Review: Automatic Wealth for Grads

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automatic wealthAutomatic Wealth for Grads was recommended to me by a reader of The Simple Dollar, a college student that I had exchanged several emails with. He described the book as inspirational and enlightening, but more difficult to follow than it seemed at first – I told him that most personal finance books were like that. However, his positive remarks made me seek out this interesting title.

Automatic Wealth for Grads takes an interesting approach to personal finance success. Instead of focusing on the mechanics of managing money, it more or less makes the assumption that you’re not in debt to begin with. The book starts off with the concept that you’re freshly out of high school with no debt to your name and gives a lot of advice on where to go from there to build up a lucrative career.

What does that mean? The book doesn’t offer extensive advice on escaping debt or budgeting – if you are looking for that information, look elsewhere. Instead, the material in this book is more along the lines of What Color Is Your Parachute? (read my review) or some aspects of Rich Dad, Poor Dad (read my review) – it focuses on building a career and building wealth more than money management techniques.

Is the information inside worthwhile, though? Books that take this route often come off as “get rich quick” schemes – does this avoid that trap and actually provide useful and tangible advice? Let’s find out.

A Deeper Look At Automatic Wealth For Grads

Chapter 1 – Wealth Matters: You Decide How Much
The book opens by describing the “crossover point” concept: in other words, the amount of money you’ll need in the bank so that you can live off of the income from the investments. Most of the chapter leads up to calculating the amount of money that you would need locked away in investments so you could live off of the interest (divide your annual desired salary to live on plus taxes by the return you expect on your investment).

The chapter does make some very optimistic statements about salary, perhaps doing this so that the book will still seem timely in a few years. It uses ranges to define what a salary is worth and basically states that $140,000 a year in household income is just “getting by.” While this might be true in some areas of the United States, it certainly is not true in most of the country – that type of income would leave you in very nice shape in most of the country.

Chapter 2 – Starting Young: How to Take Advantage of the “Miracle” of Compound Interest
A large portion of this chapter focuses on the tremendous power of compound interest and the idea that the sooner you harness it, the greater the effect it can have on your life. In other words, the earlier you begin seriously investing, the greater your rewards will be throughout your life.

Masterson advises that even as a recent graduate, one should immediately begin investing 15% of their pre-tax salary in something for the long haul – and a greater percentage than that if your salary is a strong one. If you leave college and begin investing 15% of your salary immediately, you will be well on your way to reaching that the “crossover point” discussed in the first chapter – compound interest will be in your corner all the way along. Of course, that means that your first years will be lean ones – you’re basically choosing not to have a new Lexus when you’re 25 so you can afford a new BMW when you’re 45.

Chapter 3 – Choosing a Rewarding Career: Making the Best Decisions Easily
This chapter (and, to a degree, the one following it) is basically a nutshell summary of the book What Color Is Your Parachute? (read my review). It’s basically a guide to figuring out what kind of career you want to have.

This portion of the book felt somewhat out of place to me – it felt like advice that would be great for someone much earlier along in their life path than a college graduate, although most of it is still applicable at that stage. This is the type of advice that would be great to give to a high school junior, encouraging them to use their senior year and maybe a bit of time after high school exploring what they actually want to do with their life.

Chapter 4 – Your Next and Best-Ever Job
Here, though, the book moves on to actually getting a good job out of college. Mostly, it’s a series of tips on how to write a solid resume, land an interview, and knock an interview out of the park. The advice really boils down to three nuggets: know what you’re interviewing for (the job itself, the company you work for, the people you’re going to be interviewed by, etc.), ask for an informational interview (call the office in advance and ask for a short, nonthreatening informational interview with the person who would be supervising you where you basically ask what they do and what the business is about and listen), and follow up with politeness in the form of a handwritten thank-you note.

Really, though, if chapters three and four really pique your interest, I highly recommend grabbing the whole enchilada and picking up What Color Is Your Parachute?. It’s basically a more thorough and engaging version of the information presented in those two chapters.

Chapter 5 – How Easy It Can Be to Earn a Very High Income
Here’s the plan in a nutshell: get hired at a small company, spend some time learning everything you can about the business as a whole, then start making suggestions high up the chain but with deference to your current supervisor, giving him or her partial credit regardless of how much real input they had. Rinse and repeat. That’s basically this entire chapter in a nutshell.

The only drawback is that this is a tremendous amount of work, but as a recent graduate, this is the time in your life that you should put in that work to build a foundation for the rest of your life. The people that are on top today didn’t spend their twenties sitting around every evening playing X-Box, they spent that time working their tails off doing these types of things to get ahead and stay ahead.

Chapter 6 – Starting Your Own Multimillion-Dollar Business
This book treats a progression from a great job into owning your own business as a completely natural one, a shift I’m not sure I agree with. Owning your own business involves a lot of risk, and while Masterson does pay attention to risk, he is quite confident that owning your own business is the way to go. I personally don’t believe the risks of business ownership are for everyone.

That being said, there’s a lot of good advice dispensed here, much of which parallels my own guide to self employment. Most of it focuses on not jumping into a business without a good plan, an understanding of the risks involved, and a healthy amount of money in the bank in case things don’t work out.

Chapter 7 – Why Real Estate is Right for You Even Now
Here’s the one part of the book that made me uncomfortable, and it’s the same thing that has made me uncomfortable with many books that discuss real estate. This book basically guarantees ridiculous returns in real estate, but all of the numbers are based on the real estate bubble, which is either bursting or at the very least settling right now. While it’s fine to invest in real estate a bit, but this chapter greatly overstates the case because of the incredible spike in housing from 1996-2006.

