Be an Automatic Millionaire - if only it was that easy...right? When I first came across this book, I had just finished my Bachelors degree in Business Administration and was starting my first full time job at a Financial Services Company. I was gifted the book a couple months back from a friend, but pushed it aside until after graduation. This turned out to be perfect timing as this book covers some great basics for beginners.
1) Millionaire next door - The average American Millionaire couple earned a combined income of $55,000 (written 2005) during the course of their entire career! This was a big surprise for me as I assumed you needed at least a combined income of $150,000 or more to be able to save significantly. These Millionaires were able to save with a modest income by budgeting, paying themselves first (more details below), and automating their finances. This leads to the next key idea.
2) The "Latte Factor" - The term coined by David which is the idea that you can become a millionaire by changing financial habits that snowball and have an overall big impact to your savings. Being a millennial, I've seen countless articles on "Don't eat Avocado toast if you want to purchase a home", "Don't go to Starbucks and save those dollars". I think its loosely based on the same concept. While I disagree that Avocado toasts and Starbucks are the main reasons why people do not purchase their first homes (i.e. Market prices, Fear of the 2008 crash, prefer to be renters, etc.), I do agree that small habits can give you the option to make the big purchase such as a house, impact your finances greatly, but it is often missed because these expenses are not considered in the aggregate.
If you think about it, $3-5 dollars at Starbucks may not kill your budget, but if you have read other financial books such as Rich Dad Poor Dad (I love this book!), you will know that the rich focus on creating/purchasing assets as quickly as possible, that will continue to build them wealth in the long run. What I mean is, that $3-5 dollars a day, or $1450 a year (rough estimate) can go towards buying mutual funds at a modest 8-12% return, rental properties with $100-200 cash flow per door, or even towards getting that degree that may double your salary, etc. And that is just ONE habit.
I personally view expenses now in terms of opportunity cost. For example, you might want to take a trip to Vegas with your friends after graduating, but with food, travel costs, and other expenses, you might be out of pocket $500 bucks over a weekend. Now some may argue that they do not want to deprive themselves of fun, and I totally understand, I am merely trying to prove a point and that change in "mindset" is most important.
3) Paying yourself first - This concept I was already familiar with from reading "the Richest Man in Babylon". A simple idea in which you always want to pay yourself first (legally of course), before anyone else - the government, landlord, utility company, and any other bills that may come your way.
Now, how can we do this? There are many different strategies and methods, but one is simply through 401Ks and IRAs. By automatically setting up money to go to your 401Ks and IRAs you are deferring your taxes and growth until retirement.
Simple example: Lets say John makes 50K a year and pays 25% in taxes. Without paying himself first, he will lose 12.5K to Uncle Sam and have $37,500/year or $3,125/month left over to pay the bills. Now lets say he decided to put 15% of his pre-tax income into a 401K (This is very achievable). Now, out of the 50K/year income, 7.5K is going into his 401K Tax free, and he is being taxed on $42.5K which amounts to $10.6K in taxes or overall savings of $1,875. Now this is a very simple illustration and everyone's tax deductions and credits will vary, however, there will be tax savings as you are reducing your "taxable income" off the top. Note: 401K I used in this example is deferring of taxes, not eliminating it, however, it is taking into consideration that with compound interest (Warren Buffet), we will have a built a sizable portfolio from starting early and often.
4) Automate it, take action NOW - The most important part of this book is automation. Like the title says, these ideas are only good on paper unless you act on it. So David challenges the readers to take baby steps in making changes - 1) increase 401K contributions (Check) 2) automate paychecks to go to different accounts - 401K, checking, bill pay account, etc. (Check) 3) Create a rainy day savings account worth 6 months of expense (Check).
Once I decided to take action, I have to admit it took me less than 15 minutes to automate my expenses and also create a savings account to save up for a 6 month rainy day fund (This step is critical as I personally ran into Car issues couple months later and it wiped out my savings. Luckily, I was able to rebuild it and I didn't have to rely on loans, credit cards, or anything else due to my rainy day fund).
Overall, I think book provided a great basic foundation for my finances and helped me pay for my wedding all cash, save up for a downpayment on my house, payoff any loans all in the span of 4 years. Write down your thoughts below!
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