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Applying three concepts from The Automatic Millionaire

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The Automatic Millionaire by David Bach was one of the first personal finance books I ever read. It’s a fairly easy read with some very practical lessons. The book has three major concepts that are still very relevant nearly 14 years after it’s initial release.

  1. Pay yourself first
  2. Put it on automatic
  3. The “latte factor”

Pay yourself first 

The concept of paying yourself first is just as it sounds. Each payday, the first thing you do is set aside money for saving and investing. Before you pay any bills, including your rent, you decide how much money you can spare to put towards your financial goals and you make that your number one priority. 

Let’s say you wanted to save 10% of your take-home pay for retirement. If you clear $1,500 per paycheck after taxes, the first thing you would do is put $150 into your retirement account.

Paying yourself first is a particularly effective strategy for people who don’t have a budget. In an ideal world, everyone would have a budget that is reflective of their goals and values. In reality, most people don’t have a budget. They choose to “wing it” when it comes to money and then wonder why they haven’t reached their goals.

If you don’t want to stick to a budget, paying yourself first guarantees you a baseline level of savings. If your monthly take-home pay is $3,000 and you pay yourself 10% of your income first, you’ll be saving $300 per month. You may not have a plan for the other $2,700 but at least you’re building some savings.

Paying yourself first applies to more than just retirement savings. If you want to get out of debt you can also “pay yourself first” by dedicating a certain amount of money to the principal of your debt. 

Instead of dedicating the $300 per month towards retirement, you might choose to pay an extra $300 towards your credit card debt. 

Quote - The Automatic Millionaire

Put it on Automatic 

Paying yourself first is a great idea in theory. However, simply deciding to pay yourself first is not enough to guarantee success. There is a behavioral issue that needs to be addressed. As humans, we often have great intentions when it comes to budgeting, diets and saving plans but we are rarely able to stick with it for the long term. Every new year we make a resolution to lose weight and save more and every February we end give up on our diet and start racking up credit card debt. 

That is where the concept of automation comes into play. This is the central concept of the book and why it’s called “The Automatic Millionaire”. 

Most banks allow you to easily set up an automated withdrawal from your checking account on every pay-day and have that money placed into a savings or investment account. By doing this you are taking the concept of paying yourself first and automate the process. This has two major benefits. 

  1. It takes the decision out of your hands
  2. You don’t even miss the money

Returning to our previous example of deciding to pay yourself $300 per month before you make any other financial decisions. If you got paid on the 1st and 15th of every month, you would simply set up an automatic withdrawal of $150 from your checking account to a savings account on the 1st and 15th. 

The money is never in your checking account long enough for you to spend. After a while, you adjust your spending as if that money was never there. Think about the taxes that come off your paycheck every two weeks, most people don’t even notice because the process is automated. 

The “latte factor”

This is both the most controversial and still-relevant concept from the book. The idea behind the latte factor is that seemingly small and routine purchases like buying a latte can add up to large sums over time. Bach argues that by cutting out these small purchases and automating the savings towards saving and investing, you can generate much more wealth over your lifetime. 

Other well-known personalities have pushed this same concept. Most notably Suze Orman has shamed Millennials for “pissing $1 million down the drain”. She is referring to some back of the envelope calculation showing the opportunity cost of buying a $5 coffee every day instead of investing. These comments sparked a backlash and the coining of a new phrase, “Coffee shaming”. 

I am split on the concept of the latte factor. On the one hand, it’s true if you cut back on these indulgences and redirected that money towards savings you would build more wealth over your lifetime. On the other hand, personal finance should be a life choice, not a life sentence.

If your financial plan is making you miserable, odds are you won’t stick to it. I do think it’s a good idea to try going a week or even a month where you cut all non-essential spending. Doing so will give you clarity on the things you miss and the things you don’t. From there, continue spending (a reasonable amount) on the things you miss and cut out the things you don’t. 

The more money you spend on things you value and the less you spend on “stuff”.  the happier you are likely to be. 

Quote - the more money you spend on things you value and the less you spend on stuff the happier you are likely to be

Pulling it all together 

If we are to apply the three concepts from The Automatic Millionaire we can hit our financial goals more effortlessly. Here are a few steps we can take, using these concepts to change our relationship with money. 

Step 1: create your financial goals.

  • When do you want to retire? 
  • When would you like to be out of debt?
  • Do you want to build an emergency fund?

Step 2: work out how much you need to save each month to achieve these goals.

