BFN Book Review: The Automatic Millionaire
A Powerful One-Step Plan to Live and Finish Rich
By David Bach
BFN Book Reviews
My, my, my, I have not done a BFN book review in a long, long time. The main reason is that I have not finished a PF book in quite a while, actually. I’ve started some, but have not been able to make it through any (busy, busy, busy). Well, I was poking around at the library the other day and picked up one I’ve been meaning to read for a while, David Bach’s The Automatic Millionaire, and it didn’t take me very long to make it through this book.
What is this book about?
This book is a general personal finance book. It pretty much covers the basic PF topics you’d expect to see in an overview book and it doesn’t go into tremendous detail on them. For instance, there is no detailed explanation of mutual funds or asset allocation or anything like that. But its power is in its simple message – figure out how you want to save, invest, pay down debt, and then automate all of it. Sure it’s pretty simple, but it is also powerful and effective.
Who is the author?
David Bach is a financial planner who has written a number of books and hosts seminars under the “Finish Rich” flagship. His other books include Smart Women Finish Rich, Smart Couples Finish Rich, and The Finish Rich Workbook.
What are the best parts of the book?
As full disclosure, I must admit up front that this is my kind of book! The main one that Bach teaches is automating as much as possible in your financial life. I wholeheartedly agree with this concept and I believe that I am in much better financial shape today because I automated some of my financial strategy years ago.
Besides automation, another area where the author will grab some proponents is that he hates budgets. If you hate budgets, then this is the book and the plan for you (and if you hate budgets and love automation, you are floating on cloud 9 when reading this book). Unlike Dave Ramsey, Bach claims that budgets don’t work because they are unnatural and no fun. Instead, he proposes avoiding budgets by basically automating as much of your financial plan as possible.
Another foundational concept the author presents is to pay yourself first. This, again, is critical to achieving your financial goals. If you wait until the end of the month or year to save, there won’t be anything left to save. Instead, you must do your saving at the beginning of the month before taking out any money for bills and living expenses. And after you decide how much to pay yourself first, then you automate this process.
If you are asking, “David, where do I find this money with which to pay myself first?” well, he has an answer for you there. He uses the term “The Latte Factor” to explain those things that, though they are small expenses, add up over time if we do them often enough. He challenges his readers to track every penny of spending for a few days to expose their Latte Factor, whatever it may be. He then proposes that they start by cutting down on these expenses and saving some of that money instead.
Finally, and what I found most interesting in this book, is that the author devotes a chapter to automated giving. Again, I do feel that tithing is of critical importance to a financial plan (and I automate my giving as well). He is very careful not to offend anyone with this chapter but he does discuss the importance of giving and mentions how those who give money away tend to have more money flow back to them.
Finally, Bach does a great job of encapsulating why we should be taking care of our finances and planning for our futures (hint, it’s not just to get rich and buy a huge mansion or something):
Becoming an Automatic Millionaire is not simply about accumulating wealth. It’s also about relieving stress and worries about the future-about putting yourself in a place that enables you to enjoy life now as well as in the future. In other words, having an automatic plan should not only change your future, it should also change your present.
What is not-so-good about the book?
As I mentioned, this book is not a complete detailed overview of everything financial. On second thought, maybe that is actually a good thing. If you are looking for detailed investing strategies or asset allocations, then this book will not contain what you are looking for. Well, that’s pretty much all I’ve got – there’s not much to complain about with this book.
So what is my recommendation?
I definitely recommend this book for a read – especially if you don’t like budgets and you like automation. It is a quick read, the author keeps your interest, and he provides very practical advice. In fact, he goes so far as to include numerous phone numbers and websites for specific companies to make it oh so easy to take the next step and get started.
In fact, this book actually inspired me to take action. As a result of reading this book, I increased the contribution into my 401k. I also thought about increasing my wife’s contribution and accelerating our mortgage, but haven’t pulled the trigger on those yet. That notwithstanding, what is more important than a book that actually causes you to take action? So grab a copy of the book or check it out from your local library (that’s what I did), but do read it.
Want to borrow this book? Search your local library
Want your own copy? Buy this book now at Amazon.com
Check out the books I’ve chosen for my virtual bookshelf
Book Review Preview: Outliers
I recently received a review copy of the book Outliers by Malcolm Gladwell. To be honest, I had not previously heard of this author but the book sounded quite intriguing. The subtitle of the book is "The Story of Success" (c’mon, you agree that piques your interest, right?)
