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David Bach The Automatic Millionaire

David Bach, The Automatic Millionaire

Tools for Personal Finance Empowerment

by David Bach

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Posted on Monday, January 29, 2007, 12:00AM

Last week, Yahoo! launched its new Personal Finance site. Maybe you're a regular visitor to the site or maybe part of your New Year's resolution is to better manage your money.

No matter the reason, you're in the right place at the right time if you have an interest in improving your personal finances. You're being smart about your future, and we're glad you're here.

Stop Worrying About Money

Life should be simple and enjoyable. For many, however, it tends to be complicated and worrisome because of one huge problem -- money.

A study conducted by the AARP revealed that one in four baby boomers say the worst thing about their lives right now is their finances. And according to a recent survey conducted by Harris Interactive, money woes were among the key concerns for the majority of Americans -- an unsurprising statistic considering that money affects every aspect of our lives.

Life is about much more than money, though. You can gain the freedom to live the life you dream of by breaking the financial handcuffs of living from paycheck to paycheck, worrying about debt, and losing sleep over surviving your retirement.

A Case Study

Recently, I met a woman named Harriet at one of my seminars in Washington, D.C. She was in debt and hadn't saved a dime, and was losing sleep, depressed, and extremely worried about her future.

"I'm 52 years old and I've done everything wrong," she told me. "I'm divorced and recently remarried, and am now working 45 hours a week to make ends meet. I've got nothing in savings, and I don't know what to do.

"Last year I went to a financial planner. I paid him $500 to run a financial plan for me -- and he told me that in order to be able to retire in my 60s I needed to start saving over $2,700 a month. Considering that after taxes I only take home about $3,500, his plan was ridiculous."

Harriet's financial planner had upset her so much that she hadn't been able to do anything about her financial situation. She was truly stuck.

It's a Marathon, Not a Sprint

I wasn't surprised by how hopeless Harriet felt. After all, it would seem impossible if you'd never even jogged a mile and were suddenly told to run a marathon.

Learning to save is a lot like running a marathon -- you need to build up to it by training gradually. It's too overwhelming to go from saving nothing to saving $2,700 a month, so you need to start slowly and keep it simple.

Consequently, I asked Harriet if she could save $10 a day. She felt that was totally doable -- I even got her to agree that she could get her husband to save $10 a day. That adds up to be $7,300 a year.

If Harriet paid herself that $7,300 and put it in a solid, diversified investment that earns 10 percent (less than the stock market has averaged since 1926), she would have $461,947 in 20 years

It also turns out that Harriet's employer offers a 401(k) plan that matches 50 percent of what each employee contributes. That $20 a day she saves plus the 50 percent match equals $30 a day, which adds up to $10,950 a year -- which, at a 10 percent annual return for 20 years, would give Harriet a grand total of $692,924.

Back to School

At first, Harriet was shocked by my calculations. Then she got mad. "Why didn't the guy I hired last year explain it this way?" she asked. "He made my situation seem impossible." She was silent for a moment. "You know," she said finally, "they should teach this in school. My whole life would have been different if I'd know this before."

Harriet is absolutely right -- they should teach this in school. But they don't. It's up to each of us to educate ourselves about improving our financial situation.

After all, regardless of age, status, or situation, we all control our financial destiny. Whether you're in your teens or your 80s, and whether you're single, married, divorced, or widowed, you can take charge of your financial future.

Learn Something New Every Day

One of the worst financial cliches is that failing to plan financially is planning to fail. No one plans to fail, and, happily, it's never been easier to get started on a financial plan. Web sites, books, magazines, and newspapers offer a wealth of information at your fingertips, most of it absolutely free.

I encourage you to take some time today to explore all that Yahoo! Personal Finance has to offer. Bookmark the site and make it a daily habit to read about what's new -- just like the millions of others who do.

Make a commitment to read at least one article about money every single day. You'll be amazed at how quickly you start to expand your knowledge. The more you learn, the more interesting it gets, and the more involved you'll want to be. Knowing what's going on with your money and how to improve your personal finances can really begin to change your life.

Taking Action Pays

Harriet put her plan into place right after our meeting at that seminar. I was proud of her for moving forward -- no longer wasting time fretting about what she wasn't taught, didn't know, or hadn't done. At age 52, she accepted where she was and vowed that it was time to take action immediately.

Her new savings plan didn't make her rich overnight, but her new action plan made her feel better instantly. As Dale Carnegie once said, "The secret to life is to stop worrying and start living." Smart financial information can make living rich easier -- and living more happily a reality.

