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.