As I continue on my quest to be financial independent and improving my money management knowledge, I came across the F.I.R.E movement (Financial Independence, Retire Early) that is popularised in the United States. After some digging, it seems that this sort of lifestyle may not be suited for everyone as it involves living frugally and eventually achieving financial freedom to quit your job and retiring early.
Here comes David Bach‘s money management book on The Automatic Millionaire.
Forget about Budgeting.
David touches on small simple yet effective actions to make your savings automatic because he knows that most of us do not have the discipline to invest and save up regularly. By automatizing such actions, he is able to give insights to readers on how over time, such small savings and actions can add up. Hence, amassing sufficient money to retire and not living from pay check to paycheck.
This book is recommended for all of us who feels that their bank account is not growing as much as they want to be. Do share your thoughts in the comments section below and I would love to hear from you.
Final: The Automatic Millionaire Blueprint
1. The Latte Factor
- By not spending our earnings on useless, insignificant items such as our morning coffee (which this term is derived from), the savings that come from not purchasing these items do add up to a significant amount
- Learn to instil discipline and ask yourself if you really need to purchase this item/ snack
- For example, my sinful habit is to online shop when I am bored. To overcome the habit of spending on unnecessary items, I will place items in the cart and leave it instead of purchasing them. By practising delayed gratification, I was able to not spend my hard earned salary on items which I do not need.
- Another example on my calculating my Latte Factor will be my habit of purchasing a cup of Boba Tea (bubble tea) to drink after lunch. The solution for this is to remind myself that the drink is high in calories and sugar and the cost to health and my pockets does not add up. In order to reduce my Latte Factor, I have reduced the frequency of purchasing Boba Tea and have resorted to making myself a cuppa tea from the office pantry.
2. Learn to Pay Yourself First
- Whenever you earn $1, Learn to Pay Yourself First instead of letting the government take it away i.e taxation
- For the citizens of United States, you have the option of putting aside a portion of your earnings into a Pretax Retirement account i.e your 401K plans.
- For the self employed, there is the option of IRA
- For the citizens of Singapore, we have our retirement account in the form of CPF. There are strong pro and opponents of this savings scheme. I am against depositing any more of the minimum required amount into my CPF due to the fact that it does not offer as much flexibility and autonomy as I would like to have over my earnings.
- For those like minded individuals, the solution is to open a Brokerage account and invest regularly. Alternatively, open a Regular Savings Plan with your local bank or sign up for Annuity Plans with your Insurer.
- The key is to make the deductions for these investment payments automatic.
- Automate a portion of your earnings to the plan. Recommended is 10% of your gross income. Of course, the higher the percentage of your income squirrelled away, the better. Think of the amount of compounding interest over time!
- We all know how many hours we put in at work… but How many hours have you worked for YOURSELF i.e. How much of the savings have you actually invested in your future?
3. Now Make it Automatic
- Start from savings a small percentage of your gross income and then gradually increase the savings percentage
- Tell yourself no matter what, you will pay yourself first
- Understand that when the stock market is goes down, it allows you to buy stocks at bargain prices… and that is a good thing
- Choose Balanced Fund and Target Allocation Funds because they offer the right mix of cash, bonds and stocks in one fund. The work is done for you.
- Now you only have to automate the transfer of payment from your checking account every month
4. Automate for a Rainy Day
- Build an emergency basket of cash
- Put this amount in the right place i.e Money Market Funds where the interest rate is higher and liquid
- For Singaporeans, do check out some of the savings account with pays out higher interest rates. Alternatively, there is the option of purchasing Singapore Savings Bonds, similar to US Treasury Bonds.
- Now you only have to automate the transfer of savings from your checking account every month
5. Automatic Debt Free Home Ownership
- Own a House, Not Rent
- Why Homes Make Great Investments:
- Forced savings – to keep your home, you must make monthly contributions (mortgage payment) to your home equity
- Leverage: Using borrowed money to multiply your potential gains
- Other People’s Money (OPM): When you buy a home, you are using OPM to get rich
- How to Pay off your Mortgage Faster
- Instead of making Monthly Payments, make Bi-Monthly payments i.e pay half very two weeks
- Online calculator from www.bankrate.com
6. The Automatic Debt Free Lifestyle
- Find out the effective interest rate you are paying for your debts
- Ask for lower rate
- Consolidate your Debt:
- Consolidate debt onto 1 credit card which offers the lowest rate
- Pay for the Past; Pay for the Future: split debt and future savings into 50-50. Do not use all the earnings to pay off the debt, you need to have money for investment.
- Done on Last Payment (DOLP):
- Divide each credit card balance by the minimum payment the from each credit card company
- This is the DOLP number. Rank them in ascending order.
- Take 50% of your pay yourself money and apply it to the card with the lowest DOLP number
- For each of the other credit cards, make only the minimum payment
7. Make a Difference with Automatic Tithing
Final: The Automatic Millionaire Blueprint (download link here)
I hope that by putting this together, we can all plan to take small actions today. Do share your thoughts on this and we can all work towards financial freedom together!