Book Review: The Automatic Millionaire
How do you turn an average income into greater than average wealth? What steps does it take and how can you get started? All explored in The Automatic Millionaire by David Bach.
Book Summary Notes: The Automatic Millionaire
- The easiest way to accumulate money is to set up and follow an automated system for managing your money.
- Time is the greatest ally when you begin saving. Small deposits into a savings account may not look like much alone. But done consistently over time and allowing compounding to kick in will really move the needle.
- Do you want to work for your whole life for money? Or would you rather put money to work for you?
- Worried that you can’t start saving because maybe it’s to little? That’s fine just get started anyway. Further down the line you can reevaluate as you get comfortable with your current savings rate. Once your ready try bumping up the savings rate. Even if you started saving just 1% of your take home. Next month take it to 2%. Work on small increases and simply focus on the changes needed for that next 1%. Even if you started at 1% and moved another 1% per month by the end of the year your now saving 13% of your take home salary.
- By keeping the changes small and only focusing on that next 1% you avoid getting overwhelmed or having to make huge, drastic lifestyle changes to accommodate the increases to your savings rate. If you continued down this road you’d be saving 25% of your take home pay by the end of the second year. You’re well past average at that point and should be seeing some awesome levels of accumulation happening.
- As this goes on don’t forget that any bonuses, raises or unexpected windfalls should also be immediately contributed to your savings. Don’t go and waste it! Make sure you stay accountable and stay on your path to saving.
- By keeping any additional bonuses or raises going towards your savings you also avoid lifestyle creep. That is the gradual increases most of us let into our lives.
- Now what do you do with all of this money your saving? Invest it! Learn about low cost index funds and how they can be a powerful way to put your money to work for you.
- When your pay first comes in make sure you pay into your savings first. Always work out your budget and what you have left to pay towards bills from the remainder. Saving and investing should be high priority.
- If your saving for your retirement don’t forget to use your tax advantages accounts to save on tax during the year. It’s a double win! Your saving for retirement while also keeping more of your gross pay.
- Remember that humans are terrible with things like discipline. Sooner or later we get lazy or forget. So combat this by using direct debits or automatic transfers when your pay comes in, to your savings or investment accounts.
- While investing and putting your money to work is incredibly powerful don’t forget to protect your finances with an emergency fund. This should be an amount of money used exclusively for unexpected expenses. You can choose how much to keep but most people will eventually want to accumulate 6 months of living expenses in cash in this account.
- This emergency fund is not something that should be dipped into frequently. In fact if your having more than one emergency per year then your probably not doing it right. Reassess your budget, get yourself a bills account that you contribute to each pay cycle that covers your irregular bills. If your car bursts into flames one morning before work, that is an emergency. If you have an electricity bill due, that is not an emergency, just poor planning on your part.
- Buy your own home as soon as you can. Homes get you out of the rental cycle and allow you to start accumulating equity. Once paid off it will also allow you much greater ability to save.
- Pay your mortgage as frequently as possible. Don’t fall into the habit of only paying your mortgage once a month. Split the payment in half and do it every second week. This allows you to get extra payments in each year (12 monthly payments vs 26 bi-weekly ones) and it means less interest over the long run that you’ll have to pay.
- It should go without saying but pay off your credit cards and if you can’t keep them under control and paid off each month then close them so you don’t accidentally derail your hard work.
