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Now that I’m finally back in the swing of things here at Debit versus Credit I’m ready to bring back a popular feature (and one which I enjoyed very much): Friday Book Club. I began Friday Book Club in November of 2007 with three goals.  First, to be able to share what I’m learning with all of you.  Secondly, to absorb the material that I’m reading more efficiently by reviewing it and summing it up in a matter of just a few paragraphs.  Then finally, to be able to apply what we’re learning to our personal financial lives and share with each other experiences that relate to the lessons and topics at hand.  These are my goals and I hope that you will share these common interests with me.  Now then, where were we?

Today’s Friday Book Club will feature chapter 5 of The Automatic Millionaire which was written by David Bach, the New York Times Bestselling Author of Smart Couples Finish Rich and Smart Women Finish Rich.  Chapter 5 is entitled Automate for a Rainy Day and is all about creating an emergency fund, or a rainy day fund, for protection.  I’m a big believer in this.  In fact, my wife and I are already well on our way to having a six-month emergency fund saved up.  We’re about halfway there right now and it has been one of the easiest things that we’ve ever done.  You see when we got married we decided that we didn’t want to be like some of our friends who got into financial troubles (even little ones sometimes) and didn’t have any way to cover these “emergencies.”  So we decided that before we did anything else with our money that we’d establish an automatic savings plan which would begin an emergency fund for us.  It’s paid off quite well for us and we have peace of mind now if anything bad were to happen.  On to David’s advice then…

The “Sleep Well at Night Factor”

“How can you provide yourself with some financial security today?” is the question that David asks within the first few paragraphs of this chapter.  Are you prepared if something were to happen?  Could you pay your bills if you lost your job and were unemployed for two months?  Things happen and as he says, “circumstances change.”  So what can you do to provide yourself with some insurance against this chance of risk?  Of course the answer is quite simple.  By setting aside cash as an emergency fund you can help protect yourself and your family from any financially devastating changes.  How well are you prepared to weather any storms that life might throw at you?  David asks just a few simple questions where you can easily figure out the answer to this question.  I’ll ask them as well.

• My monthly expenses currently total: $_______________
• I currently have $_______________ saved in a money market or checking account
• This equals _______ months’ worth of expenses

How’d you come out?  I’ll do it with you.  My monthly expenses currently total (roughly) $1,162 dollars.  This includes some items which I could drop if needed (such as the internet and my phone).  I currently have $3,299 dollars saved in an emergency money market.  This equals 2.84 months worth of expenses.  Not the six months that my wife and I are shooting for, but like I said it’s a good start. (more…)

Today’s Friday Book Club will feature chapters three and four of The Automatic Millionaire which was written by David Bach, the New York Times Bestselling Author of Smart Couples Finish Rich and Smart Women Finish Rich.  The third chapter is entitled ‘Learn to Pay Yourself First’ and the fourth chapter is ‘Now Make it Automatic.’  I think these chapters go hand in hand, and that is why I’ll be reviewing and covering the both of them in todays’ Friday Book Club.

Learn To Pay Yourself First

David really touches down in this chapter about why learning to pay yourself first is probably the best and most sure way that one can become wealthy.  One of the first things he mentions in this chapter is that you should throw your budget out the window.  Now while I don’t necessarily agree with completely getting rid of a budget, I do believe that creating a strict budget and sticking to it is one of the more difficult and more stressful way to create wealth.  His point is instead of budgeting every little dollar, pay yourself before anything (or anyone) else.  This way the only money you have to live on is what is left after all of your taxes, deductions and your money spent on paying yourself first.  A great idea, if you ask me.

I want to touch on a topic that David brought up in this chapter.  He brought up a list of a few ways that one can become rich in this country.  While the list is not comprehensive by any means, I do feel that it is important and relevant to bring up in today’s discussion.  I’ll go ahead and list it for you now.

• Win it
• Marry it
• Inherit it
• Sue for it
• Budget for it

OR

• Pay Yourself First

What do you think?  Of course winning it would refer to winning the lottery or gambling of some sort.  Not a very reliable method is it?  Unfortunately a large portion of people in this country feel that winning the lottery will be the only chance they’ll ever have at becoming wealthy.  They don’t realize that becoming wealthy is not something that is out of their hands.  Indeed it is quite the contrary; the road to wealth and financial independence is a path that must be laid out by the person searching for the wealth.  If they do not, the wealth will not mean much, and will probably do them no good in the long run.  Think about it for a second.  Wealth is in YOUR hands.  Not mine.  Not your parents.  Not your significant others.  It is in YOUR hands to become wealthy.  It is in YOUR hands to manage your money, and make it work for you.

How do you do this?  Honestly… it’s easy.  Pay yourself first!  Contribute to your retirement accounts.  These are tax advantaged accounts which allow you to avoid paying taxes on a portion of your money until you retire.  If your employer does not offer a retirement account then start your own (In the form of an IRA or Roth IRA)!  Again, this is not difficult, and it’s even easy to set up automatic payments into these retirement accounts.