  • How much do you need to save to retire by 65?
  • How do you make sure you are out of debt in 5 years?
  • How do you build a 3-month emergency fund over the next two years? 

Step 3: Automate monthly savings you figured out in step 2. 

Step 4: Stop spending money on “stuff” you don’t value. 

Step 5: Start spending money on things you do value.

That is the simplest explanation I can make on how to manage your money. While it is simple, it’s not easy. It is something I will be working with my students on in my money management course

Disclaimer: The information in this article is not intended to encourage any lifestyle changes without careful consideration and consultation with a qualified professional. This article is for reference purposes only, is generic in nature, is not intended as individual advice and is not financial or legal advice.

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About the Author

Ben Le Fort
Ben Le Fort
Here to write about personal finance, & economics. Editor of Making of a Millionaire and Impact Economics. Top writer in Investing, Finance, Economics, Government, Life Lessons.

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CommunityManager
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Great article, Ben Le FortBen Le Fort ! I have been in a love/hate relationship with Suze Orman for many years (though I am confident that she is not aware of our relationships, I must confess), and I appreciate your spin on her POV. Furthermore, I appreciate that you have taken something from one of your treasured business books and made it your own (5 vs 3 steps), which I believe is the whole point of 99.9% of the business books out there.

Brian Thorp
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Subscriber bonus #1: Have you read The Automatic Millionaire? Did you make changes as a result that had a positive impact on your finances? 💰 Let us know in the comments section and if we quote your story in a future newsletter, we’ll let you pick two new books as a gift from Wealthtender from among our writers’ favorites! 📚 Haven’t read The Automatic Millionaire yet? We’re sending a copy to the first 3 subscribers who ask nicely in the comments section!

Ravenlunatic
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Member

Would love a copy of The Automatic Millionaire, pretty please with sugar on top!

Brian Thorp
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Member

You got it, Ravenlunatic! We’ll send an email to get your mailing address. Enjoy the book and please report back here to let us know what you think! smile

Lealers
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Member

Great article! I would live a copy of the Automatic Millionaire, if still available.

Thank you!

Brian Thorp
Admin
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It’s yours, Lealers! Hope you enjoy!

Brian Thorp
Admin
Member

Subscriber bonus # 2: Look the other way, Suze Orman! The first 2 subscribers who post a picture of your Starbucks receipt dated November 8th through 10th in the comments section of this article will each receive a $20 gift card to Starbucks courtesy of Wealthtender ($40 gift card if the picture shows you holding the receipt up with a big grin that will turn Suze’s face read if she ever sees it). ☕

Brian Thorp
Admin
Member

UPDATE: Actually, if we already had our coffee this morning, we would have probably remembered that you’re not able to easily post a picture, so here’s a slight modification to the bonus offer:
Post a comment letting us know that you have a receipt dated November 8th through 10th and e-mail your picture to newsletter@wealthtender.com. The first 2 subscribers to post a comment with a valid receipt sent to this inbox will win the Starbucks gift cards!

mmw
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Member

I’d love a copy of the book! I’d send a receipt for coffee but I make mine at home to save money wink

Brian Thorp
Admin
Member

Hi mmw! We’ll be sending you a copy of the book! And nice job saving a little money each day by making your coffee at home! Just don’t judge those of us who choose to keep Starbucks in business and find other ways to save. smile

clyde
Member
Member

I haven’t read The Automatic Millionaire yet. Can you send me a copy, if I’m one of the first 3 subscribers who ask nicely?
Thank you.

Brian Thorp
Admin
Member

Hi Clyde! Well, officially you’re the 4th subscriber and we only said we would send out a copy of the book to the first 3 responses. But we’re excited today to celebrate the launch of the Wealthtender newsletter and we’ll make an exception this one time just for you since you asked so nicely! Thank you for signing up and joining the Wealthtender community! We appreciate your support! I’ll send you an email to get your address details. grin

clyde
Member
Member

I haven’t read The Automatic Millionaire yet. Please send me a copy if I’m one of the first 3 subscribers who ask nicely.

Brian Thorp
Admin
Member

If you weren’t quick enough to beat the Wealthtender subscribers who were awarded copies of The Automatic Millionaire we gave away today, be sure to check your email next Friday for the Wealthtender weekly newsletter that may include additional subscriber bonus opportunities! Not yet a subscriber, click the link to sign up!

https://wealthtender.com/early-access/

We’ll see you in your inbox next Friday!

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