The Automatic Millionaire is a great personal finance read by David Bach. Bach has written a wide assortment of personal finance books geared towards different audiences. The Automatic Millionaire is his most popular book and the one that applies to most people.
The book starts with a couple approaching Bach in their late 50’s worried about their finances. The couple approaches Bach for advice, trying to see if they are prepared for retirement. The couple has a dual income of approximately $60,000 a year, which is not a huge salary but provides them with a decent living. Bach takes a quick look over their finances and is surprised to see that the couple is well prepared for retirement. The rest of the story is about how this couple was able to become financially free on an average salary. Here are 3 valuable lessons you’ll find in this book.
1) Pay Yourself First – It is really disappointing whenever we get a pay cheque only to see how much gets taken off the top. The first person who usually gets paid on payday is not you but the government. Money is taken away in the form of Canada Pension Plan, income tax, and employment insurance. In addition you may have to pay a small fee for company benefits and insurance. All of these deductions can add up to as much as 30% depending on your tax bracket (it can be as high as 45-50% for people making over 100k). To bypass all of these deductions you can contribute to a Registered Retirement Savings Plan (RRSP), which can grow untaxed until it is withdrawn. When it is time to withdraw from your RRSP you should be retired, therefore your income is much lower (thus you'll be in a lower tax bracket) resulting in less income taxes. Another way to bypass tax deductions is to contribute to a Registered Education Savings Plan for your children. Either of these plans are great for paying yourself first and not the government.
Bach also suggests setting up an automatic withdrawal from your chequing account on payday into a savings account. It’s good to start with a small amount, like $5 or $10 each payday. Bach suggests that you can gradually increase this amount over time so that it doesn’t drastically change your lifestyle. Over time you’ll see a nice bundle of savings in your account. Another excellent personal finance read with the "Pay Yourself First" lesson is The Wealthy Barber. Check out: http://reynold-savemoney.blogspot.com/2010/06/one-of-best-personal-finance-reads.html for more information.
2) Latte Factor – Bach defines what he calls the Latte Factor, which are the dollars that escape our grasp on a daily basis. Often these small costs build up to large quantities of money. Bach gives an example of somebody who buys a Latte each day from Starbucks. Usually it’s only about $2, but while they are in Starbucks they decide to get a croissant and biscotti which adds up to $6. Do this for 5 weekdays and we’re already at $30.
With 52 weeks in the year and 3 weeks of vacation that’s 49 weeks of Starbuck Lattes and snacks. This adds up to a whopping $1,470! The thing about the Latte Factor is that usually we spend such small amounts on a daily basis we don’t even notice or give it a second thought. You don’t have to give up your latte all together, but when you are conscious about your spending you may be able to cut it down from 5 times a week to 2 times a week. Another important note is that when we’re in a position where we’re spending it’s easy to add in a couple extra treats. For instance in our Starbucks example, it’s not difficult for us to pick up a couple snacks when all we were planning to get was a latte. If we’re conscious of the extras we can also try to cut our expenses there.
3) DOLP – this stand for Dead On Last Payment. This is Bach’s system to prioritize paying down credit cards. This system could also work on other loans such as student loans, mortgages, car payments, etc... . Really this system can apply to all loans with the goal of minimizing interest costs. See this archived article for more details: http://reynold-savemoney.blogspot.com/2010/08/pay-off-debt-or-invest.html.
Check out this book at your local library. With these tips you can be on your way to becoming a Millionaire Automatically!
Here's an extra tip from David Bach to take 5 years off your mortgage!
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