November 27, 2005

• If I had a Million Dollars…

  
  

  I’ve been meaning to do this entry since I read this book last year called, “The Automatic Millionaire” by David Bach.  Even though the title sounds cheesy, it’s one of the best books I’ve read (even in business school) that makes learning to saving money easy to understand for the layperson.

  
  

  Granted, I knew most of the stuff that’s in there from years of my mom ingraining it into me (“Never use a credit card unless you can pay it off in full the next month”, “Pay yourself first”, “Never lease”, Never rent”, etc.) but this book is great in proving that you don’t need to have immense will power or a large salary to set aside some dough.

  
  

  The basic premise is: You can’t spend the money you can’t see.  So you automatically “hide” it from yourself:

  
  

  -Having 5% or 10% of your paycheck put automatically in a money market account or Roth IRA.

  
  

  -Set up an automatic bi-weekly program to pay your mortgage.  If your mortgage is say $2000/month — every 2 weeks, the bank deducts half of the amount ($1000) from your checking account and since you’re paying more frequently, it cuts down on the interest you pay.  Ex: Say you have a mortgage of $250,000, with 8% interest rate, for 30 years.  If you paid your mortgage once a month, it would take 30 years to do it and you’d have paid $411,000 in interest.  However, if you paid the same amount, but bi-weekly, you’ll pay off the amount in 23 years and spend only $292,000 in interest — saving $119,000 in interest!

  
  

  But say if you live paycheck to paycheck and can’t “afford” to sock cash away.  Bach demonstrates what he calls “The Latte Factor“.  Where by saving just $5/day from your normal daily routine (Bach uses cutting out a latte and muffin x 7 days = $35/week, approx $150/month.  And if you invested that $150/month in the stock market which has had an average return of 10% over the last 50 years, by age 65 that $5/day would be $1.2 million.

  
  

  It’s not an advanced book about trading stocks or playing the real estate market by any means but just gives you enough information to be smart about money on several different levels.  Which I think is actually better for the majority who aren’t “business majors” but need to have some business savvy.

  
  

  Anyone who’s ever been intimidated about the thought of choosing retirement funds, finding a mortgage or just finding a place to put your money — basically stuff you know you’re going to have to eventually learn… read this book.  It’s all in there and laid out in a simple manner.  You can breeze through the entire book in about 2 hours.

  
  

  The reason why I post this, especially for performers, is that I’m a firm believer in having ”screw you” money so that you can attain the things you want in life on your time table.  Not having to wait for that “one big break” that may or may not ever happen.  It might just be a bunch of little breaks that you need to maximize in the here and now.  You don’t want to be 65 and suddenly realize, “Holy Crap.  I’m still renting.” 

  
  

  And to younger readers — don’t think, “Oh, this is something I don’t have to worry about yet.”  — No!  You’ve got something that the rest of us old timers haven’t got — Time.  A 40 year old that puts away $6000/year until he’s 65 still wouldn’t come near the compounding power of a 20 year old kid that put away $2000/year and stopped after just 10 years of doing it.  The earlier you know this stuff and apply it, the better. 

  
  

  It’s the gift that will keep on giving.  Happy Holidays.

  • 2:08 am
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