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.
Refinance Your Mortgage
Mortgage rates hit new lows. I saw rates as low as 3.25% for 30-year fixed, 2.625% for 15-year fixed, with no points and low closing cost. Check mortgage rates in your state.