Every Sunday, The Simple Dollar reviews a personal finance book or other book of interest.

I’ve reviewed a pile of David Bach’s books over the years (Smart Couples Finish Rich, The Automatic Millionaire, and several others). Why bother reading and reviewing yet another one?

The title alone fairly well explains it. Rather than focusing on becoming rich (a la Smart Couples Finish Rich and The Automatic Millionaire), the focus here is clearly on the simple aim of debt freedom. Is it a philosophical shift away from the “latte factor” of his previous books or just a repackaging of the same old ideas for a new economic era?

1 – Who Put America Into Debt – and How You Can Get Yourself Out
The lenders made it easy, but it was still the individuals who put their name on the documents and signed themselves up for a lifetime of debt. However, just as individuals made the choice to get themselves into debt, they can also make the choice to get themselves out of debt. Debt freedom is something pretty much everyone can do for themselves as long as they choose to do it and choose to set aside elements of an overinflated lifestyle to accomplish it. Our grandparents did it, so why can’t we?

2 – Debt Math: How Lenders Keep You Broke
The biggest trick that lenders use on unsuspecting borrowers is the low low low monthly payment. If a lender has a monthly payment that just barely exceeds the accumulated interest for the month, then you’re not really reducing your debt much at all (maybe a dollar or two) by making that minimum payment. Instead, you’re going to be making that minimum payment for many, many months, paying interest to the company the whole way. When you’re just handing money to a company in the form of interest payments, it’s leaving your pocket with nothing in return except your own impatience.

3 – The Debt Free for Life Mindset
Why are you in debt? Why do you want to not be in debt? What’s the difference between these two answers? To put it simply, you have to fully understand what’s different between your life now and a life path that leads you to debt freedom. You need to know what needs to change before you can change it.

4 – If You’re in a Hole, Stop Digging
The first step in that change is to staunch the outflow of money, and the most effective and immediate way to do that is to cut back on your spending – hard. You can’t become debt free if you keep adding more debt. The way to stop adding more debt is to simply stop buying what you don’t need, then add things back in at a later time once you’ve realized that the purchases really do add enormous value to your life.

5 – The DOLP Method: How to Pay Down Your Debt in Record Time
Ramsey calls his debt repayment plan DOLP (Done on Last Payment), but it’s exactly the same as Dave Ramsey’s debt repayment plan. Just list all of your debts in order of their balance size, then focus all of your efforts in paying off the smallest debt first while making miminum payments on the rest. Coupled with some spending changes in your life, this should be doable. If it’s not, you may need a coach.

6 – Get Out of Debt Automatically with Debt Wise
This chapter greatly annoyed me. It’s essentially an ad for a service called Debt Wise which will help you manage such a debt repayment plan – for a monthly fee, of course. This seems highly out of place in a book where a big part of the plan is to cut your spending, not sign up for new services.

7 – Negotiate Your Debt Down: How to Lower the Interest Rates on Your Credit Cards
Here, Bach offers some advice on negotiating down your debts, particularly your interest rates. Mostly, it boils down to contacting the company, making it clear to them that you’re having difficulty making the payments, and requesting a rate change. Generally, it’s in their interest to cooperate with you, because that type of resolution is far better than having to deal with a defaulting customer.

8 – Your Credit Report and Score: What It Is and How to Fix It Fast
This is mostly just a summary of what a credit report is (a document detailing your history for paying back loans) and some basic methods for fixing it (get current on all of your debts, for starters). The big key is to simply be aware of what’s appearing on your credit report and, if it’s not yours, start contacting people until you can get the problem fixed.

9 – Mortgage Debt: How to Protect Your Home and Pay Off Your Mortgage Debt Early
Bach’s suggestions mostly boil down to making sure you have a thirty year fixed rate mortgage (if not a shorter term, like a twenty or a fifteen year), getting on a biweekly payment plan (paying half of your monthly balance every two weeks), and doing something about your mortgage if you simply can’t make the bills, such as using the government’s resources for mortgage relief.

10 – The Student Loan Diet: Nine Great Ways to Crush Your Student Debt and Sleep Well at Night
Much as with the previous chapter, this is just a collection of strong basic ideas for dealing with student debt: consolidating government-backed loans, focusing on paying off private loans first, looking into loan forgiveness programs that may be available to you, and understanding the specific payment options for each loan you have and choosing the one that works best with your life.

