Best Answer: David Bach believes one of the most powerful ways you can gain control over your financial life is to take advantage of the automatic savings and payment plans available to the average individual today.*
Mr. Bach is the author of "Smart Women Finish Rich" and "Smart Couples Finish Rich." His latest book, "The Automatic Millionaire," was released in January and became a national bestseller, reaching No. 1 on The New York Times, Wall Street Journal, and USA Today bestseller lists.
In his latest book, Mr. Bach details ways people can use automatic plans to save for retirement, pay off their mortgages early, and achieve other financial goals, including identifying ways to limit wasteful spending.
Investor's Weekly recently caught up with Mr. Bach to discuss the themes of his latest book.
Q. The title of your book—"The Automatic Millionaire"—is compelling. On one level, it seems to imply that it's easy to become a millionaire, but the book really communicates something altogether different. What are you trying to say with this book?
Mr. Bach: The goal of the book is to get people to do something when it comes to saving and investing. If you want to build wealth over your lifetime, the only sure way to do it is to get your plan on autopilot and make everything that's financially important in your life automatic. Essentially, the federal government has been doing this for the past 70 years. The government started automatic movement of your tax money seven decades ago because it figured out people couldn't budget for it.
The same is true for many businesses today that take money automatically out of your checking accounts or charge your credit cards. You can't, for example, join most gyms today unless you give them the right to automatically deduct money from your account. I recommend that people automate a handful of things in their financial lives. You can set it up once in less than an hour and then go back to your life.
There are two core principles of building wealth. No. 1, pay yourself first and do it automatically. It won't make you rich overnight, but it potentially might make you wealthy over your lifetime. No. 2, you have to own a home; you can't get rich being a renter. The statistics and studies bear out that the average renter is poor. The average renter in America has a net worth of less than $5,000, while the average homeowner is worth 31 times more—upwards of $140,000.
Q. You mention the "Latte Factor" in your book. What does this have to do with saving?
Mr. Bach: The "Latte Factor" is a metaphor for looking at how you spend small amounts of money every day. Are you having a latte and a muffin every morning? In New York, that can cost you $7 these days. Are you smoking a pack of cigarettes every day? Are you drinking bottled water? What's the little stuff you're doing every day that could add up to all that money you would need to save?
If people could save $10 a day, they would save $3,650 a year. And if they did that, they would be saving $36,500 a decade. And, by the way, if you did that over your lifetime, you could potentially be a millionaire. Invest $10 a day for 35 years at 10% (which is what the stock market has averaged for 50 years**), and you will have $1,163,796! And if you and your spouse would do it, you could potentially become multimillionaires.
Q. Your message is one of plain old common sense. Why do people have a tough time moving beyond paycheck-to-paycheck living?
Mr. Bach: It may seem like common sense, but it's just not taught. It's not taught in the home. It's not taught in the schools. I grew up around the dinner table with my parents talking about the stock market. I bought my first stock when I was age 7. Why doesn't everybody buy their first stock at age 7? I can remember my grandmother taking me to McDonald's and telling me, 'You can either be somebody who works here, somebody who eats here, or be somebody who owns the place.'
We learn by example. We learn by seeing what our
parents do. What many of us see is our parents using credit cards. We see them living paycheck to paycheck. And, in many cases, they're leasing a lifestyle instead of owning it.
Q. What are the different ways people can take advantage of automatic savings?
Mr. Bach: If you've got a job and your employer has a 401(k) plan or a 403(b) plan, you should sign up for the plan and use it. I recommend saving at least an hour of your income each day. The reason I say an hour day instead of 10%, is that when you tell people who've never saved anything before and you say 10%, it's such an overwhelming number that they do nothing. I ask people, 'If you're going to work eight to 10 hours a day wouldn't you like to keep an hour a day of your income?' And people say, 'Of course, I would!' It's getting people to think about it in a different way.
The second thing I would tell people is to set up an emergency account. For example, if your employer has a system where you can automatically have money taken out of your paycheck to buy government savings bonds, I would use it. It's a great place to build an emergency account. The point is to save automatically—$50 or $100 a paycheck—and buy savings bonds or have it go directly into a money market account.
A third thing I would recommend is that people set up a "dream" account. Every time you get paid—whatever it is, $10, $15, $20, or more—you should move money automatically into a mutual fund for your dreams. For someone who has dreams going out five or more years, a balanced fund or a lifestyle asset allocation fund are great choices.
Q. You're a big advocate of paying off one's mortgage early, preferably by signing up for a biweekly mortgage. Why do you place so much importance on this?
Mr. Bach: If you own a home, a biweekly mortgage is a complete no-brainer. The idea of a biweekly mortgage is you take your mortgage payment and you split it in half and pay it every two weeks. Over 52 weeks in a year, you wind up making an extra payment. Usually, there's a fee associated with such payment plans, but the savings over time will exceed any fees you'll be required to pay. You can take a typical 30-year mortgage and pay it off between five and seven years early. People have been told to make extra payments on their mortgage, but they typically don't do it. It goes right back to the fact that if it's not automatic, it won't get done. Establishing a biweekly mortgage is one more way to have a forced savings plan.
In my nine years as a financial adviser, my experience has been that people who pay their mortgages off early retire early, and in many cases they retire as much as 10 years earlier. That's significant. The common denominator of all my clients who retired in their early 50s is they had no debt. I've had a lot of clients who made $200,000 $300,000, or $400,000 a year and had to work well into their 60s because they had a very expensive lifestyle and a million-dollar mortgage to support.
Q. Has today's technology made automated savings much easier for the average individual?
Mr. Bach: In the last few years, people have been much more willing to do this automatically than in years past. You can do this sitting at home with a computer linked to the Internet. I can remember meeting with clients in the early 1990s and talking to them about systematic investing. People would look at you like you were crazy. 'That's a great idea David," they would say, "but I don't want money moved out of my account automatically." Today, the majority of people are comfortable with it.
People shouldn't be afraid to do this. A lot of people say it sounds too easy. It's not that it's too easy—it's just not hard. It can be done in less than an hour. Then you're done. My message is that it's a lot harder being poor than rich, so anything you do to improve the odds of being rich is a good thing.