Whirling Thoughts

Chewing, swishing, and spitting thoughts out. Personal blog of Nicholas Chan.

Book Summary: The Automatic Millionaire

Recently picked up the personal finance book “The Automatic Millionaire” by David Bach. It’s core concept revolves around the importance of paying yourself first, automating your finances, being rich vs. looking rich, and how humans are naturally bad at budgeting / saving.

He also discusses the importance of buying a home, which I found interesting, considering it directly contrasts the teachings of Robert Kiyosaki from “Rich Dad, Poor Dad”. Bach believes in home ownership and considers a home to be an investment. Kiyosaki believes that a home is a liability. I’ll discuss this at the end of the post after the summary.

Paying Yourself First

Bach points out that we’re often happy to pay everyone else before we pay ourselves. That means that people will pay the government, utilities, and big corporations before even thinking to pay themselves. This has enormous consequences in the world of compound interest.

Here’s a thought. Earning a salary of $100,000 doesn’t mean you take home that much. There are taxes, which are often deducted from your salary. For every dollar you make, the government can easily take away 30 cents of that dollar.

But you can take advantage of your RRSP or a company plan to keep a little bit more of that dollar. Since contributions to these plans can be considered pre-tax income, contributing to them means you aren’t really missing out on too much of the money you need for your day-day expenses.

Another concept brought up was the possibility of paying yourself one hour’s worth of wages a day. If you earn $20/hour, then just save $20 a day. It’s totally doable. Within a week, you’ll have saved $120. Within a month $480. Within a year $6240. That money is going to compound and earn more.

Automating Your Finances

People forget things. People get lazy. It is almost impossible for someone to remember to deposit $20 a day into a savings account or investment.

So instead, Bach recommends that you stop trusting yourself, call your bank, and set up an automatic contribution. Every time you deposit a paycheque, maybe 10% will automatically be put away in a savings account without you knowing it. Every day, $20 will go from one account into another.

This takes the laziness out of the equation and ensures that you will actually be saving, even when you may not necessarily want to.

The interesting thing that happens when you start doing this is that you will hardly notice the money is gone. You won’t have to make the painful decision every day to put away a few dollars. That money is stockpiling away without you noticing and you can do whatever you want with what’s leftover.

Being Rich vs. Looking Rich

We associate wealth with the idea of owning a Rolex, driving a nice car, and owning nice clothes. When we see someone with all of that, we automatically assume that they are rich and can afford it.

While there are certainly some people who can afford all of this, in reality, many of the people flashing their Rolex may be living paycheque to paycheque. If you want to look rich, it’s actually really easy. Get a credit card, put yourself in debt, and buy yourself everything you’ve ever wanted.

So why bother being rich if you don’t buy all that stuff? Shouldn’t we live in the moment and treasure the present? Of course, there are a wide range of opinions on this. One of my favourites comes from finance blogger Mr. Money Mustache who was a former software engineer who retired at 30. His philosophy revolves around spending money on the things that actually make you happy.

The bottom line is this: by focusing on happiness itself, you can lead a much better life than those who focus on convenience, luxury, and following the lead of the financially illiterate herd that is the TV-ad-absorbing Middle Class of the United States (and other rich countries) today. Happiness comes from many sources, but none of these sources involve car or purse upgrades. -Mr. Money Mustache

At the end of it being rich is about financial freedom, which means less stress over your finances and having the ability to choose how you live your life.

Another book that touches on the idea of looking vs being rich is “The Millionaire Next Door” by Thomas J. Stanley.

A House Is The Best Investment You Will Ever Make

Bach discusses how a house will likely be the best investment you can make throughout your life. It can act as a forced savings vehicle, appreciates in value, and gives you a pride of ownership. In Bach’s world, everyone should own a house.

Interestingly enough, this flies in the face of the beliefs of Robert Kiyosaki, who was the author of “Rich Dad, Poor Dad”, where he discusses how a house is a liability rather than an asset.

Kiyosaki defines an asset as something that increases your cash flow and a liability as something that decreases your cash flow, then the house that you live in is a liability. You have to pay the interest on a mortgage, there’s property taxes, maintenance costs and the opportunity cost of living in the same place, which makes you less willing to pursue opportunities elsewhere. Finally, when you choose to sell a house, you end up having to buy another house, likely during a time when house prices have increased elsewhere as much as the price of your house has increased.

While Kiyosaki believes in real estate (he made his fortune through real estate), he wants us to realize that the house we live is not an investment and more of a liability. I would tend to lean toward Kiyosaki’s principles than Bach, so this is the part of the book that I question and would love to discuss with other people.

Hope you enjoyed the summary. Would appreciate any other recommendations!

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2 Comments

  1. Love your work, thank you for this.

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