11 – Erase Your Debt with Three Simple Words: “Time-Barred Debt”
Most states have a statute of limitations on unpaid debts and, if your debt is past that time limit, you no longer have to pay it. In fact, paying it would simply harm your situation, as it would appear as a fresh entry on your credit report. If you have any debts that are far past due, find out when the statute of limitations is on that debt and, if you’ve already passed it, tell the debt collectors to take a hike.

12 – How to Get Non-Profit Credit Counseling – and a Professional to Guide You Out of Debt
Here, Bach points people towards credit counseling, which is a good solution mostly if you’ve tried to get your debt repayment under control and you’ve failed miserably at it. I genuinely believe that the best first step people should take before turning to a counselor is to try managing their debt themselves. This way, if they fail, they can at least have a chance of understanding why they failed, which can give a big clue as to the type of coaching and help that person needs.

13 – Debt Settlement: Solution or Scam?
Bach spends most of this chapter making a strong case that you should never try out debt settlement programs, and I think I agree with that assessment, even if Bach does hedge his bets a bit by the end of the chapter.

14 – How Bankruptcy Works, When to Use It, How Long It Will Take You to Recover
Mostly, this chapter offers general advice on bankruptcy (use Chapter 7 if you’re eligible, for example). One very big key that Bach mentions here is that you should never raid retirement accounts to pay off debt. If you’re in a situation where it seems that doing so is your only hope, contact a lawyer first. Often, bankruptcy proceedings will allow you to protect your retirement savings.

15 – Make It Automatic! The Automatic Millionaire 2.0
Bach begins winding down the book here, making a case for automating as much of your personal finances as you can, particularly in terms of saving for the future and investing. Direct deposit your paycheck, then have automated savings plans move some of that money out of your checking and into your savings or into your investment plan of choice.

16 – Find the Money! 7 Ways to Find Hundreds of Dollars (Maybe Thousands) in Less Than an Hour
What are these tactics? They essentially boil down to checking online resources to make sure you don’t have any unclaimed money sitting around out there. Sites mentioned here include unclaimed.org, missingmoney.com, fdic.gov, pbgc.gov, and ssa.gov, which are worthwhile visiting just to make sure you don’t have any unclaimed benefits floating around out there.

Is Debt Free for Life Worth Reading?
If you’ve never read a book by David Bach, this is the one to read and I’d recommend that you do. He offers a very solid perspective on personal finance, particularly from an angle of extracting yourself from debt and getting yourself on a good path towards retirement and the future stages of your life. Debt Free for Life is perhaps the best all-around packaging of his ideas, aside from the annoying sixth chapter.

However, if you’ve already read a book or two by David Bach, you’re not going to get too much from his book that isn’t found by supplementing what you’ve already learned from him with a bunch of personal finance blog reading. The backbone of his ideas are still the same: get your spending under control, utilize what you save from that spending to get your financial situation in a better place, and you’ll have far more resources than you had before in a few years.

The biggest difference between Debt Free for Life and Bach’s other books is in the specifics. The core idea is the same, and if you’ve already grasped that concept thoroughly, there’s nothing drastically new here other than some good specific ideas.

Every other Sunday, The Simple Dollar reviews a personal finance book.

I’ve reviewed quite a few David Bach books over the years: The Automatic Millionaire, Smart Couples Finish Rich, Start Late, Finish Rich, Smart Women Finish Rich, and Go Green, Live Rich.

Bach writes in a very approachable tone, but many of his earlier books seemed to be repetitions of the same material – The Automatic Millionaire, Smart Couples Finish Rich, Start Late, Finish Rich, and Smart Women Finish Rich might as well have been the same book with an extra chapter for each specific demographic. Thankfully, though, he seems to be addressing a new topic with his more recent writing – Go Green, Live Rich looks at the overlap of personal finance and environmentalism, for example.

This leads us to another attempt at a new direction by Bach. Fight for Your Money focuses specifically on cutting your spending by dealing head-on with companies that slip extra fees into your bills. Much of the book centers on advice for negotiating away those fees, getting better rates on your bills, and so on.

This is a very action-oriented book, not a philosophical one. Specific action points take the lead here – ones that have the potential to directly save you money. Let’s dig in.

A Walk Through Fight for Your Money
Fight for Your Money is split up into a ton of short chapters that focus tightly on specific areas of spending – for example, the first ten are Buying a New Car, Buying a Used Car, Car Leasing, Car Rentals, Car Repairs, Bank Accounts, Debit Cards, Credit Cards, Credit Scores, and Payday Loans – and there are thirty one more short chapters on similar, very specific topics.

Instead of doing a chapter-by-chapter review of such a dense book, I pulled out eight specific tactics that were of specific interest to me.

