The Automatic Millionaire: Make It Automatic

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.

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  1. Shane says:

    Instead of a mortgage handler, what I do is have my bank with free online bill pay, just cut a check every two weeks. It’s the same plan, and I don’t pay any extra.

  2. Trent Trent says:

    Shane, some banks have begun to offer that feature, but not nearly all of them. A lot of banks and mortgage handlers require a fee to do what you’re getting for free.

  3. Really? I thought something like 90+% of the big ones had free online bill pay. I’d say if your bank doesn’t offer it, then it’s worth switching or at least adding a bank that does.

    If Shane gets it for free, then perhaps other people should shop around and get it for free too.

  4. Joe says:

    I agree… it’s absurd to pay an extra fee just to pay off your debt quicker. However, it is an absolutely worthwhile approach, once the fees are taken out of the equation.

    One other point about Millionaire… I used to see the book in stores and pass it by because I thought the title, and the claim it makes were just ridiculous. Become a millionaire, automatically? Yeah, right. It wasn’t until I saw the audio book version in the library that I figured it wouldn’t hurt to give it a listen. That’s when I realized it was really a pretty silly claim to make, not because it was impossible, but because it was totally possible and practically necessary to accumulate a million dollars by retirement 25-30 years from now!

    It’s kind of ironic that he makes this bold, eye-catching claim with the title of his book, but when you factor in the time horizon and effect of inflation over that time period it becomes a big yawn.

    Great site btw Trent!

  5. Jay says:

    I read the Automatic Millionaire while in high school and it had a profound effect on me. Just flipping the switch from ‘not actively caring’ about my financial situation and future, to ‘actively caring’ has made my finances something to constantly improve upon.

    I’ve begun using the ‘every two weeks vs. twice monthly’ idea towards my car payment. I took the monthly payment and adjusted the amount to be based on 13 payments per year (rather than 12) and divided by 12. Now, each month I pay $39 extra, which comes straight out of principle, and I’ll end up paying off my car in 30% (or so) less time. All achieved in 30 minutes of number-crunching and time spent setting up the automatic payment through my bank.

    Great site by the way! I just stumbled on it, but I’ll be attempting to read your blog more regularly. Your advice, especially the range of financial-related topics, is fantastic!

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