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Highlights

Interesting quotes/text from the book.

To avoid getting overwhelmed, optionally break the chapter into sections: beginning, middle, and end.

The main takeaways from this book are:

  • Having a plan is very very important. Nothing works without a plan.
  • Forget discipline, budgeting, etc. All you need is automation. The author has stressed over this topic in his entire book.

Introduction

Philosophy behind the Automatic Millionaire:

  • You don't have to make a lot of money to be rich
  • You don't need a discipline
  • You don't need to be "your own boss"
  • The Latte factor
  • The rich get rich because they pay themselves first
  • Homeowners get rich; renters get poor
  • You'll need an automatic system, so you can't fail.

If your financial plan is not automatic, you will fail.

Chapter 1: Meeting the Automatic Millionaire

The trick to getting ahead financially free isn't being cheap and boring.

  • We don't do debt.
  • There is a difference between looking rich and being rich.
  • Parents sat us down and told us (couple) together that we needed to get serious with our lives.
  • Learn to make money work for you and really enjoy your life.
  • Every time you earn a dollar, you should make sure to pay yourself first.
  • Toss the bugget. Instead take 10 percent out of paycheck and put it in savings before you ever see it. The secret is that you can't spend what you don't see.
  • Put aside enough down payment to own a home. Key is to owning it free and clear asap. Pay off asap. With either approach below, you'll pay a few years sooner:
    • Pay biweekly
    • Pay 10% extra with each payment
  • The Latte factor. Stop wasting money on expensive coffee. Nothing against coffee.
  • No matter what, never buy on credit. No matter how big they are, pay for your purchases with cash or you don't buy, unless it appreciates in value over time (like a home)
  • If you need to use a card, pay in full each month
  • Buy a used vehicle. Have it checked by a reliable mechanic. Let someone else pay for rapid asset depreciation that happens in first few years.
  • Take the decision out of your hands. Arrange for transactions to happen automatically. If you don't have to think about it, there's no chance you'll forget to do it. Also once the decision is out of your hands, there's no way you can be tempted into doing the wrong things. It's called protecting yourself from yourself.
  • Just do it. Over time it adds up.
  • Set yourself for success. Why make getting rich hard?

Priority: Retirement > Home

Chapter 2: The Latte Factor

More often than not, the more we make, the more we spend. Chances are that you're earning more than you were ten years ago. But are you saving more?

  • How much you earn has no bearing on whether or not you can and will build wealth. When you spend everything you make, you subject yourself to a life of stress, fear, uncertainty, and debt.
  • The latte factor
  • Most of us waste a lot of what we earn on small things. They add up. By saving these unnecessary expenses, you can get your money to work for you instead of you working for it.
  • If you don't drink coffee, assume you do.
  • If someone argues in 30 years a million may not be as worth - it will certainly be a lot more than nothing
  • What matters is not how much you earn but how much you spend.
  • To get new results, you need to take new actions.
  • You need to act on what you've learned.
  • Look at the Time value of Money

Chapter 3: Learn to pay yourself

The point of the latte factor isn't to convince you to put yourself on a budget. It's to make you realize that you already earn enough to start saving and investing

  • Throw your budget out. Forget about budgeting.
    • Most people get sick of counting calories. They get sick of depriving themselves. Any system that is designed to control your normal human impulses is ultimately bound to fail.
    • We want to be in control
  • Simply having heard of the concept doesn't mean you are living it.
    • Even more important, see if you are living what you know.
  • When you earn a dollar, the first person you pay is you.
    • Otherwise it may seem like everyone is getting paid but the person who earned the paycheck.
    • You need to set up a system that guarantees you'll get paid - a system in which you pay yourself automatically.
    • The issue with most financial planning systems is that they focus on numbers. Instead think about hours of your life. Measure savings by -
      • How many hours (by hourly income) did you work for yourself each paycheck?
      • How many hours do you want to spend today working for your future?
    • We are our first priority.
    • Lord helps those who help themselves
  • A good 401k savings benchmark to shoot for is between 10-15 percent of your gross income. Even better if you could do 20 percent.
  • You can think about this a little longer, or you can commit to yourself now to make it happen. Nothing will help you achieve wealth until you decide to pay yourself first. This is the foundation of building wealth.