Don’t (?) Trade In Your Old Car
On page 12, Bach says

To put it bluntly, they will lowball your trade-in to make up for the great price they gave you on your purchase.

This is not always the case. Some dealerships have actually adopted the direct opposite of this tactic – they’ll offer a great trade-in to soften you up for later negotiations. I agree with Bach that dealers use the trade-in to play tricky games with buyers, but it’s not always that straightforward.

Take our recent car purchase. The blue book value on our trade-in was $400, and we had two different direct estimates from people we trusted that we should not expect to get more than $500 out of the car, whether selling it directly or trading it. The car had 175,000 miles on it, shocks and struts that needed immediate replacement, some ominous engine noises, wear on the interior, and a transmission that would sometimes fail to shift gears – in other words, it needed major work to stay on the road.

Instead of giving us a great deal up front on the car, the dealership played a much different game. They gave us $1,500 in trade on the car, but we were only able to negotiate the price down to about $21,100 (not including the trade-in) – roughly factory invoice, when we were intending to negotiate further.

In other words, the dealership used the trade-in as a bargaining chip, not using it to “make up” losses on the “great deal” they gave us.

Still, Bach’s point is well taken. Dealerships are there to make a profit, and you need to look at the total package you’re being offered including the trade-in.

Be Careful with Debit Cards
On page 80, Bach says:

According to calculations by Consumer Reports, a typical overdraft fee on a debit card purchase translates to an annual interest rate in excess of 1000%!

Bach’s point is simple: if you don’t keep a very careful bead on your balance, it can be easy to overdraft using a debit card – and the fees from such a use can eat you alive.

Another point: there is usually very little fraud protection on a debit card if it’s used with a PIN instead of used as a credit card with a swipe and a signature. Even if your bank seems to have a “zero-liability” policy, that policy usually only applies to uses of the card as a credit card, not as a PIN-based debit card.

Thus, his advice for debit card use is to use it only for small purchases that you’re sure you can easily afford, and use other methods for paying for larger purchases. This keeps you safe from liability concerns and also keeps you safe from overdrafts.

Ask to Have Your Credit Card Account Closed
Bach advocates a pretty hardball strategy for negotiating with your credit card company. On page 93, he advocates requesting to have the account closed if the issuer won’t lower your interest rates upon request:

If they won’t work with you, tell them you want to close your account. Often this will lead the person who took your call to transfer you to a new department – one whose job is to talk customers like you out of canceling their cards.

I believe playing hardball like this is usually good advice, but in a very shaky economy, it might not be the best advice, because they may simply say, “All right, cancelled.” Keep that in mind as a potential risk when you use this tactic.

Clean Out Your Mailbox
Identity theft is a pretty big concern, and one big route to identity theft is unsolicited mailings from creditors. Bach has a solution to such insecure junk mail on page 121:

Equifax, Experian, and TransUnion (which provide your credit history to the card issuers) have created a service called OptOutPrescreen that allows you to opt out of receiving offers of credit or insurance that you didn’t ask for. [...] For details, call them toll free at 888-5-OPTOUT (888-567-8688) or visit them online at www.optoutprescreen.com.

Excellent advice, and an excellent service. We signed up for this and our preapproved credit card offers basically disappeared overnight. Not only does this mean we have less junk to deal with in the mail, it also reduces our risk of identity theft.

Get Term Life Insurance
On page 141, Bach takes a swing at the life insurance industry:

According to the most recent statistics, about 60% of the [life insurance] policies sold in the United States are permanent policies, while about 40% are term. The greater popularity of permanent policies is not surprising, even though consumer advocates agree that term policies make more sense for most people. Permanent policies generally cost five to 10 times more than term policies – meaning insurance agents make a lot more commissions selling them, which is why your “friend in the insurance business” will gladly come to your home at night to discuss it.

In other words, consumer advocates generally point towards term life insurance policies as a better deal, yet there is still a lot of belief out there that permanent policies (like universal or whole life) are better.

Why? The salesmen make more money on the permanent policies. Any good salesman will try to sell the item that will make them the most return, so they’ll attempt to make the case for universal policies or whole life policies, while pooh-poohing the term policies (because those won’t put as much money in their pocket).

If you’re insuring yourself for your family’s benefit, focus on a term policy.

Avoid Most Work-At-Home Opportunities
On page 235, Bach encourages people to avoid most work-at-home opportunities:

Typically, work-at-home rip-offs involve phony opportunities to make big bucks doing simple tasks like stuffing envelopes, assembling small products or crafts, or processing medical insurance claims. What the ads don’t tell you is that before you can start “raking in the dough,” you’ve first go to take a training course (which costs you money) and order software or supplies (which costs you even more money). And then all a lot of them do is merely send you a list of potential clients – most of whom have absolutely no interest in hiring home workers to do anything.

