It is important to keep educate yourself. Stephen Covey calls it Sharpen the saw.
To do this, I follow seminars and/or webinars, read books and blog posts from fellow DGI’s. This to gain new insights and of course learn something new. And because reading is FUN!
I read a lot of books, all kind of books. From biographies, management books to of course financial books. I really enjoy reading. This joy I hope to give to my kids! Reading books opens up a whole new life and you enrich yourself with new knowledge. What a great gift!
In my 2017 goals I wrote that I would read at least two books every quarter. And I will share my new knowledge with you, my readers. I will do this to keep the snowball of knowledge rolling.
Here is the ninth book review for Polliesdividend.
The Automatic Millionaire – By David Bach
When I was in the bookshop, this book caught my attention. The concept of automating your finances really got to me. As you dear readers know, I’ve read tons of personal finance books, and by this, I know a lot of major personal finance concepts. David Bach encourages readers to eliminate debt, life below your means, and to pay themselves first. But than he adds something unique: Why not eliminate the weakest element, the human factor! Rather than develop will power and self-discipline, Bach shows a strategy to build wealth automatic.
In his book, David Bach focuses on two sound financial concepts. Pay Yourself First and Compound Interest.
Pay Yourself First and Compound Interest
In the first part of the book, Bach focuses on the “pay yourself first” concept. The idea is not original, and it’s certainly not new. It means just what it says. You save/invest money before you even look at living expenses.
I’m personally a strong believer of this concept. It really works. If you don’t believe it, just look at these numbers. Say you put $ 200 a month aside and invest it and you start when you’re 25 years. You put it in investments that earn an average of 10% a year; do you know what you’ll have on your 65th birthday? More than 1 million dollar!!!
Wow, this is really great. So with only $200 a month every one can be a millionaire. The secret behind this is the power of compound interest.
Bach explains how to make it easy on your self: just make the whole thing automatic. Withdraw it automatically from your paycheck each pay period and you’ll soon find your savings building up … and up. Automation is the key, it eliminates the human factor. So you can’t be tempted not to save the money and instead use it for an unnecessary living expense.
In fact, what determines your wealth is not how much you make but how much you keep of what you make
The Latte Factor
From his experience as a financial advisor, Bach knows that people find it very hard to save some money every month. This because their living expenses often match (or even exceed) their income.
Bach believes it is possible for everyone to save some money every month. To show people how this is done, he introduces something he calls the “latte factor”. In short, the “latte factor” refers to the tiny expenditures that you make each day without thinking about it. The name, thus, refers to the daily purchase of a latte.
So, if you save the money you spend every day on your latte factor and invest that money each month, you can wind up quite rich in the end thanks to the power of compound interest.
As Bach writes: In order for Pay Yourself First to be effective, the process has to be automatic. Whatever you decide to do with the money you’re paying yourself — whether you intend to park it in a retirement account, save it as a security blanket, invest it in a college fund, put it aside help you buy a house, or use it to pay down your mortgage or credit card debt — you need to have a system that doesn’t depend on following a budget or being disciplined.
The best way to do this is make it automatic. Bach explains how important it is to set up automatic deduction from your checking account each month into another (saving or investment) account. This concept is very psychologically powerful. By simply having that money go away without any effort from you, you begin to build wealth quite easily.
The first couple of months it is hard. You’ll miss the money. But over time, this new situation becomes the “norm” for your day to day life, but that money you’re withdrawing just keeps building up for your future. It’s a great concept.
Contributing to your retirement account (e.g. a 401k) is a great example of the concept of this book. Bach writes that every one should take advantage of it. Max it out! Contact your human resources department and request that a fixed percentage — 5%, 10%, 15% — be transferred from your paycheck to your retirement account. It’s best to do this now, but if you think you can’t possibly survive without the money, then wait until your next raise. Instead of taking the raise in your paycheck, have the increased income set aside in your retirement account. Continue to live on the amount you’ve been earning.
Remember, inspiration unused is merely entertainment. To get new results, you need to take new actions.
In my opinion, this book is a must read for all young people. The concepts of Pay Yourself First and compound Interest together with automation really works. With this system everyone can reach financial freedom with a little patient. It is a set and forget system. This book doesn’t tell you what specifically you should invest in, but gives you the steps to take to secure your financial freedom.
This is a book that I will give to my daughters when they turn 18. In my humble opinion the book is time very well spend!!
Okay, what do I take away from this book after I digested it?
- It is an easy and nice to read book
- You can read the book in just a few hours.
- Helpful for everyone to organize their finances
- An excellent resource and breakdown of a really simple and common-sense way to save more money
- I would like to pass on to my children
The Pollie-rating for this book is:
Have you read this book? What do you think of this book?