthly, you can use it to stay with your family, meditate, exercise or think of solution in your job or business without sudden interruption for the bill payment due.
Like the author said, you just have to do it once.
This is the whole core of this book. If you want to take the most important away from this book. Please remember AUTOMATE the thing you can.
It is a powerful concept from the other three, which is (automate, delegate, eliminate and replace). But i forgot where i having this idea.
Preparing money to let you sleep well at night by do not worried that you will be starve if this morning you got fired or something happened that need you to spend certain amount of money. Example like car accident, near relative need certain amount of money from you.
The author has describe it as the “Sleep well at night” factor. How much should you have liquid enough to let you sleep well at night. Ask yourself that. How much your emergency fund will be.
Then, Decide how big, author suggest 3 to 24 months of expenses. Says if you spend $1,000 a month, then you need a minimum of $3,000 to be wise. Of course, if your sleep-well-factor is larger like 12 months of expenses, then you need to save it up.
If you are a trader, I suggest that the emergency fund need to be at least 12 months of expenses.
Your emergency fund is important
The reason of this step is to have the freedom for us to make important decision when we met a financial problem. Example like get fired, want to switch job or other reasons.
When you have a bigger cushion, you will not be panic when facing these problem and tend to make a better choice. But most of the important thing is WE DON’T WANT TO HAVE NO CHOICE right? The cushion you build can become an umbrella to you when you face important decision or problem. The Automatic Millionaire always give themselves enough choices to choose from in critical situation.
Of course, when we decide the money is for rainy day, we cannot spend it in sunny day right? So Do not touch your emergency fund! If after 3 months of saving it, then we direct spend it of, is it still call the EMERGENCY FUND?
When your emergency fund is enough
Author said that, you can’t spend it, but you can invest it when it grow beyond the minimum amount of investment gate. Just remember to put it in the right place, do not take high risk investment.
The investment also need to be liquid enough so that when you need the money, you can take in out within the short period of time. In the book the author mentioned some of the bonds especially the government bonds for US citizen.
At last, Automate it. cut a percent from your paycheck to accumulate your emergency fund, just like the steps mentioned above.
In the book the author mentioned that buying house would be a wise investment. It is because you can leverage OPM (other people’s money) the bank money to buy your house. The house will increase its price in the time you paying your mortgage. Other than that, it also emphasize other advantages like tax breaks, it’s a forced savings and pride of ownership.
Types of mortgage
The Automatic Millionaire covered where you can find the way to finance a home, for more detail, you may purchase the book for the information. The author also explain about the mortgage type you can take.
The largest mortgage types is the fixed rate mortgage and the adjustable rate mortgage. In a simplified explanation, fixed rate mortgage is suitable for the people who want to live in a some house for a long period of time (minimum 7 years); the adjustable rate mortgage is more suitable for the people who want to live in a house for a few years and do not intent to hold the house for long period of time.
It is because the adjustable rate will be fluctuated, it is good when we buy and sell the house in the low interest rate period. If we hold on to a house for a long period of time then we may met a higher payment amount due to the increase of the interest rate.
On the other hand, the fixed rate mortgage fixed the rate when we buy the house. If we buy a house in the period where the interest rate is high, then we need to pay the whole mortgage with higher interest rate even the interest rate in fix rate mortgage had drop.
So the best choice for many of the people no planning to move, buy the house with fixed rate mortgage when the interest rate is low. Of course, the requirement for purchasing a house with fix rate mortgage is more stringent than the adjustable rate mortgage.
Pay-off your mortgage fast
The author gives a strategy for the people who want to pay off the mortgage faster. That is to pay your mortgage biweekly. This make you pay 13 months of amount in a year. Why we need to do this? It is because it can fasten the process for your payment by not only 1 month faster per year.
In the example given by the author, 2 person paying a mortgage with principle of $250,000, interest rate of 8% and the term is 30 years. One paying normally once a month, one paying twice a month. At the end, the second person finish paying the mortgage in the year of 23th. That’s a 7 years shorten. If we calculate an extra month of payment per year, it can only shorten it by 2.5 years. But because of the interest rate, it accelerate 4.5 years more for the second person to finish his payment. He had saved $119.161.43 for only the interest!
So decide to make a biweekly payment by automating the process! It’s the key, make sure the lender know and ACCEPT the biweekly payment. Let it automate so you no need to worry about anything.
In the end of this chapter, i like what the author said:
“information is power when you use it”.
The first thing to become debt-free is to not create any debt that didn’t bring you income. When the debt stop increasing, then we will have the possibility to paying off the debt.
In The Automatic Millionaire, the author mention the thing I’m very agree on, which is do not spend more that you earn. It’s basic, I know. When you have $10, you don’t spend $15. Many people spend the future money by using the credit card.
We want to BE rich, not to LOOK rich.
Don’t let the fake pride made you drown in the lake of debt.
Do not take a credit to buy things. For the expert investor, i mean REAL expert, they may using the credit for investment leveraging using OPM. but that’s another story. Just remember don’t use your future money to buy the things you don’t need.
After you stop increasing your debt, the second thing you need to do is to contact the bank for a lower and greater interest rate for paying off your debt.
Discuss with them and come out of a better solution. It maybe like switching others credit card company. But this step need to be take extra careful because some of the credit card company may charge large percentage of fee on your action.
The next thing after this is of course to automate your process. With previously automate your saving example by 10% per month. You will now need to split the 10% into 5% and 5%. One is for the saving and one is to pay the debt.
Giving is a part of receiving. Giving part of what you earn to charity. Giving make you the person you are.
Decide how much you want to give, that’s your number. When you give, you will receive more. Especially the internal joy you have.
So, decide how much you want to give. Weather is 5% or even more than 10% of your salary.
Then repeat the same steps, automate it. So that you will no need to worry you forgot it or don’t have time to do it.
There is financial benefit when you commit to donation. It will give you a certain tax exemption.
So don’t be selfish. If you stop giving, you stop receiving.
The most important technique from The Automatic Millionaire is to automate your saving decision and debt payment decision. With the decision being automated. You will no need to worried about your discipline problem and also forgot about the date to do it.
In The Automatic Millionaire it give a lot of real example and story to show you how does the thing he teaches really work. The author also mention a lot of the website and name of the company for the detail investment. The more details things will be covered in his book.
If you are interested with this concept, you should pick up this book. Here is the link to this book, using this link to buy this book will not increase the cost of the book and at the same time will help me to earn a little to maintain this website. You also may want check out the other books in the series of The Automatic Millionaire written by David Bach.
The most important thing is to DO the things you know. Really doing it
Live your life to fullest