There are ways to earn income from home, but these kinds of prepackaged deals (the type you often see advertised on late night television) aren’t the way to go unless you’d rather spend money than make it.

If you want to make money from home, find your own path. Figure out what you enjoy doing, then find ways to earn an income from it. Don’t shell out money for some prepackaged “solution.”

Save An Hour a Day of Your Income for Retirement
I thought this was a brilliant way to look at retirement contributions. From page 245:

The trick is not to think about percentages. Instead, when it comes to funding your retirement plan, think in terms of how many hours you work each week. If you work a 40 hour wee, I believe you DESERVE to at least keep one hour a day of your income. That’s five hours of income a week – or 12.5% of your gross income.

That’s an interesting perspective on retirement savings, one that focuses on the time you invest instead of the money you earn.

One could take that same philosophy and apply it to any savings goal. Are you saving for a house? Isn’t that worth twenty minutes of your workday? Start saving 4% of your gross income, then, and then use that as motivation to find the ways you’re wasting money elsewhere.

Don’t Get Extended Warranties
On page 297, Bach says:

As a rule, if a product is so unreliable that you need to supplement the manufacturer’s warranty with additional protection, you probably shouldn’t be buying it in the first place.

I took this as a major call to research your purchase. If you go into a store to make a major purchase and don’t know exactly what you want, you’re probably not going to walk out of the store with the best option for you.

If you do the research, not just into specific models but into how reliable the brands and product lines are, you’re much more likely to find the reliable item that’s perfect for your needs. Doing that allows you to shop for that specific item, do price comparisons, and then when you’re ready to buy, the extended warranty is just an extra expense you don’t really need.

Is Fight for Your Money Worth Reading?
Fight for Your Money is a great compendium of consumer information that offers real, tangible ways to make yourself more secure, reduce the amount you pay on lots of different things, and learn some useful negotiating tactics. If you’re willing to spend some time reading through this book and taking action along the way, you will save some money.

This is the perfect book to pick up if you’re going to have a “money saving weekend.” Many of the tasks suggested in the book can be done over the weekend, with only a big handful that would have to wait until the workweek to execute.

Does it have long-term usefulness? Fight for Your Money is incredibly worthwhile right now, but in two or three years, some of the information in the book will be dated. Specific information will change and large companies will change their tactics. Fight for Your Money works great in the here and now.

My suggestion? Pick up Fight for Your Money in 2009 if you’re interested (and there’s plenty of worthwhile material in here if you are). After that, wait for a revision or a later edition on this one. In other words, I highly recommend the book – in 2009.

Each Friday, The Simple Dollar reviews a personal finance book.

As I’ve written before about David Bach’s books, you really only need to read one of them. I’ve read and reviewed The Automatic Millionaire, Smart Women Finish Rich, and Smart Couples Finish Rich and I found that … well, for the most part, they were the same book.

Bach’s books focus on a handful of points (the “latte” factor, the power of automatic savings and investments, the idea that your relationships with people are key for money management) and applies them to different groups (women, couples, people with large money aspirations). Here, Bach’s focus is on middle-aged people – people who are seeing retirement age sneak up on them but haven’t really started saving for it.

So why review Start Late, Finish Rich? If it’s “another” David Bach book, why review it?

The biggest reason is that it has the potential to give some real insight into shorter-term goals. Most of the ideas presented in Bach’s other books assume that people are going to be investing for the long haul – thirty or forty years. This book tosses that assumption out the window – what about goals of ten or fifteen years? While I’m not looking at retirement in that time frame, I am looking at some other goals and I’m wondering if there’s useful advice in here for me.

More importantly, though, my father-in-law will be retiring in this time frame. I’ve talked to him a bit about financial questions and, if this book seems to make sense, I’ll be giving my copy to him and recommending that he read it.

Is it worthwile? Let’s dig in and find out.

Looking at Start Late, Finish Rich

Part One: It’s Time to Get It
Start Late, Finish Rich opens with some good ol’ fashioned motivation. Within that motivation, though, is some good ol’ fashioned truth. Bach makes two really astute points in this section:

First, it’s never too late to start saving. No matter how close you are to your goal, it’s never too late to start. I like to think of it this way. Imagine you’re going to buy a car in six months and don’t have a dime saved for it. You’re far, far better off saving $300 a month starting now and having a $1,850 (or so) down payment in six months than not saving a dime until then and getting a loan for the whole car. You reduce your debt by $1,850 and also reduce the amount of interest you’ll pay over the life of the loan. Start now, not later.

