Automatic+Millionaire

Brian Szabela 12/11/08 __ The Automatic Millionaire __ In a mere 228 pages, David Bach has taught me to Pay Myself First. This is the main idea of his bestselling novel, __The Automatic Millionaire__. David begins his brilliant novel with a short anecdote referring to the first time he met a pair of automatic millionaires, the McIntyres, a middle-aged couple whose financial success story caused David to rethink his entire financial outlook. From there, David shares with his readers the steps to take to become a millionaire, automatically! Although this may sound like a scam, believe me, it’s the real deal. Like the McIntyres, David Paid Himself First and became an Automatic Millionaire, before he started writing bestselling novels. You may be wondering what the term Pay Himself First means. Well, it means just what it says, that when you receive payment for work you do, the first person that should benefit from your hard work is you. Almost all Americans who receive paychecks do not realize that they are actually paying the U.S. government before they can even take their hard earned checks to the bank. On average American workers pay about $.30 on the dollar in state and federal income taxes. So, instead of making $7 an hour at Chick-Fil-A, I’m really making closer to $5. The government takes money for Social Security, Medicare, and unemployment, and as David says “You need to set up a system that guarantees you’ll get to Pay Yourself First AUTOMATICALLY.” To do this, David suggests that you set up a 401(k) at work. Now for most high school teens, 401(k)s are not a very practical option. I don’t think that many fast food restaurants or clothing stores offer retirement plans to their part time employees. Luckily, David also discusses the IRA, or Individual Retirement Account, that almost anyone can set up. There are both traditional IRAs and Roth IRAs, both of which David discusses in great detail. I recently set up a Roth IRA, which is beneficial because although the government has access to my paycheck when I receive it, as long as I keep it until I am sixty the government cannot tax the money when I take it out of the account. David explains that in order to make your system fully automatic you need to contact your employer and set up direct deposit into the account. IRA accounts can be opened at hundreds of locations, such as at local banks, brokerage firms, or online at sites such as [|www.tdwaterhouse.com] or [|www.vanguard.com]. Once you set up an account, be it a 401(k) or an IRA, you have to select how you want your money to be invested. David suggests not to put all of your eggs in one basket, and proposes the Automatic Millionaire Investment Pyramid, which is based on two priciples: 1)  Your money should be invested in a combination of cash, bonds, and stocks    2)   The nature of this combination should change over time as your life situation changes. David divides an investor’s life into four parts: teens to thirties, known as the “Getting Started” years, thirties to fifties, known as the “Making Money” years, fifty to mid-sixties, known as the “Preretirement” years, and sixties and up, or the “Retirement” years. The pyramid changes as one gets older by transitioning from a somewhat high-risk portfolio to a conservative one. The nice thing about David Bach is his belief that “managing your money should be boring!” This said, he shows how to make it as easy as possible to set up accounts and automate their funding. David also talks about the Latte Factor, which is how an individual can fund his or her retirement account with money that will not be missed. What I mean by this is that people spend money daily that does not actually need to be spent, on such purchases as their daily cup of coffee from Starbucks, which adds up over time. David explains that if you can cut back on these splurges, it can really make a difference. Assume that you buy $5 of unnecessary items everyday. Multiply that by seven and that’s $35 a week, or $1820 a year. Now think about that over twenty years. It gets worse. Assume your “Latte” is cigarettes. Not only are you spending thousands of dollars a year on them, you are also killing yourself, puff by puff. Now, think what would happen if you took that $1820 and invested it. Assuming you earn 10% interest, which is what the stock market has averaged over the last fifty years, your $1820 a year for forty years would make you a millionaire, instead of putting you in the hole $72,000. Think about that for a minute. I know everyone has a Latte Factor, they just have to find it. Mine are lottery tickets, energy drinks, and fast food. I am now putting away $6 a day that I would have wasted away otherwise. The fact is, I think I will get more satisfaction knowing that I am automatically becoming a millionaire than by scratching of little pieces of paper in an effort to win a few dollars. The next step in David’s process to becoming an automatic millionaire is creating the “Sleep Well At Night” Fund. This fund does just what it sounds like it does; it helps you have a feeling of security. This is not extremely pertinent to high schoolers, but it is a very important concept that I feel I should talk about. According to studies, the average American worker has less than the cost of three months of expenses set aside as an emergency fund. This means that if someone loses his job, he would need to get a new one in less than three months in order to continue living in the manner he was accustomed to. David says that at the very minimum you should have three months worth of expenses saved and that there should be no maximum to the amount you save; whatever helps you sleep at night will suffice. The most common mistake when opening a Sleep Well At Night Fund is that people put the savings in a checking account or a savings account, both of which pay little to no interest. You should put the money in a money market account, which is like buying shares in a mutual fund that invests mostly in short-term government bonds. People often think that a large sum of money is needed to open these types of accounts, however, generally only $1000 is needed and in some cases you can start one with just one dollar. It is a good idea to shop around for the best interest rate by researching online and by calling local banks, almost like shopping for a new car. After you chose a money market account and get it set up, make it automatic to fully benefit from the process. Call your employer and set up a direct deposit to the institution that controls the account. On the contrary, you can bypass the money market account and directly invest in government bonds by visiting [|www.treasurydirect.gov] which offers both I-Bonds and EE Bonds. I-Bonds or Inflation Bonds have their interest rates adjusted according to inflation, are sold at face value, and can earn interest for up to thirty years. EE Bonds, or Patriot Bonds, were issued after September 11th, are sold at 50% of their face value, and can be cashed at full face value after they come due in thirty years. In my opinion, the money market account is a better option because your money has more liquidity, even though the government bonds are paying a little higher interest at the moment. The next section in the book regards buying a home and paying accelerated payments on the mortgage, and although this is the most important investment you will ever make, for the sake of space and the fact that home-buying is not in our near future I am just going to tell you this: for your first house, do not buy more house than you need, and make sure it is in your price range. David ends his book with a chapter on how to get out of credit card debt. For hopefully all students in Ms. Moeller’s 3rd period class, this is a nonexistent problem, at least at the moment. A general rule of thumb is to not spend more than you can pay off. If you do find yourself in debt, try to get it paid off before concentrating all your efforts on saving for the future. It does not make much sense to have money in the bank earning 5% interest when you have $1500 in credit card debt at 29%. I am a huge fan of the book __The Automatic Millionaire__ and I would recommend it to anyone. I hope that you, like I am starting to do, will follow the steps to becoming the next Automatic Millionaire. And remember, always Pay Yourself First.