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80 Comments

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  • tropics123 - Thursday, February 22, 2007, 8:48PM ET  Report Abuse

    • Overall: 4/5

    I agree that saving for retirement is very important and a good 401k plan with a match is an easy way to do this. I think that if someone has credit card debt on high interest cards they should focus first on getting that high interest debt paid off. There are credit cards out there at 2.99% for the life of a balance transfer. This is a great way to transfer those higher interest debts into a focused debt reduction plan at a low interest rate. A good place to go to find and compare these low interest rate cards is a comparison site called www.creditcardradio.com After this debt is paid off then I agree you can focus on saving more toward retirement objectives.

  • Justin - Thursday, February 22, 2007, 10:38AM ET  Report Abuse

    • Overall: 4/5

    Thanks for the article! All too often people are so wrooied about failure that they don't even think about retirment. This is a nice little bit of encouragement.

  • LisaM - Friday, February 16, 2007, 3:25PM ET  Report Abuse

    • Overall: 4/5

    My take-home lesson from this article: PAY YOURSELF FIRST! Okay, so I learned that lesson years ago. It isn't sufficient to protect you from fraud, catastrophe (something on the order of Hurricane Katrina--not a fender-bender) or a substance abuser in the family, but short of that, even small savings contributions, made regularly, add up over time. Once I decided to make a very significant commitment to savings and investment (65% of my income rather than 1 or 2%), I found commiting to learning about investments, markets and money very easy. It simply wasn't an area I'd explored before, and I'm a hopeless number and data nerd to begin with. I can't imagine why anyone WOULDN'T find it interesting, but most people don't find economic mathematical models or tax code interesting either. (See what I mean by nerd?) I can recommend the "easier" financial magazines like Money, Kiplinger's and Smart Money as good places to start. They have easy-to-understand articles, great illustrations, real-life examples and aren't intimidating. I may prefer more sophisticated sources now, but I still like to just curl up with a (horrors!) latte and one of the magazines I mentioned above from time to time.

  • Yahoo! Finance User - Wednesday, February 14, 2007, 10:01PM ET  Report Abuse

    • Overall: 5/5

    appreciate this financial education.It will help me improve my financial intellegence. Thank you.

  • success - Wednesday, February 14, 2007, 5:57AM ET  Report Abuse

    • Overall: 3/5

    I appreciate this financial education.It will help me improve my financial intellegence. Thank you.

  • evareth - Wednesday, February 14, 2007, 5:02AM ET  Report Abuse

    • Overall: 5/5

    Thank you David Batch. That was an excellent issue. Very simple yet realistic one. I have been always thinking on how to save with the very little earnings I got. Today I think I find the right solution. Thanks.

  • SHANTANU - Wednesday, February 14, 2007, 4:46AM ET  Report Abuse

    • Overall: 4/5

    Very pragmatic and the beauty is that the plan is simple.

  • Yahoo! Finance User - Tuesday, February 13, 2007, 5:28PM ET  Report Abuse

    • Overall: 4/5

    The comments below are interesting although somewhat negative. The point is this...no matter how little you save, it will make a difference. Once you are in the habit of saving and can see that you can do it, you aren't going to be saving $10/day anymore. You'll likely increase it over time because you'll tell yourself, "that wasn't so hard." Don't forget that the woman in the article was depressed & living paycheck to paycheck & had lived 52 years without saving. You have to start somewhere!

  • Alakdan - Monday, February 12, 2007, 4:41PM ET  Report Abuse

    • Overall: 5/5

    well, like you said, this one thing i learn today. excellent!!! i extra 3 years in school just to expecting they would teach me how to get rich and incharge of my finances but all i learned was ''how to make the rich get richer....'' if only i read your article before then maybe just maybe, my life story is much much different. well, sir, keep writing and i know many peoples lives will be changed.....

  • Yahoo! Finance User - Monday, February 12, 2007, 4:36PM ET  Report Abuse

    • Overall: 2/5

    It's interesting that he asks her to save $10/day, and to get her husband to save $10/day too...but then says "with $7300...Harriet would have..." Reality: she won't ever get to retire, unless retirement involves eating cat food or depending upon her children to cover her expenses. The *couple* would have that money, not one person, so the numbers are far less compelling.

  • george - Saturday, February 10, 2007, 9:33AM ET  Report Abuse

    • Overall: 3/5

    Most important point made - basic finance should be mandatory education at the HS level. It is interesting to note she wants to retire in her in her sixties (52 now) and he calculates the value twenty years in the future- she will have stopped saving and began spending by then.