Second, the first (and biggest) step is recognizing that there’s a problem. The day you really realize you need to kick things into gear and start doing something – anything – about it is the most important day of all.

Part Two: Spend Less
In the second section, Bach offers some pretty straightforward advice on spending less and reducing debt. Unsurprisingly (for anyone who has read other Bach books), he leads off with the “latte factor” (calling it the “double latte factor”, but it’s the same idea). For those uninitiated, the “latte factor” refers to the idea that over the long haul, you can save a lot of money if you cut out very small routine expenses from your life – like a daily latte at Starbucks, for example. Using the repetitiveness of a $4 latte, if you were to buy one every weekday for a year, you would have spent $1,040 on lattes in a year. If you take that $1,040 and put it somewhere where it earns 7% a year (say, a retirement account), you’ll have just shy of $100,000 after thirty years. Obviously, not everyone overspends on lattes, but everyone does have something that they spend a little more than they should on routinely. I had a whole pile of “latte factors” before my financial meltdown… in fact, I’ll be talking about this later today.

Bach also addresses credit card debt – basically, that credit card debt will eat you alive, but it’s not because of the amount you owe. You’ll be eaten alive by the interest (and possible late fees). You do have some leverage, though – so many companies are in this business that they’re cutthroat with each other, thus it’s not too hard to talk a credit card company into reducing your interest rate to keep you as a customer.

Two other good suggestions: don’t devote all of your resources to debt elimination if you’re this late in the game, and also don’t use credit counseling services for things that you can figure out yourself (and most consumer debt situations can be figured out on your own with some time and care).

Part Three: Save More
There’s really two principles in this section.

First, make your investing and savings automatic. This is the big principle behind Bach’s book The Automatic Millionaire. Simply put, instruct your bank to directly sock some money away for you in an investment or savings account. That way, that money isn’t even there in your checking account to tempt you into spending it. I agree wholeheartedly with this idea – it’s a big part of how I manage my own money.

Second, buy a house. Even in today’s terrible housing market, this still makes a lot of sense over the long haul because you’ll wind up holding an asset rather than putting money in someone else’s pocket. My feeling is, though, that many people in Bach’s audience already do own their own home (or are close to it).

Part Four: Make More
Here, Bach argues that it’s going to be pretty tough to make up the difference if you don’t kick your income into high gear. That means either increasing your pay doing what you’re doing right now or starting a side business.

For increasing your pay, Bach basically says to take an honest evaluation of yourself as an employee and ask if you’re valuable to the organization. If you are, use the exact reasons why you’re valuable as leverage for higher pay. If you’re not, find ways to become more valuable at work – be self-motivated, waste less time, and so on.

Bach also encourages people to find a side business, and he offers up quite a few suggestions in detail. At least one of them is dated – I don’t know that too many people who are involved in real estate on the weekends that are doing really great at it right now – but many of them are solid ideas.

Part Five: Give More, Live More
Why do all of this – working harder and cutting back on the little perks of life? Bach addresses that here, and basically it’s a matter of not having to work until you drop dead. Your final years can be ones of peace both for yourself and for your children and grandchildren, instead of stressful.

This whole section reminded me of the grandmother of one of my college friends, who was still going strong at work when I was a college student. She kept working, she said, for the same reasons that she worked forty years earlier – she was working to make life better for her children. Back then, it was directly – she put a roof over their head and paid for them to go to school. Now she was working to make sure she didn’t become a burden on her children – and so that she could do some things that would make her grandchildren very happy (and thus, by extension, her children). Her reasoning was absolutely beautiful, and it almost brought tears to my eyes – I can’t even imagine how it would have felt if I were related to her.

Ask yourself why you want to finish rich, and use that for the motivation.

Buy or Don’t Buy?

It’s another David Bach book, what can I say? They’re all solidly written, but they all cover much the same material with only a minor difference in perspective. Basically, I stick to my original belief that if you’ve read one David Bach book, you’ve covered most of the material in all of his books.

If you’re over the age of forty, this is probably the one Bach book to read. He cuts the timeframe down a bit from his other books, recognizing that you’re not going to be saving for forty years – more like twenty five or thirty. The writing also recognizes that you’re probably going to need to make a bit more serious lifestyle changes than in other books, as he delves more into increasing one’s earnings.