I finally started reading it (I have quite a list of books to read and am only slowly working my way through them) and it has absolutely not disappointed. In fact, it is quite enlightening and I have already found myself discussing it with friends on numerous occasions.
How can you not like a book that starts off discussing Canadian junior hockey teams and quickly moves to software tycoons, the Beatles, geniuses, lawyers, and immigrants making it big in the early-American garment industry. And that’s only in the first part of the book – Opportunity. The second part, Legacy, takes off from Appalachia…and that’s as far as I’ve gotten.
The Opportunity section of the book is chock full of interesting information on how to truly view success – specifically the necessary ingredients to achieve it. Gladwell posits that there are numerous other factors that lead to success besides the obvious ones that we so often hear bandied about – being smart and working hard. Remember, this is just a preview so here are a few questions to whet your appetite:
Do you notice anything interesting about the birth years of these US computer moguls?
- Bill Gates – 1955
- Paul Allen – 1953
- Steve Ballmer – 1956
- Steve Jobs – 1955
- Eric Schmidt (Novell then Google) – 1955
- Bill Joy (Sun Microsystems) – 1954
- Scott McNealy (Sun) – 1954
- Vinod Khosla (Sun) – 1955
- Andy Bechtolsheim (Sun) – 1955
Why were 11 of the 22 members of the 2007 Czech junior national hockey team born during January, February, and March while only two on the same team were born in October, November, and December?
I am excited to finish this book and I’m hoping that there will be some sort of takeaway that will help me apply the knowledge the author shares in this book. It is all very interesting, but I am wondering whether it will turn out to be practical or just informational. To be fair, so far I have found two extremely useful bits of information regarding education and preparing your children for success (I will share those later as well).
When I finish reading the book, I will do a full review of it. In fact, I may have to do more than one. At the very least, some of the topics covered by Gladwell will certainly spark a few blog posts of their own! I am enjoying this book and am very excited to pre-announce that I will do a giveaway of the book when I post the complete review of it. So, please stay tuned for that as it will be the very first giveaway in the short history of Borrow From None.
Book Review: Your Money Counts
The biblical guide to earning, spending, saving, investing, giving, and getting out of debt
By Howard Dayton
BFN Book Reviews
Well, it has been quite a while since I did a book review here at BFN. It’s a habit that I’d like to get back into – so why not start again today? I provide a brief overview of the book and the author, touch on the good and bad in the book, and finally, give you my personal recommendation for whether you should borrow the book, buy the book, or neither.
What is this book about?
This book is a pretty small book but it basically tries to cover everything about money. Specifically, to clarify, it tries to cover most of what the Bible says about finances. It’s a pretty ambitious goal, especially given the size of the book (it is 175 pages, but it’s skinny). It actually does cover quite a bit of the ground it mentions on the cover. In fact, it touches on other subjects as well. Of course, it can’t go into much detail on each portion. Overall, however, the author is quite successful in jamming an extraordinary amount of biblical guidance into this skinny little book.
Who is the author?
Howard Dayton is a co-founder of Crown Financial Ministries with Larry Burkett. The mission of Crown Financial Ministries is:
Equipping people worldwide to learn, apply, and teach God’s financial principles so they may know Christ more intimately, be free to serve Him, and help fund the Great Commission.
Before founding Crown Financial Ministries, he founded Crown Ministries back in 1985. Therefore, Dayton has been studying Biblical financial principles for quite some time and attempting to teach them to others through the Crown bible studies and events.
What are the best parts of the book?
As I mentioned above, this book undertakes a very ambitious goal. I feel that it does, for the most part, meet that goal. This is a great introduction of God’s teachings on money, possessions, and prosperity. The book starts off by providing these statistics from the Bible:
- 16 of the 38 parables regard how to handle money and possessions
- There are approximately 500 verses about Faith
- There are approximately 500 verses about Prayer
- There are over 2350 verses about money & possessions
So, the author points out that the proper attitude and treatment of money and possessions is quite important. Why is there such an emphasis on money and possessions in the Bible, you ask? Dayton offers these three answers:
- How we handle money affects our relationship with the Lord (see Luke 16:11 )
- Possessions compete with the Lord for our focus and attention (see Matt 6:24 )
- Much of life as we currently live it revolves around the use of money
Dayton then spends the remainder of the book going through the various aspects of finances that touch us on a daily basis. For each section, he discusses the main points and provides numerous Bible references. Personally, I feel that the references are the most valuable part of the book. For the topics covered, this book provides a great starting point for personal Bible study.
