"Automatic Millionaire," by David Bach

“Automatic Millionaire: A Powerful One-Step Plan to Live and Finish Rich,” by David Bach, (New York: Broadway Books; 2004), 237 pages.

"Automatic Millionaire" has a simple message: anyone can follow a few simple steps and retire as a millionaire. The first tip is to live within your means, which can be restated as don’t spend more than you earn. This becomes easier than you think if you omit wasteful spending habits, such as the daily latte/cigarettes/purchased lunch. Bach shows how eliminating these types of spending, when continued throughout an entire working life can, with compounding and prudent investing of the savings, grow to over $1 million over a lifetime. The final amount accumulated will be large the more you save and the earlier you start saving.

Bach’s second tip is to save for retirement automatically in pre-tax dollars every time you get paid. Saving in pre-tax dollars (using one of the tax deferred saving plans such as 401K, 457 etc) can quickly multiply your savings when investing pre-tax dollars, particularly when you have an employer that matches your contribution. Bach emphasizes that pre-tax automatic saving is the key. By investing pre-tax money the amount you invest and accumulate over your working life is greater than if invested from taxed money.

Bach’s third tip is to have a rainy day fund or emergency fund. Sometimes life brings large unexpected events, such as unemployment or large medical expenses. Bach states that the best way to manage such events is to have an emergency fund or cash reserve equivalent to at least 3 to 6 months of expenses. To his credit, Bach also provides readers with tips for finding secure places in which to keep an emergency fund, such as at-call high interest bank accounts, high interest deposits, and certain U.S. Treasury instruments.

The forth tip Bach gives is for readers to make their monthly mortgage payment obligation in two two-weekly payments. By paying the same monthly total in two installments two weeks apart, a homeowner can pay off their home a lot earlier (by almost 7 to 10 years) and reduce the total amount of interest paid to their bank over the life of the (now reduced term) loan. This simple task enables a homeowner to retire their debt much earlier, lower their total interest payments, and enable the homeowner to invest the money previously allocated to repaying the mortgage.

Bach’s fifth tip is to tithe or donate money to charitable or religious causes. Not only does the donation benefit the receiving organization, but it also is, in many instances, tax deductible.

Bach’s book is targeted to people interested in improving their financial position. His advice is sensible, and the implementation strategy (establishing once-off automatic savings, investment and mortgage repayment plans) easy to implement. The book is a good introduction for people interested in securing their financial security. Bach nicely shows how his strategy works for all income levels. He gives a real-life example of how using this strategy, a couple earning $40,000 per year, owns two paid off houses, and has investments approaching $1 million. To some readers, Bach’s message maybe familiar, or may have been made by other writers or personal finance advisers. This is probably good news as it endorses the strategy. It is a powerful message told in an accessible and non-technical style. It is a fine guide to convince and help regular workers on any income to live within their means, and to set up automatic plans that will ensure that anyone can become a millionaire at retirement.