Friday, February 12, 2010

Automatic Millionaire By David Bach

I was at the library the other day and was browsing through the Automatic Millionaire by David Bach. Here is the one key lesson that I learnt from reading his book.

Forget about The Budget

David Bach started out as a financial planner and he tells the story of how this average-looking couple in their fifties walked into his office one day. To his amazement, he discovered that they had actually close to $2 million in networth and were ready for retirement even though they were just in their early fifties. What the rest of the book talks about is how normal people can be like the couple and become millionaires - AUTOMATICALLY.

The thing is to forget about budgeting as it does not work. Rather, the principle is to pay yourself first. And the BEST way to pay yourself first is to automate the process such that a certain percentage of your income goes into some savings or investment instrument automatically. You can then spend the rest of your money without worries.

I find this a much more useful approach compared to budgeting. Afterall, I am very lousy at budgeting and simply cannot keep to my budgets. It is better to just pay yourself first and spend the rest of your money without having to worry about a budget. It is just framing the problem in another way if you ask me.
The method does not make you a millionaire overnight but it should make you a millionaire one day as long as you keep setting aside a sum of money every month. (Ideally, I think the amount should be around $300 to $500 per month based on 10% returns). If the returns are not doing well, I think you should adjust the figure accordingly.

Apple Tree Story


This brings me to the apple tree story which I have heard some other people talking about. We should all aim to have multiple sources of income such that we do not over rely on only our earned income. The way to do that is to grow more apple trees. Each apple tree is a money generating tree such that once you have enough apple trees, you can safely retire.

Apple trees can be bonds, REITs, dividend paying stocks, rental property, options and even trading income or businesses.

Combine PAY YOURSELF FIRST and the APPLE TREE.

If one combines both approaches and automate your savings while investing your savings into apple trees and re-investing whatever income you get from the apple trees, I think you will not have a problem retiring when you reach the retirement age in Singapore. This is just my 2 cents thought. Feel free to expand and share your strategies.

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