The book really does cover a lot of ground, so I can’t possible summarize even a fraction of it in this review. Allow me to provide you with a glimpse of some of the interesting things I learned while reading it.
Giving
The author touches on the importance of giving and mentions that there are more Bible verses on giving than on any other individual financial topic. He points out that your attitude about giving is of crucial importance. He does not provide a set percentage that you should give, however, as he leaves that as a decision between you and God.
Working
Dayton also brings to the reader’s attention that work was designed before the fall of Adam and Eve in the Garden of Eden (Genesis 2:15 ). So, having to do work is not a result of sin, work just got a lot harder because of it.
Investing
The author advocates being a "steady plodder" when it comes to your investing strategy. He uses the quote "saving is making provision for tomorrow while debt is presumption upon tomorrow." He lays out these three important investment goals:
- Providing for your family
- Becoming financially free to serve the Lord
- Operating your business
He also stresses that it is not an acceptable investment goal to save and invest for the sole purpose of becoming very wealthy (1 Tim 6:9-11 ). His counsel is to determine the maximum amount of money you want to save and when you reach that number, stop saving and redirect the money you were investing to helping other people (kinda like those commercials where the people carry around those big orange numbers).
At the end of the book, there is a small section with some related questions (basically a FAQ), here are two questions and summarized answers that I thought were interesting:
How does the Bible define financial success?
It is achieved by being a faithful steward – not by how much wealth you have accumulated.
Should Christians give to secular charities?
There are many charities competing for our dollars and scripture does not specifically address whether we are only to give to Christian charities. The author and his wife have decided that, with some certain exceptions, they themselves will only give to Christian charities. This is mainly because, for the most part, everyone gives to secular charities but only Christians give to Christian charities.
What is not-so-good about the book?
This book covers a tremendous amount of information in a relatively short amount of time (well, I guess it depends on how fast you read). As you might imagine, there are not enough pages to go into terrible detail on each topic. As a result, your appetite is whetted but you will need to turn elsewhere if you want an exhaustive treatment on any specific topic.
Also, it is not nearly as practical or "step-by-step" as some other financial books. For instance, Dayton spends about half a page on his four step process for getting your finances in order. Dave Ramsey, in contrast, has an entire book on the subject . I feel that this book is not really trying to be that, though. The point of this book is to get you thinking about Biblical standards for money. It is to give you a primer on the main points, to maybe challenge some of the (wrong) ideas you may have about money, and to pique your interest to delve into the subject more. And in that scope, I think it performs well.
So what is my recommendation?
I think this is a good reference book to own. It has a ton of information crammed into it. In fact, it’s going onto BFN’s virtual bookshelf . I think it is a valuable read to get started on your path to understanding what God teaches about money. There are copious amounts of Bible references throughout, so it is helpful to open it up to a specific topic to see how the author summarizes the topic and start searching the Bible references provided.
As I mentioned, it’s not a practical step-by-step guide to getting out of debt or whatever. If that is what you need in your life right now, this is not the book for you. One option is to find a Crown Financial Ministries Bible study in your area – that’s actually where I received this book (you get it as part of the material for the class) – as it will provide that step-by-step process you’re looking for.
I would say that if you can do the Bible study or pick up a copy of this book at a good price, then it’s a good book to have and refer back to often.
Want to borrow this book? Search your local library
Want your own copy? Buy this book now at Amazon.com
Check out the other books I’ve chosen for my virtual bookshelf
Book Review: The Bogleheads’ Guide to Investing – Part 2
By Taylor Larimore, Mel Lindauer, and Michael LeBoeuf
This is part 2 of a multi-post book review of the excellent book, The Bogleheads’ Guide to Investing . If you haven’t already, please check out part 1 now .
What else is good about the book?
Consider taxes
When we left off yesterday, we had just finished talking about how costs were critically important when choosing mutual funds. If you are investing in a taxable account, it is most likely that the biggest expenses you will face are taxes. It is therefore quite important to consider taxes when planning your portfolio. The most important suggestion the authors have is to ensure that your least tax efficient funds are in your tax-advantaged accounts. If you don’t have the luxury of any tax-advantaged accounts, make sure that you are investing in tax-friendly mutual funds.
Why would I want to invest in index funds to only get the market average?
