Wednesday, May 11, 2011

Review: The Automatic Millionaire

I rediscovered the public library last week and have so far read 3 books in 3 days (I'm sort of obsessive sometimes). One of these books was one I've read about in various personal finance blogs and is a fairly well reviewed and famous book.

The Automatic Millionaire: Canadian Edition by David Bach

It's neat that there is a Canadian Edition first of all. I'm guessing instead of 401K's we get RRSPs. This book was written in 2002 so we don't yet have the TFSAs enacted yet. The premise of the book is that to become a millionaire you basically have to automate it, but virtually anyone given enough time can become a millionaire. If you have to manually budget and put away money for the future... you generally won't.

There are a lot of extremely good tips on how to automate your whole financial savings plan. From asking your employer to automatically deduct from payroll to fund an RRSP to setting up other automated accounts to take money from your main account and put it into a separate account (out of sight out of mind and you won't miss it). David has an interesting and enlightening way to explain the concept of paying yourself first. He brought out a formula which I found really changed the way I looked at this concept. He asks the questions how many hours last week did you work for yourself?

  1. How many hours do you work in a week? ______
  2. What is your hourly wage before taxes? _____
  3. How much did you set aside (or save) for retirement last week? ____
  4. Divide the amount you saved by your hourly wage and you get the amount of hours you paid yourself or worked for yourself (instead of the government, or your credit card, etc.) last week.
He states that generally Canadians only have a 2.6 percent savings rate... which works out to about 10 minutes a day that we work for ourselves. Very sad indeed. He believes we should at least work 1 hour a day for ourselves, for our future... and it is fairly motivational to think about it this way. At least to me. How many hours a day do you work for yourself?

He has a few other concepts that are interesting as well, such as the Latte factor (where people can generally find little things that can add up to a lot after compounding and about 40 years).

Why am I reviewing a personal finance book on a blog that deals with property investment?

Well one of his biggest points is that renters can't become rich and you NEED to own your own home. I actually disagree with this myself. As I've stated previously I see a primary residence as a liability and not an asset. Also I don't really believe in generalizing things like this. I mean if rents are WAY lower than a similar place you can get with a mortgage does it still make sense to buy your own place?

Absolutes can be good and quick rules of thumb (but they can also be wrong)... I mean owning a house is a forced and automated savings account in a sense... so it fits with David's system(The automatic millionaire)... and as you gain equity in your home you definitely can use that money from a HELOC or whatever to buy other investments you desire. But you can't tell me that if I can find a place to rent for say $600 a month... and an equivalent condominium would cost me $1200 a month in mortgage along with say $36,000 down payment... that I would still be better off buying... (Think of the average costs of real estate in places like Toronto or Vancouver... versus the rents people can get... and you'll see that this is true for quite a number of major centres.)

You can just as easily automate investing more into your investment accounts from what you save on your rent vs mortgage payments and probably come out ahead in some places.

I believe that rental properties can be a good investment (obviously), though not for everyone. I found it interesting that his automatic millionaire couple also owned an investment property (one reason I'm reviewing it here). Just that being adamant that you have to own your personal residence to become rich didn't gel with me. Another one of his books The Automatic Millionaire Homeowner, Canadian Edition: A Powerful Plan to Finish Rich in Real Estate seems to deal with investment properties in more detail. (Haven't read it yet, but did borrow it from the library).

One other point I was not in total agreement with was his choice to tell people that a fixed rate mortgage was the ideal solution and only to look at variable rate mortgages if you don't plan on staying in a residence for more than 7 years. Most things I've read is that you choose a variable mortgage and pay at the mortgage rate of the fixed rate you could get or at the rate that you feel that interest rates could go up to (say 6%). Many people have talked about the choice of fixed versus variable... and it seems variable is generally the winner. Since as most people attest... the majority of your payment in the first 10 years or so is towards interest... if you can decrease your interest rate (from what I can tell variable interest is usually like 1 to 2% or more below the same fixed rate of the same length... say 5 years)... but pay the same amount... you will hit the principal mortgage amount harder and save a lot of interest during the life of your mortgage (and of course pay it off much faster as well)

This isn't to knock The Automatic Millionaire it really is a great book and has some very useful tips for getting to that 7 figure mark slowly and surely. It definitely isn't a get rich quick book with time frames of 30 or 40 years... this book is probably for people in their 20's and early 30's and less for people closer to their retirement age. Though I think most people could benefit from the message of automating your financial life so you can't screw it up. I am curious though if David would still think10% in the stock market or if housing is still such a great asset following the 2008 financial crisis and the huge housing bust that came out of the U.S.

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