Now Make It Automatic

I like the way that David describes the importance of this step, and I’ll quote him for your reading pleasure.  “There’s no getting around it. In order for Pay Yourself First to be effective, the process has to be automatic.”  Truer words might have never been spoken.  Most people just don’t have the discipline to pay themselves first every single month unless the process is automatic and out of their hands.  Please do not take this advice lightly.  Make the process automatic and you will thank yourself later.

Using your retirement plan at work is an easy way to make the process automatic.  If your employer offers a retirement plan and you are not already enrolled in it, then drop everything until you have enrolled.  Most employers will match your contribution up to a certain amount, which gives you an automatic return on your money.  Where else can you get such easy money?  For more information on 401(k) accounts (the traditional work retirement plan) follow this link to Are You Ignoring Free Money.

Another way to create a retirement account and make the process automatic would be to open up an IRA account and then set up automatic transfers into this account.  Ask your bank or credit union if they offer IRA accounts, but make sure that their accounts offer different investment options other than just a set savings rate or cd rate.  You want to retire wealthy right?  You won’t build wealth by investing in 2 to 4% savings and cd accounts.  Ask about how you can invest your retirement in mutual funds and other higher-yielding accounts.  Another place you might go to inquire about an IRA or Roth IRA would be a brokerage firm such as Vanguard, TD Waterhouse, ING Direct, Sharebuilder, or Merril Lynch.

A Quick Overview

These chapters cover a lot more than what I’ve just mentioned and go more in depth with some numbers showing you how much even $3,000 a year can net you over the course of forty years.  It’s amazing how much wealth you can build with such a small investment, it truly is.  Please if you have learned anything from todays’ Friday Book Club, apply this to your life.  Open a retirement account if you don’t already have one, and then set up automatic payments.  You’ll thank me, you’ll thank David Bach and most especially you’ll thank yourself.

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Today’s Friday Book Club will feature chapter two of The Automatic Millionaire which was written by David Bach, the New York Times Bestselling Author of Smart Couples Finish Rich and Smart Women Finish Rich. The second chapter of The Automatic Millionaire is entitled ‘The Latte Factor’ and focuses on an idea of David’s (which he dubbed ‘The Latte Factor’) which in a nutshell says that anyone can save money by watching their unnecessary expenditures, such as a morning latte at Starbucks, which could be replaced with homemade coffee at a fraction of the cost.

The Latte Factor 

In the early parts of this chapter David explains how he coined the phrase “The Latte Factor.” He was teaching a four-week investment course years ago when one of his students spoke up and told him that his ideas were unrealistic and not really feasible in real life. David, being somewhat offended by this remark, asked the woman to explain. She said that it wasn’t really possible to save 10 dollars a day, that she was living paycheck to paycheck. David called her out on this and asked if she would play along and walk him through a typical day with all of her expenses. She has no problem with this and they begin his little game. It turns out that this woman spends over ten dollars before she is even through her work day! Of course we all have these bad financial habits, whether it be for a latte from starbucks or a pack of cigarettes or maybe even a bag of chips from the vending machine every day. These little expenses can add up quickly. As David puts it a latte a day (at $3.50) adds up to roughly $1,260 over the course of a year.

What That Latte Really Costs

After David covers how these small-item spending habits can cost us thousands a year he works some numbers and figures out how much this woman that he had been talking would be able to save over the course of 42 years at a 10 percent return if she cut down her daily spending habits and saved $5 a day, which is about $2,000 dollars a year. If this woman would do this simple act she would be able to save close to 1.2 million dollars by the time she hits the young age of 65. It sounds amazing doesn’t it? This is one of the reasons that I wanted to start this site, and why I am reaching for a target twenty-something audience. Compound interest (which means earning interest on your interest) is a powerful force. I believe it was Einstein who said it is the most powerful thing in the universe. Twenty-somethings (or even those in their later teens) are still young enough where they can truly take advantage of the power of compounding interest. Twenty-somethings are also a very self-gratifying generation. We know what we want and we get it, which isn’t always what is best for us in the long-term. I do believe that for some people “The Latte Factor” is a very viable alternative for finding ways to save money. If this saved money is investing wisely (which truly is not a terribly difficult thing to do) then it can (and will) lead to future wealth.

Overall I found this second chapter of The Automatic Millionaire very gratifying. It has some fantastic principles and sound advice for anyone to apply to their own lives. If you haven’t checked out this book yet I’d encourage you to get it, or at the very least check it out from your local library and give it a quick read (it’s very easy reading). David does a great job relating to anyone and giving sound advice, while keeping things entertaining.

A Financial Tool For Your Use 

For those who are interested I threw together a spreadsheet which you can use to calculate how much money you could save over the course of forty years by cutting back on your expenses and saving a certain dollar amount a day. It’s a really easy spreadsheet to use, just plug in the dollar amount which you think you can save a day into the dark green box, which will then calculate the monthly savings and plug that number into everything else. The blue box will show the amount that you will have accumulated after forty years. Give it a try, you can download it by clicking HERE.

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