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.