Of course it makes perfect sense that you should strive to get better returns on your investments than the market in general, as provided by index funds. This is one case, however, where common sense is just not correct. In yesterday’s post I listed the reasons the authors give for investing in index funds. Another item the authors would like you to consider is that it is extremely difficult to pick the best mutual funds in advance.
Multiple studies are referenced by the authors showing that the "hot" funds for one-year, five-year, or ten-year periods are very unlikely to be the "hot" funds in the subsequent period. An example presented is from a Vanguard study where they looked at the top 20 US equity funds for the ten-year period ending in 1993. Over the next ten-year period, only one of those top 20 funds were even in the top 100! Remember, you need to pick a fund before it experiences its great growth. It does you no good to have last year’s hot fund if it is performing below average this year.
The authors wrap up Part I of the book with chapters on investing for college, managing a windfall, and a discussion on whether or not you need to hire a financial advisor to manage your money for you.
The importance of rebalancing
Part II of the book starts off with a discussion on rebalancing. The authors present two basic rebalancing strategies:
- Time-based – Rebalance after a certain time period. Most people do this quarterly or yearly. Of note is a Morningstar study mentioned in the book that showed people who rebalance every 18 months get the same benefit and lower costs than those who do it more frequently.
- Expansion bands – Rebalance when your original asset allocation gets skewed by more than a predetermined percentage (say 5%).
Behavioral Economics
There was some fantastic information in this chapter about why smart people make bad investment decisions. I will list the items presented by the authors here but I can’t do into more detail today. I am planning to do a number of posts on these topics, however, as I find them very interesting and important to understand.
- Greed & Fear
- Ego & Overconfidence
- Loss aversion -a loss if felt more than an equal gain
- Paralysis by analysis – spending too much time analyzing a situation and never acting
- The endowment effect – people tend to confuse familiar with safe and overvalue what they already know
- Following the herd
- Mental accounting – treating money differently based on where it comes from – i.e., viewing your tax return as a windfall
- Anchoring – clinging to an old belief or comfortable opinion even if it is wrong
- Financial negligence
The final three chapters stray off of strict investment advice and cover the topics of ensuring you outlive your money, protecting yourself through insurance coverage, and passing on your estate when you die. These contain some useful information and act to round out the book. Again, this book is certainly more than a strictly investment advice book. Though it does not go into terrible detail on these other topics, there is some good "bullet-point" level information in them.
What is not-so-good about the book?
Overall, I really found this to be a useful book but there were some issues with it. First, if you are not into index funds, you are going to have a hard time reading this book. The authors are very pro-index funds and that philosophy is reflected throughout the book. Of course, if that is you, maybe this is a good book for you to read to examine what the authors claim about their strategy and give it a fair look.
Though this book is not strictly about Vanguard, there are references to Vanguard littered throughout it. They do mention other index funds, but they clearly love Vanguard. Of course, what can you expect from a book with this title?
Finally, I didn’t really get the organization of the book. The chapters do not flow logically for me. I know that this is a minor point (and it probably says more about the way my brain works then the authors’ organizational capability) but it can give the feel that the book is disjointed and somewhat scatter-brained.
So what is my recommendation?
I really think this is a useful book for someone who wants to learn the basics of investing. There is a lot of educational information in here about the stock market and especially index funds. Of course, the authors are espousing a certain investment philosophy and I just so happen to agree with that philosophy. Actually, I wasn’t totally sold on the low-cost index fund thing when I first started reading this book. It did a good job of explaining some of the issues that I was confused about in a way that made the index fund strategy more understandable and plausible.
After reading through the book and my notes, I have decided to put this book onto my virtual bookshelf. It really does present a great overview of the low cost mutual fund strategy of investing. I feel it is a valuable read for that reason. I highly recommend that you read this book as I think you might learn a lot from it. Whether you buy or borrow it does not matter, though at over 300 pages, you might have to renew it. For full disclosure purposes, I borrowed it from my local library (twice).
Want to borrow this book? Search your local library
Want your own copy? Buy this book now at Amazon.com
Check out the other books currently on my virtual bookshelf
Book Review: The Bogleheads’ Guide to Investing – Part 1
By Taylor Larimore, Mel Lindauer, and Michael LeBoeuf
BFN Book Reviews
Here at BFN, I have been periodically reviewing personal finance books. In each review, I provide a brief overview of the book and the author(s), touch on the good and bad in the book, and give you my personal recommendation for whether you should borrow the book, buy the book, or neither. This is a fairly thick book with a lot of useful information so I am not going to be able to cover it in a single post. This will be Part 1 and Part 2 will follow soon after.