  • AEstrada - Friday, February 9, 2007, 11:21AM ET  Report Abuse

    • Overall: 5/5

    Excellent article. Not worrying about now or future. Start acting now and start living today.

  • Yahoo! Finance User - Thursday, February 8, 2007, 1:24PM ET  Report Abuse

    • Overall: 4/5

    Iwould like David Bach Financail planner

  • Yahoo! Finance User - Tuesday, February 6, 2007, 6:41PM ET  Report Abuse

    • Overall: 5/5

    Excellent advise!

  • Yahoo! Finance User - Tuesday, February 6, 2007, 6:06PM ET  Report Abuse

    • Overall: 4/5

    very good story thank you

  • Michael H - Tuesday, February 6, 2007, 3:30PM ET  Report Abuse

    • Overall: 3/5

    Unfortunately, Harriet is in damage control mode. Its better to do damage control than do nothing. But it is not likely Harriet will be working at her current job or salary for the next 20 years. That said, even if she only manages to save 10 percent of her income for the next 10 years, she will certainly be much better off than if she does nothing.

  • chel - Tuesday, February 6, 2007, 12:25PM ET  Report Abuse

    • Overall: 3/5

    I am a single, almost 52 year old female. Fully employed. I have no dependents, nor do I own anything. After all the TAXES are taken out of my pay, I come home with a HUGE $500.00 a week. I get paid every 2 weeks. I am rounding off to the nearest dollar my monthly expenses. I have no savings account. I also do not have a 401K. I live paycheck to paycheck. I have no credit cards. because I know I cant afford one. Rent: $700 heat:(Winter) $200 Electric: $40 Hot Water: $22 Car Payment: $260 Cable/Internet: $45 Food (plus 2 dogs) $100 Cell Phone: $52 Car Gas for work: $20 Laundry: $30 This does not include car maintenace like changing the oil, dogs to the vet, or any of life's little mishaps. If I have an emergency, I dont pay bill(s) that month. I have the very basic cable tv which costs about $12 and the rest is all whatever taxes they can think of to charge you for. The only REAL luxury I allow myself is the internet connection for my PC at home which costs about $25.00 which brings my total cable/internet bill to about $42. I have the cheapest cell phone plan which is about $35 and the rest all taxes which brings it to about $52.00 a month. I do not use a land line at home. I do all my food shopping once a month for me and my 2 dogs. I shop at the local Save-a-lot and can buy a months worth of food for under $100. I am currently uninsured with my car. I was laid off from my job in Dec 04 and was out of work for 8 months. I also had to move twice in the last 2 years because I am a magnet to the "wrong" kind of landlord because I have 2 dogs. I was with Allstate for almost 20 years when I fell on hard times and with moving twice, yes, I admit I was late with the bill. But, my agent decided I was a deadbeat. I am currently trying to save up $600 for out-of-pocket expenses to the Dentist. I do not go out to eat, I bring my lunch to work everyday, I shop at the Salvation army store or Wal-marts and every dollar store I can find. Why am I having such a hard time saving money? I dont know what else there is I can cut back on...

  • Stephen M - Sunday, February 4, 2007, 3:20PM ET  Report Abuse

    • Overall: 5/5

    David Bach and the woman he advised is absolutely right -- personal finance should be taught in high school. Bach's advice was perfect -- get in the habit of saving/investing with a reasonable amount of money, invest wisely and watch it grow. I am glad I did just that in my early 30s. I now enjoy a comfortable retirement.

  • Felix - Sunday, February 4, 2007, 12:09PM ET  Report Abuse

    • Overall: 2/5

    Like most expert opinion or advise, Mr. Bach talks about what Harriet will have in twenty years with a 10% return assumption. He should also address what will she need and how to achieve what she needs.

  • MariaK - Thursday, February 1, 2007, 5:37PM ET  Report Abuse

    • Overall: 3/5

    Has anybody ever suggested reading Robert Kiyosaki's books? Rich Dad, Poor Dad? Cashflow Quadrant? You need money to make money. I don't think there is such thing as saving your way to wealth, or expecting a job to provide you with enough income to save your way to that point. You could, however, study and learn ways of diversifying your income so that you generate wealth outside of your job... But these are just my opinions. Like I said, Look up Robert Kiyosaki and read some of his books. They offer a refreshing new perspective on how to create financial security.

  • Yahoo! Finance User - Thursday, February 1, 2007, 1:55PM ET  Report Abuse

    • Overall: 5/5

    For those who are concerned that Harriet will be in her 70s in 20 years, that is not David's fault. It wasn't his recommendation to wait until she was in her 50s to get started saving for the future. Frankly, there aren't too many options for her. She can increase her income in order to save more, decrease her expenses to save more, or work more years in order to save more. She needs to something and sooner is better than latter. Complaining or wishing she could change her past wont do a bit of good. Perhaps some 20 or 30 something will read this and realize they better take ownership of their financial education and financial future.

