Tuesday, April 13, 2010

Book Review: The Automatic Millionaire

Book Review: The Automatic Millionaire (Canadian Edition) by David Bach

David Bach's book is short, you can read it in about two hours and put his ideas into practice in about the same amount of time. Think of it as "The Wealthy Barber - Light." But for a moment let me digress. Compare the following three situations:

1. Imagine that Billy put $3000 a year ($250 a month) into an investment/savings account for the next 5 years (ages 15-20) and then just let that money sit and get 10% a year of compounding interest until the age of 65.

2. Imagine that Susan at age 19 put $3000 a year ($250 a month) into an investment/savings account for the next 8 years (ages 19-26) and then just let that money sit and get 10% a year of compounding interest until the age of 65.

3. Imagine that at age 27 Kim put $3000 a year ($250 a month) into a savings/investment account for the next 39 years (ages 27 to 65) and then just let that money sit and get 10% a year of compounding interest until the age of 65.

So, the question is, who would have more at the end?

Just so you know Billy invests a total of $15000, Susan invests $24,000, and Kim invests a whopping $110,000. OK, enough suspense, here is what they would each make by the time they were 65:

Billy at 65 (after 5 years of investing $3000 a year, starting at age 15) - $1,615,363.40
Sally at 65 (after 8 years of investing $3000 a year, starting at age 19) - $1,552,739.35
Kim at 65 (after 39 years of investing $3000 a year, starting at age 27) - $1,324,777.67

Incredibly, Billy invested $102,000 less then Kim and has $290,585.73 more! This is the power of investing regularly each month and letting the miracle of compound interest slowly grow your investment. Where you invest is important but more so is the fact that you start as soon as you can. I've blogged before about the power of paying yourself first, putting aside a portion of your income that goes directly into an investments that enjoys the power of compound interest. I think these numbers prove the wisdom of it. The lesson for today: START SAVING/INVESTING EARLY.

This is the message behind David Bach's Automatic Millionaire. Bach takes the idea of paying yourself one step further in order to beat human nature: make everything automatic. Set automatic withdrawals into your RRSP or mutual funds (so that you can set it and forget about it). He also suggests automating your tithing, paying off your home (and doing it early), and saving for a rainy day fund. Once these things are set up automatically you won't be so tempted to spend money elsewhere. I agree with Bach that for most of us, going automatic is the surest way to insure that you will save/invest regularly. He says that since most of can't hold to our budgets (if we are even trying to) that automatic withdrawals to appropriate places is key. The money is taken out automatically and eventually you will automatically become a millionaire. Bach shares the story of couple who taught him to do this and it is very inspiring. I highly recommend this simple book for anyone wanting to improve their financial education but wanting something easy to implement and lacking in complexity. I rate it 4 out of 5 ninja stars.

No comments: