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
- 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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