The Automatic Millionaire Summary: Pay Yourself First

You tried to save from your salary. You made a budget. You tried a no-spend month. Both lasted about two weeks. So you start to think the problem is you.

The Automatic Millionaire by David Bach says it is not. The problem is the order in which your money moves. Bach argues that you can build wealth on an ordinary salary, if you set up the right system once.

What is The Automatic Millionaire about?

David Bach is an American financial adviser and author. He published this book in 2003. It grew from his years teaching money classes, and it opens with a story from one of them.

A man named Jim told Bach he was retiring at 52. He was a middle manager at a utility company, and his wife Sue was a beautician. They earned a little under $54,000 a year together. Yet they owned two homes with no loan on either, had no debt, and had a net worth near two million dollars. Bach asked if they had inherited money. They said all they had inherited was knowledge.

Bach’s central idea is that wealth does not come from discipline. It comes from the order in which your salary is spent. His rule is to pay yourself first, automatically, before you see the money.

Why a raise does not make you richer

Ask anyone who got a raise last year if their savings rose with it. Bach says the answer is almost always no. The more we make, the more we spend. He describes a friend whose income grew from $50,000 to over $500,000. His savings barely moved, because his lifestyle grew with every raise.

Imagine a couple in Hyderabad who each get a 12% raise. They feel richer for a week. By the last week of the month, the account looks the same as a year ago. Neither is careless. They pay for everything else first.

The Latte Factor

Bach tells of a student, Kim, who said she could not save anything. He asked about her morning. A coffee and muffin, a juice, and a snack came to $11.20 before lunch. Bach then showed what just $5 a day could grow to by age 65, using a high yearly return. The total was close to $1.2 million.

Critics point out that his sum leaves out inflation and tax, so treat it as a picture and not a promise. The real point is that you probably earn enough to start. Money leaks out through small spends that you never count. Bach calls this the Latte Factor. It is not about coffee. It is about any small daily purchase you make without noticing.

Why budgets fail and automation works

Bach says budgets fail because they are no fun. People do not like to be controlled. They want to be in control.

He points to the way governments collect income tax. Until 1943, Americans got their full pay and paid tax the following spring. Then the government began to take the tax from pay before it reached anyone. In our own reading, tax deducted at source from an Indian salary works the same way. You never miss it, because you never see it.

Jim and Sue worked this way for thirty years. Right after their wedding, their parents told them to pay themselves first. They began at 4% of their income and had reached 15% by the time they met Bach. Jim said Sue had some self-control and he had very little. The system did the work.

The stakes are clear in another story. Two friends with similar pay both had saving taken out of their wages. One chose 15% and the other chose 6%. Both lost their jobs in their fifties. The first had over $900,000. The second had about half.

One hour a day, and a cushion

Bach says to save 10% to 15% of your pay before tax. That is about one hour’s pay out of each working day, kept for yourself. He suggests starting small if you must. He started at 1% and raised it over time. He tells you to choose a percentage, so each raise lifts your saving as well.

The second thing to move out first is a cushion, based on advice from his grandmother: when times get tough, the tough have cash. Keep at least three months of spending, and aim for a year. Move at least 5% of take-home pay into a separate account that earns interest. One man in a seminar kept his cushion buried in a suitcase in his backyard. Bach says cash that earns nothing is almost as bad.

If you owe money on a card, start with one month of spending as a cushion. Then split what you pay yourself: half to savings and half to the card.

How to use this at work and at home

1. Choose a percentage of your pay to save. Start at 5% if 15% feels too high.
2. Set up an automatic transfer for the day after salary day.
3. Open a separate account for your cushion. Send at least 5% of take-home pay to it.
4. Each time you get a raise, increase the percentage first.
5. When you change jobs, reset the percentage on the first day. Do not restart at a lower rate.

Our take

The strongest part of this book is its plain method. Setting up a system once is far easier than finding willpower every month. The McIntyre story also makes the case for starting early.

There are weak points. The examples are American, so the retirement accounts he names do not exist in India. In India, the nearest step is an automatic investment each month, and you should check costs, risks and tax rules yourself. Bach’s growth figures are optimistic. The Latte Factor can make small treats feel like guilt, when the bigger costs are often rent, a car loan or school fees. And not everyone has pay left over to move.

Even so, the order of payment is a good idea for anyone who earns something.

The animated summary shows these ideas through a Hyderabad couple, and it takes about 19 minutes.