Today’s Friday Book Club will feature chapter one 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 first chapter of The Automatic Millionaire is entitled ‘Meeting the Automatic Millionaire’ and focuses on a middle-aged couple that David met when he was in his young twenties. This couple meets with David to discuss their retirement, which he assumes is still quite a few years off. He is shocked to discover that this simple-minded couple actually has a net worth of close to 2 million dollars, and begs them to share with him their secret. Chapter one of this fantastic book covers the rest of the conversation that David shared with this couple and is a great introduction to how simple it really can be to become an “Automatic Millionaire,” as David Bach puts it.
Just about the first thing that David does with this couple is look at their financial statements which they had brought in. For the previous year they had earned about $53,000, which he refers to as a decent income. While scanning their financial statements he did not see any debts listed, when he inquired this happy couple about it they told him that they “don’t do debt.” Looking further into it he saw that they owned two houses, both of which were completely paid for. They lived in one of the properties, and the other they kept as a rental property. They also owned three cars, a boat and had roughly $900,000 dollars between three retirement accounts, municipal bonds and a bank savings account. At this point I was floored, as was David. I couldn’t believe what I was reading. My wife and I make a little bit more than this couple does every year, and just thinking about how they were able to build up their net worth like this in just under thirty years was exhilarating.
The only thing we inherited was knowledge. Our parents taught us a few rules about handling money. We just did what they said, and sure enough it worked.
David mentions at this point how he couldn’t believe that such ordinary people with an ordinary income could have amassed such great wealth and he asks the couple if they had inherited any of it. The man laughed and said “Inherit? The only thing we inherited was knowledge. Our parents taught us a few commonsense rules about handling money. We just did what they said, and sure enough it worked.” They then go on to talk about how they started to set aside money every single paycheck (on average 10 percent) when they were newly married to save for retirement, then a down payment on a house. They also brought up what David refers to in this book as the “Latte Factor.” They talked about how getting rid of little spending habits they had which could probably be done without was part of their success in becoming financially independent. For their example they mentioned how they both smoked and decided that if they would just stop smoking and save they money that they spent on cigarettes they could have enough money for a down payment on a house saved up within two years, and of course save their health in the process.
Next the couple that David is interviewing mentions that they accelerated their mortgage payments in order to pay it down more quickly. A really neat trick that they used which I found interesting was to cut the monthly mortgage payment in half and instead of paying the full payment amount once a month pay the half of it twice a month. According to them this would cut a 30 year mortgage down to only 23 years. They also contributed even more to the principal when they could which cut down the time until their mortgage was payed off even more. By the time they were in their late thirties their house was payed off and they decided to move into a nicer house and rent out their first house. This brought them in monthly rental income and helped them pay off their new house mortgage even more quickly than their first one.
It’s amazing isn’t it? I mean honestly here’s a couple who truthfully doesn’t make all that much money a year. It’s a modest amount for a family, to say the least. Yet they managed to have the financial discipline to make sure they pay themselves first, before anything or anyone else. This is how they amassed their wealth, and this is the biggest thing that David was flabbergasted about: their financial discipline. Yet when he asks them how they were able to be so disciplined they tell him that they took it out of their hands; they automated their savings, which ensured their success. This is what I love, because this is what I do, and it works great. Just as I mentioned in My 33% Savings Plan I have my money processes mostly automated. Every two weeks when my wife and I are paid a set portion is transferred from our checking account to our savings and investment accounts. This is the best way that I have found, and I believe this is the only way to ensure my future financial independence.
Let me make a quick bullet-point list for you of the main highlights of the chapter, or the different ways that this couple were able to become “automatic millionaires.”
- Cut out wasteful spending
- Accelerate mortgage payments (if any)
- Pay yourself first, and do it automatically
- Avoid debt at all costs – save until you can pay cash for something
- Don’t get trapped in the web of credit card debt
If you have anything to share about this book or if you have applied any of the principals learned in this to your life, or plan to apply them to your life please leave a comment or send me an e-mail. I love to hear from you all!
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