  • Yahoo! Finance User - Wednesday, January 31, 2007, 11:03PM ET  Report Abuse

    • Overall: 5/5

    I agree with everything that David Bach stated. Saving for the future is a gradual process. I started saving diligently when I was age 26. Now, at age 50, with the high six-figure savings I have accumulated over the years, I have enough to retire with the pension I soon will be getting from my government employer. Many people do worry to much. I believe that as people accumulate assets (and reduce and eventually eliminate their debt), just as I have, they will be happier and will worry much less. One of the easiest and painless ways for working people to accumulate assets is to comtribute to their employer's defined-contribution plan (a 401K and/or 457 plans). Such contributions are made with pre-tax money and grow on a tax-deferred basis. Roth IRAs, for those who are eligible for them, also are an excellent tool for people to accumulate assets. As people save money, they need to have patience and to allow the power of compounding to occur.

  • Douglas - Wednesday, January 31, 2007, 6:10PM ET  Report Abuse

    • Overall: 5/5

    This is a simple truth which pays long range dividends:...do a little bit consistently, and don't stop and it will grow for you. This is a simple truth for business, personal education, and life.

  • Yahoo! Finance User - Wednesday, January 31, 2007, 10:52AM ET  Report Abuse

    • Overall: 2/5

    Yesterday I posted a comment explaining how your choice of car can have a huge impact on your ability to save money. After a few hours the comment was removed from the board. I wonder if Mr Bach is going to have an original article next month where he explains how your choice of car can have a huge impact on your ability to save money.

  • Saunders - Wednesday, January 31, 2007, 8:52AM ET  Report Abuse

    • Overall: 5/5

    The previous person is correct, except that the formula should read: (=A1*1.1 A$1$). This takes into account the compunding of each $7,300 saved annually. Thanks for showing these people how to do the calculations CORRECTLY!!

  • Yahoo! Finance User - Wednesday, January 31, 2007, 8:34AM ET  Report Abuse

    • Overall: 4/5

    Ok to Stevie Ray and the other guy who just posted, I cant let this go on. Since you are using a computer I will make it really easy for you. 1) Open a spread sheet (dont worry I will give you time to figure this one out.) Ok good. 2)Type 7300 at the top. 3) Now this is where it is difficutlt in the box below type [=a1*1.1 $a$1] (I will explain the first a1 is the previous year amount, multiply by 1.1 for a 10 percent increase, the $a$1 added again is the 7300 saved again this year.) 4) Now click and drag down to box 20 5) Read the number You will only have 418,107 but that differs from the 461k quoted probably because my caculation assumes you earn no interest in the year the money is saved. 6) Dont make fun of someones math skills and then demonstrate an incredible ability to not know any math yourself. * But once again the point of the article was not Here is how to make 461 thousand dollars. It was educate yourself and dont believe that it is so impossible you should just give up. (To everyone else: I have seen this article many times. While I agree with it someone tell me about and article that says if you are in your mid 20s, make 3500 a month, save 10 percent in a 401k, then here is how to truly maximize your benefits. Just because I got a headstart, thanks to people like you, doesnt mean I dont want the advice.)

  • Richard - Tuesday, January 30, 2007, 11:30PM ET  Report Abuse

    • Overall: 1/5

    is this guy completely insane???? 7300 at ten percent per twenty years compund interest is 49,110. I really want to take advice from a clown that cant do basic math.

  • Prithvi - Tuesday, January 30, 2007, 11:27PM ET  Report Abuse

    • Overall: 3/5

    While david is absolutely right in saying that saving 10$ a day is better than nothing, he is misleading poor harriet about the 10% gain that is next to impossible to achieve for someone that risk tolerence. Morever he disregards the long reach of inflation. I would rather advise her to save up more money a month than the 10$ david recommends working for 20 years(shes 52! )

  • Yahoo! Finance User - Tuesday, January 30, 2007, 11:01PM ET  Report Abuse

    • Overall: 5/5

    Personal, practical, professional advice. Made common sense and will make uncommon dollars over time. P. Merit

  • Krish - Tuesday, January 30, 2007, 10:12PM ET  Report Abuse

    • Overall: 4/5

    The Article made Investing very affordable and easy to believe, especially for a starter, Thanks!

Showing comments 6-35 of 80<< PreviousNext >>

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