Of course, he does rely heavily on the old Bach chestnuts of the “latte factor” and the mantra of “make it automatic.” Those things are true in pretty much every book I’ve read by him. After so many readings, I realize that these are really his core principles and he feels a need to hammer them home in every book he writes.

It’s a good book, especially if you’ve never read a David Bach book. If you’re under 40, though, there may be better choices – try reading Smart Women Finish Rich if you’re female, Smart Couples Finish Rich if you’re married or in a long term relationship, or The Automatic Millionaire if you’re under 40, male, and single.

This week, The Simple Dollar takes a look at David Bach’s The Automatic Millionaire. I enjoyed Bach’s earlier book, Smart Couples Finish Rich, but will I like this one, too? Let’s find out.

The sensational title of this book is a big eye-cather when you see it on the shelf. In fact, this book was one of the first books I read when I was in financial armageddon and I was stumbling about looking for answers – I couldn’t help but be attracted to the title of the book. I have great memories of staying up late and devouring this entire book in a single sitting, wondering to myself how this could all be so simple, yet I missed out on so much.

Basically, Bach focuses on two major concepts throughout the book. First, one should pay themselves first by automating contributions to retirement accounts and other investments before even thinking about living expenses. Once this is done, Bach uses the power of compound interest to show how even a small amount of paying yourself first can grow into, well, millions of dollars over the years.

In short, the sensational title isn’t a lie at all: this book really is a plan to become an automatic millionaire, which excited me greatly the first time I read the book. Since then, I’ve read mountains of personal finance books, and now that I’ve returned to this one, the big question I ask myself is whether it holds up in comparison to other personal finance books. Does the message contained in The Automatic Millionaire really stand up, or is it a book best left to people just starting their financial journey? Let’s find out.

Pay Yourself First

The first portion of the book focuses on the “pay yourself first” concept, which basically boils down to putting away investments for the future right off the top, before you even look at living expenses. It’s a simple concept, but one that most people either (a) don’t believe in, or (b) believe is far too difficult to try (usually because they’re “just getting by” as it is).

The truth is that the “pay yourself first” concept, even if you pay yourself only a small amount each day, simply works. Let’s say you are able to put aside ten dollars a day; that gives you $300 a month to invest. Start doing this when you’re 25 and put it in investments that earn an average of 10% a year, do you know what you’ll have on your 65th birthday? $1.66 million.

Many people think about a ten dollar bill and can’t possibly connect it to being a millionaire, but the power of compound interest makes it so, and people who can harness the power of compounding are the ones that become rich; people who don’t spend their lives scraping together two dimes to get by. Bach spends several pages focused on this concept alone.

Bach also spends time explaining how it’s not difficult, either: 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 … and up. Automation is the key, though, because without automation it becomes very easy to simply not save the money and instead use it for an unnecessary living expense.

The Latte Factor

The “pay yourself first” concept presents a problem for many people, however, as their living expenses often match (or even exceed) their income.

To solve this quandary, Bach introduces something he calls the “latte factor,” and uses a lengthy story to explain the concept. Basically, the “latte factor” refers to the tiny expenditures that you make each day without scarcely thinking about it. The name, thus, refers to the daily purchase of a latte.

Here’s an example from my own life that demonstrates the latte factor quite well:

When I was first starting out in professional life, I would start off each day with a latte and a bagel, costing together about $5. I would also hit the vending machine a couple of times each day at a cost of about $2 a visit. On my way home, I often would stop for a snack of some sort, adding up to about $3, and about two days a week would stop at the bookstore, averaging $10 a visit. Little expenditures, right? In a single seven day week, that added up to $80. Over a year, that comes out to $4,160. Investing that amount each year at 10% annual return until I was sixty five came out to $1.92 million dollars.

In other words, that morning coffee and that occasional new book was stopping me from becoming a multimillionaire.

So, if you cut out the latte factor (even partially) and invest that money each month, you can wind up quite rich in the end thanks to the power of compound interest.

Obviously, there are a few minor caveats here: inflation will reduce the actual value of that $1.92 million (meaning that a dollar then won’t be worth what it is today), and you’re anticipating always being able to put that amount away every single month, no matter what. On the other hand, even with some strong inflation, two million dollars is a nice nest egg.

Make it Automatic

The remainder of the book finds Bach applying the “automatic pay yourself first” concept to various aspects of financial life: building an emergency fund, being debt-free, and buying a home. In each case, the application is nearly obvious once the concept of making it automatic is clear, so let’s focus on that.

