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Key Lessons from “The Automatic Millionaire”: A Financial Planners Review

Before I began my path toward working as a financial planner, I had enjoyed reading books on self-development and financial literacy. One of my favorite books in this category is David Bach’s “The Automatic Millionaire,” which was first published in 2003.

“The Automatic Millionaire” stands out for its unique and simple philosophy – that you don’t need to earn a fortune to accumulate wealth. Instead, the book explains in simple terms that it’s really about managing whatever you earn smartly and efficiently. 

Let’s explore the key takeaways from this classic book.


1. “The Latte Factor”

“The Latte Factor” is the famous term coined by Bach in the book. This is the principle that small daily expenses, like a latte, can add up over time. And saving and investing these small amounts can lead to significant wealth over time.

But it’s not just about lattes, but any small purchases you make regularly, such as snacks, cigarettes, magazine subscriptions, or even the miles we drive to work. 

The point of “The Latte Factor” is to make us aware of our unconscious spending habits. For instance, spending $5 on a daily latte at Starbucks might seem insignificant, but if you were to save that $5 instead and invest it, it could grow to much more over time.  

Assume you invested that daily $5 latte money, which equals to saving $1,825 a year. If you then invested that money at an annual growth rate of 10%, compounded over 20 years, you’d be able to amass $116,785.

So, while you’re only spending $5 a day, you’re also potentially foregoing $116,785 over the long term.



2. Pay Yourself First 

A key principle in the book is that “the rich get rich (and stay that way) because they pay themselves first.” The concept of paying yourself first is not new. This is the fundamental principle from “The Richest Man in Babylon” by George S. Clason. 

“The Automatic Millionaire” begins with the story of an average American couple, Jim and Sue McIntyre, who, despite never earning more than $40,000 per year, own two mortgage-free homes, have put their kids through college, and comfortably retired with nearly $2 million in savings. They were able to achieve all this by paying themselves first and making their financial plan automatic.

The idea is simple – before you pay your bills, buy groceries, or spend money on anything else, first set aside a portion of your income for savings. This money should be automatically directed into savings or investment accounts. 

Over time, you’ll become accustomed to living on a slightly reduced income. The money you regularly save becomes part of your financial plan, not the “extra money” that you might have spent. 

You’ve adjusted your lifestyle and spending habits accordingly, and the saved money effectively becomes “invisible” to you because it’s automatically moved into your savings or investment accounts.

I’m a big fan of this approach because it ensures that you’re consistently saving,  reduces the temptation to spend, and it can help you build a substantial nest egg over time. It’s so simple, yet powerful.


3. You Don’t Have to Make a Lot to be Rich

This principle emphasizes that wealth accumulation isn’t just about earning a high income, but more about how you manage, save, and invest the money you earn.

Bach makes the case that you can achieve financial success as an employee by making smart financial decisions. If the entrepreneurial path isn’t for you, “you can still get rich being an employee,” Bach writes. 

The McIntyre’s made their money work for them rather than working for their money. I’ve seen firsthand that a client who earns a 5% return on their investments, who has low expenses, is financially better off than a client who earns a 10% return on their investments, but spends all of it. 

It’s not about how much you earn but about how much you keep and grow.


4. Make Your Financial Plan Automatic

Another key principle is that financial success is not about willpower, but about setting up automatic systems that make managing money effortless. 

Setting up automatic payments frees up valuable time. It allows you to focus on other things rather than spending time worrying about whether you paid a bill or contributed to your retirement account by the deadline. 

The idea is to make saving money a habit that happens automatically, so you don’t have to think about it each time you get paid. It’s a “set it and forget it” approach.  

Once these systems are in place, they require little to no ongoing effort to maintain. You can do this by: 

  1. Setting up automatic transfers from your paycheck to your savings or investment account.
  2. Automating your bill payments to ensure they’re paid on time every month. This also helps avoid late fees and protects your credit score.
  3. Setting up automatic payments towards your debts to ensure you become debt-free faster. 
  4. Set up automatic contributions for your retirement accounts such as a 401(k) or a Roth IRA. This ensures that you’re consistently building your retirement savings. 

“Making your financial plan automatic is the one step that virtually guarantees that you won’t fail financially,” Bach writes. 


5. Debt Reduction

Debt Reduction is another key principle in the book.

Bach introduces the ‘DOLP’ (Done On Last Payment) system as a method to reduce debt. The DOLP system involves listing all your debts, ordering them from the smallest balance to the largest, and then focusing on paying off the smallest debt first while making minimum payments on the rest. Once the smallest debt is paid off, you move on to the next smallest, and so on. 

This method is also known as the ‘debt snowball method,’ creates a sense of achievement that can motivate you to continue reducing your debts. You can read our article on How to Pay Off Debt which discusses the debt snowball method here.

Overall, reducing your debts can free up more of your income for savings and investments, reduce your financial stress, and improve your credit score. You can also read our article on 5 Reasons to Pay Off Debt (Instead of Investing) here.


6. Homeowners Get Rich; Renters Get Poor

In the book, Bach presents homeownership as a compelling strategy for wealth accumulation. He likens it to a ‘forced’ savings plan. Each mortgage payment you make not only covers your living costs but also contributes to your net worth by reducing the principal of your loan. Over time, as your mortgage decreases, the equity – or ownership – in your home increases, effectively building your wealth.

