11 years ago, 'The Automatic Millionaire' taught me 4 crucial lessons about money I still use today
- "The Automatic Millionaire" by David Bach is a personal finance bestseller with practical tips to cut spending and increase your savings.
- He coined the term "The Latte Factor," which points out that saving $5 per day on a habit like coffee, cigarettes, or even going out for lunch can add up to nearly $1 million over a 40-year career.
- His book taught me that funding your retirement and other savings goals first helps guarantee you have a more comfortable financial future even if it adds an extra constraint today.
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"The Automatic Millionaire" by David Bach is a bestselling personal finance book first published in 2004. Updated in late 2016, the book offers a plethora of financial lessons that I wholeheartedly agree with.
In fact, this was the last book I read before launching my own personal finance blog back in 2008. To say it inspired me was an understatement!
But more important than inspiration, this book is packed with actionable, useful tips and lessons that are great for money novices and veterans alike. Here are some of the best lessons from "The Automatic Millionaire."
1. Small purchases add up
The second chapter in the book, and one of the most important concepts espoused by David Bach, is "The Latte Factor." The idea here is that small, regular purchases add up to huge amounts over time. Once you take interest into account, $5 per day on coffee costs a lot more than the $1,825 per year you pay directly.
While Bach takes a jab at the daily coffee shop visit in his book, the concept applies to eating lunch out instead of packing one, regular trips to happy hour, or any other recurring cost in your financial life.
2. Pay yourself first
Any regular reader of personal finance blogs is familiar with the term "pay yourself first." This means you should allocate money from your budget for things like 401(k) contributions, Roth IRA contributions, emergency savings, and putting money away for important goals before your other budgeting categories. This forces you to save for your future.
If you pay yourself first, you get used to living without the money and can avoid the pitfalls of lifestyle inflation. You can fund things like entertainment and restaurant visits with what's left over after saving for retirement, not the other way around.
3. Savings and investments compound over time
In the book, Bach shows an example of what happens if you invest a $5 per day savings instead of spending it. If you can invest $150 per month at a 10% annual return, you would have $948,611 after 40 years. That's nearly $1 million in retirement from cutting a coffee habit!
Ten dollars per day in investments would yield $1,897,224. If you can scrape together $20 per day, or $600 per month, you would have $3,794,448 at the end, assuming the same 10% return. This isn't voodoo or cheating the system. This is how your money works when you put it to work for you instead of spending it.
4. You can automate nearly every aspect of your money
In this book, Bach explains how to automate retirement savings, emergency fund savings, paying off debt including your home, and even giving to a favorite charity. If you still write paper checks or enter manual transfers online, you are practically living in the financial stone age! Today, it's all about automation.
Most banks, credit unions, lenders, and billers give you the option to switch on automatic payments. Take advantage. It may just put you on track to passing the millionaire net worth milestone.
Get inspired to level up your money skills
This book was very inspiring for me. It put me on a journey of learning the intricate details of how my money works so I can make the most of every dollar I earn. If you are going to read just one book about money, this may be the best choice. It's one of my favorites and an excellent blueprint for your financial plan.
Learn more about "The Automatic Millionaire"»
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