It’s been two decades since “The Automatic Millionaire” stirred droves of regular folks to put down their lattes and buckle in for their hopeful journey to millionaire-dom.
Now David Bach, the bestselling author of that seminal book, is back with the 20th anniversary updated edition.
Here are edited excerpts of our recent conversation:
Kerry Hannon:David, what hasn’t changed since that first edition came out?
Bach: The premise of “The Automatic Millionaire” is that there’s a way to build wealth and financial security in America on an ordinary income and become a millionaire. You can also be broke on an extraordinary income.
It’s simple. Throw out the budget and don’t count on discipline. Pay yourself first automatically and save one hour a day of your income. That comes out to 12.5% of your gross income.
You coined the term “the latte factor.” How relevant is this today?
The latte factor is as important today as it’s ever been. I used to talk about saving $5 to $10 a day by not going to Starbucks and spending on those small things like a latte or two. Today, that’s more like $27 a day. Today, the latte factor is a larger amount of money, and it can really make a difference. Don’t buy stupid. Look at where you spend small amounts of money on little things.
What about home ownership for those aiming to be millionaires?
You have to own a home. You can’t get rich renting. There’s been a push today from people talking about the fact that it’s cheaper to rent than own. I totally disagree. There are two primary escalators to building wealth in America — stocks and real estate. If you don’t own both of those, you get left behind.
Twenty years ago, people told me real estate prices couldn’t keep going up. They’ve gone up fourfold in 20 years. It all depends on where you live, of course. Real estate has always been local, not national.
When you rent, no one is eating the expenses that you think you’re saving. The landlord who owns your property is not eating the taxes, not eating the insurance, not eating the maintenance. Those expenses get passed to you. Ultimately, rents always go higher long-term. And the only one who gets rich in the transaction is the person who owns the real estate.
It’s never been easier to become an automatic millionaire than it is today. The number of millionaires has skyrocketed. When I wrote the first book, there were around 8 million. Today, over 24 million. That number is going to double in the next 10 years.
They did it by automating their savings accounts and their investment accounts. They did it by automating their 401(k) plans. They did it by automating their IRA accounts.
We have an extraordinary amount of wealth now in retirement accounts. Twenty years ago, you would get a job, and you would be handed your 401(k) paperwork, and if you didn’t fill that out, you didn’t get signed up.
One caveat: While 401(k) plans are automated, now people actually have to be financially literate and know what they were automatically enrolled at — 3% of their gross income. Well, that’s not enough. You need to manually increase that. You should increase it to at least 12% to 15% of your gross income.
The second thing that’s changed is the emergence of target-date mutual funds. They have become an automatic way to invest all your money at one time in a professionally managed, diversified portfolio. People used to be skeptical about these funds. And I would say, this is the future of investing.
For the average person, they should pick a target-date mutual fund, and that’s it. They should be done. These mutual funds have really improved the way people invest in their retirement accounts.
Third, most mutual fund companies like Vanguard and Schwab no longer have minimum amounts required to open accounts. When I wrote the first book, most of them did. That’s great for someone getting started.
Author David Bach reviews the keys to becoming a millionaire. Photo Credit: Eftihia Buffington ·Photo Credit: Eftihia Buffington, photo credit
You mention there are a few things that you wish had changed? Can you elaborate?
Seven out of 10 Americans were living paycheck to paycheck 20 years ago. And that’s still the same case. About 40% of Americans couldn’t get their hands on a thousand dollars in case of emergency purposes, and that’s still the case.
I’m concerned more than ever about the disparity of wealth in America. There are 42 million Americans getting Supplemental Nutrition Assistance Program (SNAP) checks. (The national average monthly benefit earlier this year was $188.45 per person and $350.89 per household.)
We’re still not teaching our kids about money in school. It’s not a part of mandatory financial education. It’s not a part of the requirements to graduate. When financial literacy is placed in school, it’s often a half-day, extracurricular thing.
What role does private equity play in 401(k) plans?
Ultimately private equity is not necessary for the average retail investor. With that said, having a slight private equity exposure in a target-date fund won’t be a problem. You’re going to see slight exposures to private equity and crypto in these funds.
You’re a big fan of the mini-retirement. What’s that all about?
The mini-retirement can be a one-month or a two-month break. Save money in an account just for mini-retirements, and take one every 10 years. That can completely change your life, improve your energy, improve your health, and improve your outlook on everything.
What advice do you give folks about the age to tap their Social Security checks?
The moment you can take Social Security, you should take it and enjoy it. When I turn 62, I’m taking it that day. The idea that you should wait to get a little bit of extra money is absurd. It’s three years from now, so hopefully I will get that money. Look, if you don’t want to enjoy it, you can just reinvest the money.