Chapter 4: Now make it automatic

  • In order for pay yourself first to be effective, the process has to be automatic. You need to have a system that doesn't depend on your following a budget or being disciplined.
  • How do you get a secure financial future?
    • Simple. You buy it, by committing yourself to invest the money you've decided to pay yourself in your future (401k)
  • Max out your 401k if possible
  • Automation + Compound interest = Serious wealth
    • Over time, money compounds.
    • Over a lot of time, money compounds dramatically!
    • Look at the power of pretax investing in after thoughts
  • Traditional IRA vs Roth IRA
    • Money compounds pre-tax in traditional IRA, however you are required to withdraw the money by the time you reach the age 70 1/2. And who knows what the tax rate will be in future.
    • There is no tax to pay in Roth IRA on withdrawal. And you are not forced by the government to start taking money out at 70 1/2.
  • Hire a good financial advisor.
  • Managing your money should be BORING
  • Remember to make it automatic

Note: Vanguard offers some of the lowest cost mutual funds in the industry.

Self-employed people

Small businesses truly powers our economy. The government gives business owners the best tax breaks when it comes tor retirement accounts.

If you are employed, as well as own a business, check with your accountant if you can use any of these approaches.

SEP IRA

Simplified Employee Pension is a self-employed retirement account. You an contribute as much as 25 percent of your gross income, up to a maximum of $66,000 as of 2023. To make the most out of it, you'll need to earn $264,000 a year from your business.

An ideal approach would be to pay yourself some salary, so you won't have to think about funding your account at the end of the year.

One-Participant 401k/Profit-Sharing plan

This plan is meant for a business with no employees other than yourself. You can fund it with up to 100 percent of the first $22,500 as of 2023. On top of that you can contribute another 25 percent with combined total up to $66,000 as of 2023.

This is why business owners get richer faster. It's hard work, but pays off well in the end.

For more details, refer IRS website here

Some companies to check out:

Diversify

It's critical that you invest wisely, and not gamble. Diversify. Spread it around between stocks, bonds and cash) in one retirement account. Note that the nature of this combination should change over time, balancing between aggressiveness, growth, and long-term outlook.

Invest in a Asset Allocation Fund or a Balanced Fund. Most of these funds have low expenses. Simplest way to do so is to select a fund closes to your projected retirement date.

During stressful times for market, historically, portfolios diversified among stocks, bonds and treasury bills nearly maintain its value.

Remember: Losing money is more expensive than growing it. Always protect your capital.

Resources for Research

  • MorningStar originated the concept of ranking mutual funds. For free, you get a list of the top performing U.S. funds over the last 10 years. You can also look at fund reports which can be very helpful in making decisions.
  • Yahoo Finance offers a true full-service financial portal. It also offers a very helpful mutual fund screener and a list of top performing mutual funds using this screener for free.
  • Mutual Fund Education Center
  • MarketWatch - created by editors of Smart Money magazine. Check out the personal finance planning section, articles and tools
  • NYSE - official site for the New York Stock Exchange. Contains detailed data about companies as well as solid background information
  • NASDAQ - for real time stock quotes and detailed information about companies listed

Chapter 5: Automate for Rainy day

There will always be things that are out of your control. If there is anything you can count on, it's that life is filled with unexpected changes. You never plan on losing, but stuff happens. In today's world, we often don't maintain the same cushion of emergency money that our parents and grandparents routinely stashed away. Remember, cash is king, cash is security, cash is protection. This section focuses on two basic questions:

  1. How much money should you put aside in order to protect yourself against the "rainy day"?
  2. Where should you put that money?

Rule #1: Be aware of your monthly expenses and get close enough idea of what that number looks like each month on average. A 3 months to a year's worth of expenses is the ultimate goal to shoot for, however if you see that taking a really long time, start small. Start with 1 month, then grow it to 3 months, then 6 months, whatever duration you're comfortable with and helps you sleep well at night.

Rule #2: Don't touch this money, ever. You read "In case of emergency, break glass". Think of your emergency fund the same way. A real emergency is something that threatens your survival, not just your desire to be comfortable.

Rule #3: Don't let it stay buried. Set it and forget it. Put it in a money market account earning a reasonable return. The goal is not to make the most money out of it, but keeping it simple, safe and yet grow. You're actually buying a money market fund - a mutual fund that invests in the safest and most liquid securities there are: very short-term government bonds and sometimes highly rated corporate bonds. Do not save it in your regular bank account to avoid temptations. Out of sight, out of mind.