The “automatic” portion of The Automatic Millionaire basically refers to the process of setting up an automatic deduction from your checking account each week or month into another account. For example, if you’re saving to build up an emergency fund, you might set up an automatic deduction of $75 each week into an ING Direct savings account. On the other hand, if you’re paying off a home mortgage, you might set up automatic payments to the group that holds your mortgage.

This concept is very psychologically powerful. By simply having that money go away without any effort from you, you begin to reshape your life to this new “reality” quite easily. You check your account and when you see what’s in there, it already has the money you need to pay yourself taken out, so you budget based on what you have left. 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, but in a few places, Bach carries it too far. In one chapter, Bach advocates setting up a situation with a mortgage handler so that you pay them every two weeks instead of monthly in order to automatically make an extra payment every year. Unfortunately, this process often costs you a little fee each time that, when added up, removes most of the benefit of doing this. Instead of doing his plan, just do the monthly automated payment, then open a savings account and automatically put 10% of a payment each month into that second savings account. At the end of the year, empty out that account and use it as an extra payment on your mortgage. Not only are you still using the “automate it” philosophy, you don’t have to pay nonsensical fees for it.

Buy or Don’t Buy?

I’ll be honest: if I had read The Automatic Millionaire before I read Smart Couples Finish Rich, my enjoyment of The Automatic Millionaire would have been much higher. Why? The Automatic Millionaire is nothing more than a flimsy rewrite of the first one.

There is very little content in The Automatic Millionaire that isn’t in Smart Couples Finish Rich. The latter book is simply a better book: there’s much more content in terms of getting your finances straight, and almost all of the concepts that I’ve talked about this week are in it.

In short, don’t buy The Automatic Millionaire; if you’re considering buying it, get Smart Couples Finish Rich instead (I’ve heard similarly good things about Smart Women Finish Rich, though I have yet to read it). The only reason I can see to buy The Automatic Millionaire is if you want a very simple and quick read, because anyone could finish this book in a couple of hours. However, in going for brevity, you’re missing out on a lot of good information.

To be sure, I’m not condemning the book’s content at all, merely expressing disappointment that it’s so derivative. Bach’s earlier book was substantially better in every way; this one is sorely lacking compared to it, containing just a subset of the material with very little new thinking.

I originally reviewed The Automatic Millionaire in five parts, which you can find here, here, here, here, and here if you would like to read the original comments.

The Automatic Millionaire is the thirteenth of fifty-two books in The Simple Dollar’s series 52 Personal Finance Books in 52 Weeks.

This week, The Simple Dollar takes a look at David Bach’s The Automatic Millionaire. I enjoyed Bach’s earlier book, Smart Couples Finish Rich, but will I like this one, too? Let’s find out.

I’ll be honest: if I had read The Automatic Millionaire before I read Smart Couples Finish Rich, my enjoyment of The Automatic Millionaire would have been much higher. Why? The Automatic Millionaire is nothing more than a flimsy rewrite of the first one.

There is very little content in The Automatic Millionaire that isn’t in Smart Couples Finish Rich. The latter book is simply a better book: there’s much more content in terms of getting your finances straight, and almost all of the concepts that I’ve talked about this week are in it.

In short, don’t buy The Automatic Millionaire; if you’re considering buying it, get Smart Couples Finish Rich instead (I’ve heard similarly good things about Smart Women Finish Rich, though I have yet to read it). The only reason I can see to buy The Automatic Millionaire is if you want a very simple and quick read, because anyone could finish this book in a couple of hours. However, in going for brevity, you’re missing out on a lot of good information.

To be sure, I’m not condemning the book’s content at all, merely expressing disappointment that it’s so derivative. Bach’s earlier book was substantially better in every way; this one is sorely lacking compared to it, containing just a subset of the material with very little new thinking.

The Automatic Millionaire is the thirteenth of fifty-two books in The Simple Dollar’s series 52 Personal Finance Books in 52 Weeks.

This week, The Simple Dollar takes a look at David Bach’s The Automatic Millionaire. I enjoyed Bach’s earlier book, Smart Couples Finish Rich, but will I like this one, too? Let’s find out.

The remainder of the book finds Bach applying the “automatic pay yourself first” concept to various aspects of financial life: building an emergency fund, being debt-free, and buying a home. In each case, the application is nearly obvious once the concept of making it automatic is clear, so let’s focus on that.

The “automatic” portion of The Automatic Millionaire basically refers to the process of setting up an automatic deduction from your checking account each week or month into another account. For example, if you’re saving to build up an emergency fund, you might set up an automatic deduction of $75 each week into an ING Direct savings account. On the other hand, if you’re paying off a home mortgage, you might set up automatic payments to the group that holds your mortgage.

