imgbd Wise Advice

Learn to pay yourself first!

David Bach, USA

imgbd

David Bach, author of the 'Automatic Millionaire' is a veritable demonstration of the American dream. He is the pied piper who has attracted millions across the world to his principle of small savings with big effects. His advice is very simple and can be implemented by just about anybody: he says if you really want to become rich, learn to pay yourself first!

imgbd

String of best-selling books with simple yet effective strategies

In the last twenty years, David Bach's writings and advice has impacted over a hundred million people. He reaches people through his books, speeches, newsletters, seminars and media appearances. He has hosted television shows like Smart Women Finish Rich and The Automatic Millionaire, both produced by him. He founded a company, the FinishRich Media, to promote his brands like David Bach Brand and FinishRich. From 1993 to 2001, Bach served as Senior Vice-President at The Bach Group at Morgan Stanley, managing over USD 500 million for individuals. He has co-founded AE Wealth Management and is the director of investor Education.

imgbd

Learn to pay yourself first!

His dictum for getting rich is very simple. "Before you pay the government, before you pay taxes, before you pay your bills, before you pay anyone, the first person that gets paid is you." Naturally this leads to the question of how much should one set apart for oneself. "Today, my wife, Michelle, and I each strive to pay ourselves the first 20% of our gross income. That may sound like a lot, but because I've worked up to it gradually over the course of fifteen years, it's become our 'new normal'." (Business insider, Kathleen Elkins JAN 19, 2016)

imgbd

This sounds a lot easier in theory than it is to practice in real life. In fact at first, even David had difficulties in grasping this concept. "When I first heard about this concept I was doing what most people do - trying to budget, beating up on myself for failing, and then scrambling at the end of the year to find some money to put in my retirement and savings accounts, only to find another year had come and gone and I had not made any financial progress."

Like many young people, David found that he had very little surplus money to put in savings. Initially it was as little as 1% of his income. "I was in my mid-twenties, and I wanted to make sure it didn't hurt. Within three months, I realized that 1% was easy, so I increased the amount to 3%." He gradually increased the percentage - from 3% to 10% to 15% - until he reached 20%.

Bach is emphatic that this is possible for everyone, however high or low their income might be. "You'll learn to live without it. If you are not paying yourself first now, that's probably because you think you can't afford to ... But I can tell you from personal experience that once you decide to pay yourself first and then you make it automatic, it's done - and within the first three months, you totally forget about it. You'd be amazed how effortlessly you can learn to live on a little less."

Bach says that investing in retirement funds including individual retirement funds is one of the best ways to save. He is also for investing in shares and stocks.

The Latte factor

But more than the kind of investment, his focus is on finding the cash to actually make those investments. Many people feel that they simply do not have enough income to make meaningful investments. In their daily lives they struggle to make ends meet. In this scenario how would it be possible to put money 'aside' in savings, when day to day needs take away all of one's income?

imgbd

"It is the latte factor," says David Bach. One could easily be wasting $ 5 or $10 on unneeded coffees teas and snacks. There could be other unnecessary expenses which escapes the notice of most people. While this may not be much, it certainly would be a starting point for your savings journey; a big moment in anybody's life. "My core philosophy is spend less than you make. Don't waste money on little things (the Latte Factor - small amounts of money you spend can add up to a fortune)."

If you're only comfortable with setting aside 1%, it's better to start there than not get started at all. "This one little step will change your habits and make saving automatic," according to Bach. "And that will put you on a path that ultimately will make you rich."

When the going gets tough, the tough have cash

Says Bach, "my Grandma Rose Bach used to tell me, David, when the going gets tough, the tough have cash."The next smart step to getting rich is to a have an emergency fund. This is needed to as a cushion against unexpected expenses. Setting up this fund would a little more difficult than regular savings. As more funds would be needed, it will require giving up something that is dear to one, like eating out, taking a bus instead of using cabs etc. However this sacrifice will be worth the trouble once the emergency fund is at the targeted level. The real problem here is the will power to do without something that you are used to. The answer to that according to Bach is to make it automatic. For instance you can have a part of your pay automatically deducted and put into an account set up just for this purpose. What is attractive about this idea is that once you set up the plan, you can well-nigh forget about it. You need not think about it, which means that you will neither forget to save nor change your mind and dip into your savings. The deductions will add up to your savings silently, securely and automatically.

imgbd

Prescription for prosperity

His prescription for prosperity is for steady even if small savings, accumulated regularly and invested in the even the most common instruments leads to the creation of big wealth. For example the below table is calculated based on a return of 12% annually.

imgbd

Famous Quotes

  1. If you're in a hole, stop digging.

  2. Before you can really start setting financial goals, you need to determine where you stand financially.

  3. Learning to save is a lot like running a marathon - you need to build up to it by training gradually. It's too overwhelming to go from saving nothing to saving $2,700 a month, so you need to start slowly and keep it simple.

  4. Life is not easy. But that's not the only truth that matters in this context. It also happens to be true that it takes just as much effort to have a "bad life," in which you don't get what you want, as it does to have a "good life," where you do. So given the choice, why not go for the good life?

  5. You can't get rich watching and wondering. You have to take action.

  6. The recession brings an opportunity to renegotiate everything. And you get a better price on it. - David Bach, 2009.

  7. For most of us, debt can be a trap that forces us to work longer than we should have to. What puts us into debt are bad habits such as running up balances on our credit cards and then paying them down slowly, if at all.Did you know the average American family has about $16,000 in credit card debt? That translates to a lot of money wasted on interest payments.- David Bach, 2012

  8. Your life should be interesting - your investments should be boring.

  9. It's not too late for you to become rich - if you start today.

  10. Many of the success stories people have shared with me over the years focus on how home ownership has been the key to their financial security. I'm confident these essays will inspire millions of renters to work toward their first home and millions of current home owners to consider second homes or investment properties as a road to building financial freedom.

  11. Recessions make millionaires.

  12. Downturns are when you can buy stocks and other investments at bargain prices - that is, On Sale!

Content is prepared by Wealth Forum and should not be construed as an opinion of HDFC Mutual Fund.

imgbd



Share this article