★ Rockstar Book Review: “The Automatic Millionaire”
This is part of our Rockstar Book Review series.
Be sure to check out all previous books we’ve covered!
Solid Advice That Skirts Some Issues and Overemphasizes Others
Here are the main points Bach covers in “The Automatic Millionaire“:
- Want to be a millionaire? Pay yourself first.
- Automatic allocation of money helps us meet our goals.
- Homeowners are significantly wealthier than renters.
- Credit cards are a significant driver of consumer debt.
#1. Pay Yourself First
The author stresses the fact that rich people focus on paying themselves first before paying any other financial obligation and that this behavior works at virtually any income $40K and up. And that, by keeping that money out of sight, we’re less likely to spend it, especially on silly daily purchases that really add up (latte anyone?). As a result, all types of savings and investments experience regular growth thanks to regular contributions and the power of compounding.
[Y]ou’ve got to accept the idea that regardless of the size of your paycheck, you probably already make enough money to be rich. (pg. 36)
#2. Automatic Allocation of Money Helps Us Meet Our Goals
Knowing and doing are two different things. Bach explains that, when it comes to managing our finances, the key to success is to automate. He stresses the need to automate our retirement savings, regular savings, emergency savings, debt repayment of all types (mortgage, car, credit cards, other), and any accelerated repayment plan we choose to take on.
Another key message is that this automation makes it less likely that our household needs to operate on a budget to avoid mindless spending (though the allocation itself is a budget of sorts that limits our spending) as well as less likely that we will stop the behaviors once the system is in place, especially once we experience its benefits like increased peace of mind.
#3. Homeowners are Significantly Wealthier Than Renters
The author states that when compared to renters, homeowners are vastly more wealthy on average. Bach also asserts that owning a home is the best investment anyone can make* and that a family should accelerate their mortgage payments when possible to pay their home off faster.
Unfortunately, these blanket statements can be dangerous to follow blindly, as are the book ends of affordability he includes in the book. Homeownership needs to be carefully weighed against what a family wants from an affordability, lifestyle and obligation perspective. Ironically, earlier in the book and in a different context, Bach states this truth:
The problem with most financial planning and financial education is that it focuses on numbers and not on people’s lives. (pg. 71)
This belief in homeownership leads many to make decisions that leave families with:
- A home they find difficult to afford, often because it is larger than needed and/or in an inflated market, not to mention fluctuating interest rates over the payoff period.
- Significant property maintenance costs they did not anticipate.
- A dependence on two incomes to cover the mortgage and other living expenses.
- Significant fees associated with homeownership when families move often: real estate commissions and closing costs.
- Increased commuting time or other lifestyle changes that are difficult to appreciate until a family starts living in the home.
*One of the reasons this is the case is that, as stated in the book, it tends to be the only significant source of savings many families in Western society have. That, in and of itself, is not reason enough to call it a “good investment”. A primary residence is an asset, not an investment.
#4. Credit Cards are a Significant Driver of Consumer Debt
With their high interest rates and low minimum payments, Bach is not a fan of credit cards unless we pay them off in full each and every month. He emphasizes that millionaires don’t buy what they can’t afford, and that means not using credit cards for items we can’t afford to pay for in cash.
The author makes strong points about the negative impact carrying credit card balances can have on a household, from the regular monthly obligation to the astronomical total interest paid on often-inconsequential consumer purchases. His advice? Pay them off and kill them off as soon as the last payment has been made.
Despite its patent generalizations in some areas, “The Automatic Millionaire” is a book worth reading for anyone who has not reached their regular saving and/or debt repayment objectives.
Other books I’d recommend to help you tackle the hows of saving and paying off debt include “The Total Money Makeover” by Dave Ramsey, “Your Money or Your Life” by Vicki Robin and Joe Dominguez, “The Simple Path to Wealth” by JL Collins and “I Will Teach You to Be Rich” by Ramit Sethi.
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