This concept is very psychologically powerful. By simply having that money go away without any effort from you, you begin to reshape your life to this new “reality” quite easily. You check your account and when you see what’s in there, it already has the money you need to pay yourself taken out, so you budget based on what you have left. 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, but in a few places, Bach carries it too far. In one chapter, Bach advocates setting up a situation with a mortgage handler so that you pay them every two weeks instead of monthly in order to automatically make an extra payment every year. Unfortunately, this process often costs you a little fee each time that, when added up, removes most of the benefit of doing this. Instead of doing his plan, just do the monthly automated payment, then open a savings account and automatically put 10% of a payment each month into that second savings account. At the end of the year, empty out that account and use it as an extra payment on your mortgage. Not only are you still using the “automate it” philosophy, you don’t have to pay nonsensical fees for it.

Tomorrow, I’ll give a final “buy or don’t buy” recommendation for The Automatic Millionaire.

The Automatic Millionaire is the thirteenth of fifty-two books in The Simple Dollar’s series 52 Personal Finance Books in 52 Weeks.

This week, The Simple Dollar takes a look at David Bach’s The Automatic Millionaire. I enjoyed Bach’s earlier book, Smart Couples Finish Rich, but will I like this one, too? Let’s find out.

Yesterday, we discussed Bach’s “pay yourself first” concept, in which an individual should put money away for their future before considering any sort of living expenses. This presents a problem for many people, however, as their living expenses often match (or even exceed) their income.

To solve this quandary, Bach introduces something he calls the “latte factor,” and uses a lengthy story to explain the concept. Basically, the “latte factor” refers to the tiny expenditures that you make each day without scarcely thinking about it. The name, thus, refers to the daily purchase of a latte.

Here’s an example from my own life that demonstrates the latte factor quite well:

When I was first starting out in professional life, I would start off each day with a latte and a bagel, costing together about $5. I would also hit the vending machine a couple of times each day at a cost of about $2 a visit. On my way home, I often would stop for a snack of some sort, adding up to about $3, and about two days a week would stop at the bookstore, averaging $10 a visit. Little expenditures, right? In a single seven day week, that added up to $80. Over a year, that comes out to $4,160. Investing that amount each year at 10% annual return until I was sixty five came out to $1.92 million dollars.

In other words, that morning coffee and that occasional new book was stopping me from becoming a multimillionaire.

So, if you cut out the latte factor (even partially) and invest that money each month, you can wind up quite rich in the end thanks to the power of compound interest.

Obviously, there are a few minor caveats here: inflation will reduce the actual value of that $1.92 million (meaning that a dollar then won’t be worth what it is today), and you’re anticipating always being able to put that amount away every single month, no matter what. On the other hand, even with some strong inflation, two million dollars is a nice nest egg.

Tomorrow, we’ll look at some applications of making this automatic.

The Automatic Millionaire is the thirteenth of fifty-two books in The Simple Dollar’s series 52 Personal Finance Books in 52 Weeks.

This week, The Simple Dollar takes a look at David Bach’s The Automatic Millionaire. I enjoyed Bach’s earlier book, Smart Couples Finish Rich, but will I like this one, too? Let’s find out.

The first portion of the book focuses on the “pay yourself first” concept, which basically boils down to putting away investments for the future right off the top, before you even look at living expenses. It’s a simple concept, but one that most people either (a) don’t believe in, or (b) believe is far too difficult to try (usually because they’re “just getting by” as it is).

The truth is that the “pay yourself first” concept, even if you pay yourself only a small amount each day, simply works. Let’s say you are able to put aside ten dollars a day; that gives you $300 a month to invest. Start doing this when you’re 25 and put it in investments that earn an average of 10% a year, do you know what you’ll have on your 65th birthday? $1.66 million.

Many people think about a ten dollar bill and can’t possibly connect it to being a millionaire, but the power of compound interest makes it so, and people who can harness the power of compounding are the ones that become rich; people who don’t spend their lives scraping together two dimes to get by. Bach spends several pages focused on this concept alone.

Bach also spends time explaining how it’s not difficult, either: 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 … and up. Automation is the key, though, because without automation it becomes very easy to simply not save the money and instead use it for an unnecessary living expense.

With regards of coming up with money out of your monthly income and expenditures to actually start doing this… we’ll discuss that tomorrow.

The Automatic Millionaire is the thirteenth of fifty-two books in The Simple Dollar’s series 52 Personal Finance Books in 52 Weeks.