The Automatic Millionaire

The author is David Bach. He gives straight forward strategies without going round the bush in how to become a millionaire. A easy read with about 230 pages and 8 chapters.

The book starts with a meeting many year back between David and a middle aged couple who wanted to retire. David, a financial advisor then, was suspicious as the couple were in their early 50s and has an annual income of $53,946. But when the couple revealed their assets, David was awed as the couple had a net worth approaching $2 million. The couple then shared their story on how they were able to accumulate the money. The most important secret is that you do not need will power or discipline.

Chapter 2 is about the Latte Factor. It is about how you can cut down your daily unnecessary expenses and save the small amount. To see the effect, the author used a cup of latte and a muffin which cost $5. If you save $5 in a 10%pa return account, you will have $1,885 after the 1st year, $30,727 after the 10th year, $339,073 after the 30th year and $948,611 after the 40th year. This shows how a miserable $5 can become nearly $1 million.

Paying yourself first is perhaps the most important chapter in this book. This method is pretty simple. Have you done any budgeting before on how much you "would try to save"? Most of us would look at all our loans, bills, meals and transport expenses and after all that, we would then determine how much is left. There usually isn't much left and to make things worse, we have some impulse buys and this small amount usually became zero in no time. In paying yourself first, you should put aside your savings(transfer the amount out of your "salary" account first. It is recommended to save at least 10% of your salary. And to take the discipline out of your own hands, arrange with the bank to transfer this amount automatically every month. Another way of looking at the $5 is the number of hours you work for yourself. If you earn $3000 per month, it means you earn $100/day and $10/hr(assuming you work 30 days and 10 hours for simple calculation sake). By saving this $5, it means you are working for yourself for 1/2hours each day.

This book is catered for the US citizens where there are the 401k and 403b retirement plans. I guess that it is still applicable as in Singapore, we have the CPF. One for the ways is to transfer the maximum amount possible into the CPF account every year to enjoy the interest return. And all these transfers can be made automatic. As the CPF account only give 2.5% interest, you should invest this money in the unit trusts.

Next is to build your emergency fund. This ranges from 1 month to 36 months, depending on your needs. The method of paying your housing debt is a very simple one. Right now, most of us are paying your installments on a monthly basis. The method is just to pay half your installments on a fortnightly basis. Though this might seemed the same, let me explain by an example. If you are paying $1000/mth for 30 years, you are paying $12000 in a year and in total $360,000. If you pay $500(half of $1000) every 2 weeks, you will be paying $13000 in a year. Why? Because there are 52 weeks in a year and since you are paying every 2 weeks, you will be paying 26 times and 26 times $500 is $13000. So by paying every 2 weeks, you will be paying $1000 more. And do you know that by doing so, you would have paid your loan in 23 years instead of the original 30 years?

The author then talks about how to reduce your debts, mostly on credit card debts. Lastly, it about giving to charities.

Overall, this book has very good methods on how to grow your wealth and it does not really need you to research on investments(business, trading etc), except what unit trust to put your CPF money in. I strongly recommends this book. One of the very few books which I find useful in accumulating wealth.