Chapter 8 – Investing in the Stock Market – The Smart Way
Masterson has some much more realistic ideas about investing in stocks. In a nutshell, invest in mutual funds with very low fees (or index funds). He offers about two pages of cursory advice about individual stock investing, most of which boils down to invest in companies you know and use the “trailing 25% rule,” which basically means that if you buy a stock, you should sell it when it drops 25% from the highest point that you owned it.

He then goes on to explain potential ways to leverage tax advantages for investments by putting them in accounts that are pretax investments (like 401(k)s) or have their earnings protected from taxes (like Roth IRAs), along with advocating using as many tax writeoffs as you can.

Chapter 9 – Living Rich Starting Tomorrow
The book ends with some tips for personal productivity and development: eliminate distractions from your life (like television), reduce stress, set goals in your personal life that leave you fulfilled, and enjoy the finer things but not in overabundance – focus on simplicity. This chapter is fun (with tidbits like how to open a champagne bottle), but it somehow feels a bit out of place with the rest of the book.

Buy or Don’t Buy?
Automatic Wealth for Grads was a very enjoyable read with mostly sound advice in it (outside of the chapter on real estate, which is somewhat dodgy). The concepts are rational and link together well, and it’s quite readable and engaging. It does cover a lot of topics in a limited amount of space, however, so if one of the pieces of the puzzle sounds particularly interesting to you, you’re probably better off seeking a different book that focuses in on that topic, like a job-hunting book or a stock investing book or a small business ownership book.

Given that, I give Automatic Wealth for Grads a buy recommendation, particularly as a gift for a levelheaded graduate. There’s a lot of good advice crunched into this relatively short but quite readable book that could plant some valuable ideas in a young person’s head at just the right time so that they can begin executing them and live out a life of both material and spiritual abundance.

Automatic Wealth For Grads is the thirty-second of fifty-two books in The Simple Dollar’s series 52 Personal Finance Books in 52 Weeks.

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5 thoughts on “Review: Automatic Wealth for Grads

  1. As a college senior, I think this book is a good introduction to young people to the different ways to become wealthy, whether it be through consistent contributions into stocks, real estate investing, or starting your own business. Obviously, some of the numbers provided are a bit rosy, and some of the real estate advice given is sketchy. Personally, once I saw the end result of saving now for the future, it made it a much bigger priority to learn about some of the things not covered in the book, like budgeting.

  2. You can find out more of Maserson’s philosophy at http://www.earlytorise.com. He has a daily email letter (weekdays I believe) that goes into a lot of detail.

    I will warn you that you need to have a filter present, especially with the related ads that come, but he has some really good tips and the price is right (free).

    Keep your eyes open though. A good follow on book review might be _Automatic Wealth_.

    Brad

  3. The stock market advice from Chapter 8 is pretty generic…same ole stuff you get from many of these books. Would you ever go to a grocery store where you were not allowed to see prices? You simply shopped for all the items you wanted and then after your payment was processed you were told the total that was already deducted from your account. The store could basically charge you ANY PRICE they wanted…no matter how outrageous. Well, most of us always ask “how much?” before we buy groceries but we never ask how much when we buy stocks or funds. Warren Buffett says that “we should buy our stocks like we buy our groceries, not our perfume”…always asking how much? It’s important to know that price is what you pay, but value is what you get. If you fail to ask how much then you are likely buying without any margin of safety. Simply saying that you should sell a stock if it drops 25% below the purchase price is in no way a substitute for margin of safety.
    If you are going to buy stocks then it is important that you can have some sort of quick and dirty method of placing a value on that stock(or index), then compare that value to the quoted price. Anyone of average intelligence can do this with a little homework. You don’t need to derive a precisely calculated method, because value is something you should recognize when you see it. It should almost jump off the page at you. Margin of safety is simply getting more than what you paid for. Isn’t that the essence of our frugal lifestyle? Why should we do it any differently with our investments?

    Probably the best way for the average person to get value(in a passive manner)is to buy stocks through a program of dollar cost averaging. This means that you will contribute a set amount into a portfolio of well selected stocks(or an index fund) on a regular basis through thick and thin, good markets and bad markets(dividends and distributions automatically reinvested). This ensures that you buy more shares when the market is cheap, and less shares when the market is extended in price. This is really value investing by default. Warren Buffett said “When dumb money realizes its limitations it then ceases to be dumb”

    If you would like to learn more about simple valuation metrics used for buying stocks at sensible prices, and always with a margin of safety, then I’d recommend these books…..

    Wall Street on Sale…by Timothy Vick
    How to Pick Stocks Like Warren Buffett…by Timothy Vick
    The Little Book that Beats the Market….by Joel Greenblatt
    The Essential Buffett…by Robert Hagstrom
    The Dhando Investor…by Mohnish Pabrai
    Beating the Street…by Peter Lynch
    One Up on Wall Street…by Peter lynch

    The following publicly traded investment companies will allocate capital into investments on your behalf using a deep value oriented framework as a guide. These guys are good and their long term stock charts and track records are highly impressive. The managers of these companies all own a signifigant amount of the stock, so their money is invested with you. They eat their own cooking. these options would offer a somewhat passive way to ensure that you are always asking “HOW MUCH” and that you are always getting that critical “margin of safety”. These companies have outperformed 99%(or better) of all mutual funds over long periods of time. These companies don’t(or rarely) pay dividends because that money can be retained, reinvested, and compounded at high rates of return on your behalf. There are no tax issues to interrupt the compounding dynamics. Dividends are always taxed as income, and the likelyhood that you could compound these distributions yourself at the same rate as management is unlikely…given their impressive track records.

    Sears Holdings(SHLD)
    Leucadia National(LUK)
    Berkshire Hathaway B shares(BRK B)

    I own shares of each, and this is in no way a recommendation by me to buy or sell a mentioned stock.

  4. Wait a minute…how are you supposed to save 15% if you start out with student loan debt and a minimum wage job?

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