Book Review: The Automatic Millionaire

I read over the weekend The Automatic Millionaire by David Bach. See my other book reviews on this list.

The subtitle of this book is “A Powerful One-Step Plan to Live and Finish Rich” (emphasis are mine). That’s a bold statement. Instead of a 9-step plan from Scott Adams or Suze Orman, here we have a one-step plan. So it goes, just do this one thing and you are golden. It turns out there is more than just one step, but the gist of the book is that you should pay yourself first, i.e. setting up automatic payroll deduction and electronic fund transfers for saving, investing, and debt reduction. I’m all for that, even though that idea is nothing new. All 401k plans work this way. There’s not much secret in personal finance. So don’t expect a magic wand that fixes everything without any sacrifice.

David Bach says his plan requires “no budget, no discipline, less than ten dollars a day of investment.” If only it were that easy! It still requires commitment and re-prioritization. When you want to buy a plasma TV and you don’t have money, do you stop your automatic savings, or charge it on your credit card, or do you forego that TV? Paying yourself first requires commitment. It means you won’t be able to have as many nice dinners as you want or do today. It means you won’t have leather seats in your car but settle for regular cloth seats. There’s no way around that. Automate however you want. At the end of the day, you have to cut your spending. If your spending doesn’t come down, you won’t be able to continue on your auto-pilot for too long.

The book also gives the illusion that you don’t have to save much in order to retire rich. The “less than ten dollars a day” part is totally disingenuous. Investing $10 a day at 5% after inflation for 40 years gets you about $18,500 a year in retirement income before tax. Not bad, but I don’t think anybody can call it Finish Rich if you retire on $18,500 a year. If someone is not saving any money at all, saving $10 a day is better than nothing and we all have to start somewhere. If you really want to Finish Rich, $10 a day is not going to cut it. Later in the book the author said you should save 10-15% of your income for retirement. That’s a lot better. Saving and investing $7,500 a year on a $50k income at 5% after inflation for 40 years will generate $38,000 a year in retirement income. But that’s 40 years. If you want to retire in 30 years, your investments can only generate $21,000 a year. Don’t expect that you will be like Jim and Sue McIntyres in the book, at age 52 having two homes paid off free and clear, two kids in college, and a $1 million investment portfolio. I’m sorry to burst the dream, but saving 15% on $50,000 income for 30 years is not going to get you there. It will get you somewhere, a lot farther than if you didn’t save as much, but Finishing Rich will require saving much more than that.

His suggestion on bi-weekly mortgage payments is plain bad advice. You should pay off all high rate credit cards and car loans and contribute the maximum allowed to your 401k and Roth IRA before you even consider paying extra on your mortgage. According to a Vanguard study, only 11% of the 401k participants in this country contribute the maximum to their 401k. Until you count yourself among the 11%, don’t even bother with mortgage pre-payments.

This book is more on the inspirational side than on the information side. For people who are spending everything they earn and then some, it motivates people toward saving and investing in their 401k plans and Roth IRAs. That’s great, even if the numbers don’t necessarily add up. If that gets people started on saving for retirement, more power to David Bach! If you are reading Personal Finance blogs like this one, you are probably already contributing to your 401k and Roth IRA. You are not going to gain much insight from this book. David Bach is living proof that a motivational seminar host can package anything into warm and fuzzy book series, workbooks, audio CDs, and live seminars with heavy marketing. People don’t want to hear that saving for retirement requires hard choices between today and tomorrow. This book gives them exactly that.

Rating: *** (average). Skip, you won’t miss anything.

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Comments

  1. Anonymous says

    I agree with you. I think this book is for people that do not have a savings acct at all. It’s not necessary for the average person that is on top on his finances. It gives readers ways to save instead of wasting money on little things. But, the word Millionaire should be taken off the title.

    Automatic Saver is more like it.

    Overall its not a total waste of money to purchase the book. Its helpful in some ways.

  2. Anonymous says

    I agree it is not a total waste. When i picked this book I knew nothing about savings, finance, retirement accounts, etc. It was simple and easy for someone like me to understand. Now that I know a few things, I can look back and say that its is truely a beginners book, I mean for people that absolutely know nothing whatsoever about finances and what to start.

    but like everything else you dont read a book by one person and believe completely everything he/she says. Do your homework and read until you get a wide range of opinions.

  3. Harry Sit says

    Thank you for the comments. I didn’t say it’s a total waste. I just thought it’s a lot of hype for an idea that’s not original. If the hype made the click and pushed you into saving for retirement, that’s great. Whatever works is great.

    I think other books on my Recommended Reading List do a much better job.

  4. sewall says

    The overall message of the post is clear, so this is a fine point:

    In the examples in the post you used the words “5% inflation” but this wasn’t clear. Did you mean 5% compound growth? Where you assuming the contributions ($10/day or whatever) grew with inflation? It just wasn’t totally clear.

  5. Harry Sit says

    sewall – When I said “investing at 5% after inflation” I meant (a) your yearly contributions go up with inflation every year; and (b) your savings earn 5% on top of inflation. In other words, everything is done in today’s dollars. I first calculated the future value of the savings. Then I applied the 4% safe withdrawal rate for retirement income. In Microsoft Excel:

    $10/day for 40 years:
    FV(5%, 40, -3650, 0, 1) * 4% = 18,519

    $7,500/year for 30 years:
    FV(5%, 30, -7500, 0, 1) * 4% = 20,928

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