Rule #4: As life goes on, your expenses may go up as well. Periodically revise your estimates and adjust your stash size accordingly.

Rule #5: Make the deposit automatic/recurring/systematic.

Remember: the rich get richer because they make their money work for them.

Money market accounts are considered to be the safest investments around. Make sure the account is federally insured (FDIC-insured)

Alternative Investment

Alternatively, you could invest in US Savings Series I-bonds to hedge against inflation, capped at $10,000 per year as of 2023. Interest compounds every six months on the last principle amount + interest earned. There is no state tax on interest earned. You can sell I-bonds after one year, although if you sell before five years, there is a penalty of three months' worth of interest.

Both options have their own benefits. Money market accounts provide you more liquidity. Government savings bonds pay a higher rate of interest, because they are considered longer-term investments.

How to get there?

Set up 5% of your net take-home pay to automatically go in your rainy day account every paycheck.

Chapter 6: Automatic Debt-free home ownership

You can't get rich renting. You aren't in a game of building wealth until you own some real estate.

Even more important than money is the feeling home ownership gives you. When you own, you have the security that comes from knowing that you are building equity and living in a place that belongs to you. You're not at the mercy of a landlord who can raise your rent or evict you.

Reasons to buy a home

If you just look at the math, getting rich with home ownership may not always be true for you. However it is very important to be aware of all the benefits that come with home ownership and then decide for yourself.

  1. Forced savings. A lot of us wait to get "comfortable" before buying a home, and then something else takes over priority in life.
  2. Leverage. Using borrowed money to multiply your potential gains. For example, you put 20% on a $500,000 house, and over just a few years the prices went up to $700,000. You could really just sell the house and bag $200,000 profit. If you compare it with investment, you made 200% returns over $100,000 invested, in a short amount of time.
  3. OPM. Other people's money. Really rich people not only get their money to work for them but also get other people's money to work for them.
    1. Let's say you have the money to buy the house without taking loan. It makes sense to invest that money somewhere to get a higher rate of return than the APR bank would charge you on the loan. If you don't trust your investment skills, ignore this reason.
    2. If you will need a loan from bank, and say the property price goes up after some time, you could refinance the property to cash out, and invest is somewhere for higher gains, if needed. Again, be smart with your own money as well as borrowed money.
  4. Tax Breaks. You deduct the cost of the interest you pay on your mortgage (up to a maximum of $1 million) each year. This applies only to your primary home, where you live presently.
  5. Pride of ownership. You put down your roots, become part of a community, with a real sense of security.

Agencies that help buying

  • U.S. Department of housing and Urban Development a.k.a HUD. HUD's mission is to create opportunities for home ownership. If you're a first-time home buyer, visit the website.
  • National Council of State Housing Finance Agencies - if you're a first-time home buyer, you may qualify for special state loan programs specifically created for this purpose.
  • Fannie Mae, The Federal National Mortgage Association. It operations under a congressional charter to increase the availability and affordability of home ownership for low, moderate and middle-income Americans. Fannie Mae doesn't lend money itself; it provides the financing that makes it possible for banks to lend money to consumers. It also offers free reports by simply asking for them. Check out HomePath
  • Freddie Mac, the Federal Home Loan Mortgage Corporation. Freddie Mac does not make loans to consumers; rather it provides the financing that allows lenders to offer home loans that are affordable. Checkout HomeBuyers for great tools & information, and HomeSteps for bargain homes. It does this by listing foreclosure auctions nationwide and providing information about loan programs that allow would-be homeowners to buy foreclosed properties with as little as 5 percent down.

Loan Programs to consider

FHA (Federal Housing Administration) is an agency within HUD that provides lenders with mortgage insurance, thus giving them the security to lend to first-time home buyers. FHA loans can cover up to 97 percent of the purchase price and can be used to buy a second or third home

State Bond Loans - most states offer individual bond programs designed to help first-time home buyers. Example NJ. For more information, check National Council of State Housing Finance Agencies.

Home Affordability Limits

According to FHA, a good rule of thumb is that most people can afford to spend 29 percent of their gross income on housing expenses - as much as 41 percent if they have no debt. This applies if you either rent or have a mortgage to pay.

30-year Mortgage

These are great because you get the interest rate locked in for 30 years.

Do not wait for all 30 years to pay your loan, otherwise you could end up paying a lot more money in interest over time.

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