What is this book about?
Don’t be fooled by the title, though this is a book about investing, it contains much more than just investment advice. The authors do spend the bulk of their time discussing and educating the reader on the various aspects of investing. However, they also touch on other related topics such as financial lifestyle, insurance, estate planning, etc.
Who are the authors?
Not only are the authors "Bogleheads," but Taylor Larimore is actually the founder of the Bogleheads. Co-authors Mel Lindauer and Michael LeBoeuf also spend a lot of time reading and responding to posts on the Bogleheads forum hosted at bogleheads.org . At this point, you might be asking, "What is a Boglehead? " (good question!) A Boglehead is a person who shares the investment philoshophy espoused by John Bogle, the founder of The Vanguard Group. In a nutshell, that philosophy is based on investing in a diversified manner with very low cost investments. (yes, that picture on the cover is John Bogle’s head)
What are the best parts of the book?
There is a great deal of useful and interesting information in this book. I really enjoyed reading it. I felt like I learned much about the stock market and especially mutual funds as a result. I’d heard how important mutual fund costs were to a portfolio, but really learned the "why" in this book. I can’t really go into too much detail on all of what they wrote in the book (it is going to take multiple posts as it is!), so I will present the information and you can check out the book if you want a more detailed treatment of each topic.
The authors start out by pointing out why investing is different than the rest of life by claiming that the following statements are NOT true for investing:
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If you don’t know how to do something, hire an expert
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You get what you pay for
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If there’s a crisis, take action!
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The best predictor of future performance is past performance
These are the investment principles that do work:
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Choose a sound financial lifestyle – I covered their three financial lifestyles in a recent post.
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Start early and invest regularly
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Know what you’re buying
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Preserve your buying power
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Keep costs and taxes low
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Diversify your stock portfolio
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Diversify your stock risk with a bond portfolio
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I thought it was a good idea for the authors to spend time discussing the importance of the extra-investing topics. Basically, the fundamental point is that the more you can do to free up money to invest, the more investment success you will have.
Chapters 1 & 2 focus on financial lifestyle and ways to spend less or make more money so you have more to invest. The following few chapters go into detail explaining what some of the common investments types are and how they work. These include various bonds (with an entire chapter on inflation protected bonds), mutual funds, ETFs, annuities, etc.
The investment part of the book starts in chapter 7. The authors, as you might expect, recommend using index funds as the core, if not the entirety, of your portfolio. The authors present the following list of why index funds are a great choice:
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No sales commissions
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Low operating expenses
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A 1% difference makes an 18% difference in returns when compounded over 20 years
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Many index funds are tax efficient
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You don’t have to hire a money manager
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Index funds are highly diversified and less risky than individual stocks
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It doesn’t matter who manages the fund
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Style drift and tracking errors aren’t a problem
Asset Allocation
Asset allocation is portrayed in this book as the cornerstone of successful investing. Some of the same theory is discussed in another book recently reviewed at BFN, The Intelligent Asset Allocator . The authors reference a 1986 study of pension plans by Brinson, Hood, & Beebower that found the following:
- Allocation between stocks, bonds, and cash determined 93.6% of the variability of the studied pension plans’ returns
- Manager’s attempts to actively manage their fund cost the average fund a 1.1% reduction in return compared to the indexes
Costs Matter
How is it possible that professional money managers actually cost their funds money, you ask? To borrow (and alter) a phrase, "It’s the costs, stupid!" The authors reference another study that found the expense ratio is the only reliable predictor of future mutual fund performance. Also, there are a number of hidden costs that investors never hear about in a mutual funds’ prospectus:
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Hidden Transaction costs
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Brokerage commissions
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Soft dollar arrangements
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Spread costs
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Market impact costs
The investing takeaway from these chapters: buy a diversified mix of low-cost index funds in the context of an appropriate asset allocation. (you have to figure out your exact "appropriate" asset allocation yourself though there are some very general guidelines in the book)
That’s enough for one post
Ok, I’m stopping here for this post. I appreciate you sticking around as long as you did – and I’m only half way through the book! Update – please check out part 2 of the review .
If you’re already sold on the book….
Want to borrow this book? Search your local library
Want your own copy? Buy this book now at Amazon.com
Check out the books I’ve chosen for my virtual bookshelf
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