Homeownership offers other benefits that can influence your financial health. For example, it provides a way for wealth accumulation through equity, potential tax benefits, and a sense of stability and security. Furthermore, once your mortgage is fully paid, your housing costs drop substantially, freeing up more funds for savings and investments.

In addition, setting up automatic payments for your mortgage ensures that you’re consistently paying down your mortgage and building equity in your home. 


7. Charitable Giving

Bach also advocates for Charitable Giving and makes the case that generosity benefits both the recipient and the giver, offering a sense of purpose, personal happiness, and potential tax advantages. 


8. Investing

Another key principle is investing. Bach introduces the concept of the Investment Pyramid, which has two parts:

  1. Your money should be invested in a combination of cash, bonds, and stocks
  2. The allocation of these assets should change over time as your life situation changes

Bach’s other principles of investing are:

  • Set up automatic contributions to your investment accounts to ensure consistent investing and benefit from dollar-cost averaging (DCA), which involves investing a fixed amount regularly, regardless of market conditions. 
  • Understand the exponential growth potential of your investments when the interest earned is reinvested.
  • Wealth is built over decades, not days, so maintain a long-term perspective when investing. 

Bach recommends using mutual funds to invest in a diversified portfolio of stocks, bonds, or other assets. 

And of course, he recommends setting up automatic contributions to your investment accounts.

In the two decades since “The Automatic Millionaire ” was first published, Exchange-Traded Funds (ETFs) have emerged as hugely popular investment vehicles, with many advantages over mutual funds.

ETFs typically offer lower expense ratios than mutual funds and can be traded like stocks. And they typically have lower minimum investment requirements, making them accessible to more investors.

The structure of ETFs allows investors to defer capital gains taxes until the investment is sold, which beats out mutual funds in their tax efficiency. It’s very likely that if Bach were to write the book today, he’d favor ETFs over mutual funds.


Other Perspectives on “The Automatic Millionaire” 

While “The Automatic Millionaire” has gotten a lot of praise for its straightforward and practical advice, it’s also received criticism over the years as well. Here are a few points of contention and my thoughts.

1. Some have argued that Bach’s “The Latte Factor” overemphasizes frugality and have pushed back on this concept, saying that merely saving a few dollars on lattes won’t lead to real wealth. They suggest that focusing on generating income or on larger cost-saving areas is a more effective approach. 

This topic is personal, as many believe in the value of enjoying their hard-earned money in the present, even if it potentially compromises some savings in the future. 

In my view, this is a personal choice we each have to make. Spending to enjoy modest comforts can be healthy, but spending responsibly is also important. You’ll need to decide what you value more.

2. “The Automatic Millionaire” emphasizes homeownership as one of the best ways to build wealth. Some have criticized Bach’s view of home ownership as a ‘forced’ savings plan as being overly simplistic. 

Critics say that real estate may not always be the best investment due to all the substantial hidden and phantom costs, such as property taxes, repairs, maintenance, insurance, and other expenses. They suggest other investment options such as low-cost index funds, often yield better returns over time.

It’s also worth noting that renting is a great way to get started on the path to homeownership. When you rent, you don’t have to worry about keeping up with repairs, maintenance, and other costs that come with owning a home. You also gain flexibility in your living situation. 

For example, if you want to move for a job opportunity or other reasons, later on, it’s much easier to do so when you’re renting than if you own a home. You’ll also want to consider that the housing market can be unpredictable, and owning a home can limit your mobility, especially now in the age of remote and location-independent work.

But if your primary purpose in buying a home is to live in it, and you plan to stay in your home for at least five years, then buying typically starts to pay off more than renting. 

From a historical perspective, stocks have tended to outperform real estate investments over long periods (20+ years). Annualized returns on stocks have averaged around 7-10% since the late 1920s. Home prices have increased nationally by an average of 3-6% per year over long periods.

  1. While automation can be an effective way of managing finances, some have said that it may not align with everyone’s financial circumstances or preferences. 

Automation can streamline the process of saving, investing, and paying bills, but it’s not a one-size-fits-all solution.

For instance, some might enjoy the process of researching and selecting investments rather than relying on automated contributions to predetermined funds. There are some who want a financial planner or financial advisor to work with them to provide ongoing guidance.

Even with automation of your finances, you’ll still need to stay engaged. Regularly reviewing your financial plan, tracking your progress, and making adjustments are part of financial planning. 

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Final Thoughts

The core theme of “The Automatic Millionaire” is that financial freedom is less about the size of your income and more about how effectively you manage it. If you’re not saving money with your current income, it’s unlikely you’ll do so in the future. 

My experience as a financial planner supports this. I’ve come across people with high incomes who proportionately increase their spending with their income and often find reasons to avoid future savings.

While “The Automatic Millionaire” may appear simplistic, the book’s beauty lies in its simplicity. It’s not intended to provide comprehensive financial strategies, but to lay out a simple and easy-to-understand blueprint for automating your finances.

Overall, “The Automatic Millionaire” makes a great case that anyone can achieve financial freedom and wealth accumulation regardless of income.

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