As promised, here is our first detailed post about our book recommendation The Automatic Millionaire by David Bach.

As we said last week, The Automatic Millionaire is not a get rich quick scheme, or a financial plan that requires a lot of time and money. Bach outlines a simple plan that can help people at any income level become millionaires over the course of their career by making some easy decisions about money.

Today, we will discuss Bach’s first two outlined steps to becoming a millionaire: the “Latte Factor” and “Pay Yourself First.”

The “Latte Factor”

 

Bach’s “Latte Factor” is likely something we’re all familiar with. It battles the myth that you must make more money in order to be rich. What if you could save $3.50 a day? That’s $1,277.50 a year in savings, not including the affect of compound interest on that money.

Think you can’t afford $3.50 a day? How about more? The “Latte Factor” shows you where you can afford to make adjustment to your spending. Obviously, the idea is that if you get your coffee elsewhere (home or work), you can save about $3.50 a day by not stopping on your way to work for a latte at the coffee shop. But it doesn’t have to be a latte. The idea is that once you examine your spending, you will likely find some way you spend money daily that you can live without. Maybe it’s $3.50, maybe it’s $10.00, maybe even more.

Once you discover what your “Latte Factor” is (check out the book for a worksheet to help you decide what your personal factor is), make the decision to save that money instead of spending it. Even if you think, “How is this going to make me a millionaire?” consider it just a step: one small thing you can do to start you in the right direction. According to Bach” Becoming rich requires nothing more than committing and sticking to a systematic savings and investment plan.”

“Pay Yourself First”

 

The next step in becoming an “Automatic Millionaire” is to “Pay Yourself First.” Basically, this means when you get your paycheck before you pay anything else, pay yourself first by putting money aside for your future.

Sounds easy, but this is likely where many people fail. It’s much too easy to come up with reasons and excuses why you can’t save. You have bills to pay and situations always come up that require money. Then you find yourself strapped for cash, waiting for your next paycheck, and somehow no money ended up in your savings.

However, Bach believes Paying Yourself First is the most important step to becoming a millionaire. No, excuses, Pay Yourself First, and then your other financial commitments become secondary.

Paying Yourself First becomes more difficult when your paycheck has taxes automatically taken from it before you even see the money. However, if you have the option of a pre-tax retirement plan (401(K) or 403(B)) which can be funded by dollars directly deducted from your paycheck, then setting up automatic savings into this type of account is a way to Pay Yourself First before the government. If not, you can look into pre-tax accounts like a Traditional IRA to help Pay Yourself First. If you are unable to participate in a pre-tax account, at the very least Pay Yourself First by funding an after-tax account the day after you receive your paycheck and before other bills are paid.

However you want to handle it, Paying Yourself First is the most important step you can take. Savings then become a reality instead of something that you’ll do some day when you can afford it.

“Make it Automatic”

Even if you just follow these two steps, you will be on solid footing for your future. However, Bach adds another step: “Make it Automatic.” To avoid the need to spend excessive amounts of time and the need for a lot of discipline, making your finances “automatic” will help simplify the process and help ensure that it continues. We’ll discuss this step next week.

 

 

  • Disclaimer: The information on this blog is not meant for specific financial advice. The ideas/opinions stated are not suited for everyone, and readers should use their own judgment in applying them in their financial lives.
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