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Bill Brown

A complicated man.

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My friend Larry has often said that he doesn’t know how anyone in this day and age can’t be worth a million dollars at retirement. He’s right because it doesn’t take a substantial monthly savings to amass a fortune if you’ve got enough time. There’s really nothing magical or mysterious about it: save a little bit each month and invest it in something—even something relatively conservative—and it’ll turn into something substantial in 30 or 40 years. Of course, that hasn’t stopped many investment book authors from cashing in on common sense. David Bach’s The Automatic Millionaire is a great example of that

(Side note: I’ve become convinced that investment, business, and management books should not be listened to. Most of these type of books rely on a hook or a gimmick that can easily be glossed over when reading, but becomes positively grating after listening to six CDs filled with it. I can’t think of the last book in the genre that I didn’t entertain thoughts of ditching halfway through. “Good to great”, “make it automatic”, “millionaire next door” all call forth repulsion at their thought.)

Bach’s basic message is as helpful as it is obvious: the more effort required to keep up your personal financial plan, the less likely you are to see it through. Bach’s unique insight is, umm, well, I don’t think there is anything particularly unique in the entire book. His advice on investing, saving, paying off debt, and tithing (tithing? You don’t see that phrase used in many books) amounts to “make it automatic.” He spends countless pages describing how to take advantage of direct deposit and automated debits. Apparently, this isn’t common knowledge among people; nor is the fact that you can set up automatic payment plans to mutual funds with little or no initial investment. I wouldn’t have believed that, except that this is a very popular book.

I’ve got a few beefs with this book. First, I am sick of every author and financial planner on Earth recommending asset allocation plans as a panacea. Diversification is good if you’re buying individual stocks and you want to spread your risk across many companies. It’s less tenable when you’re buying mutual funds, which are diversifications in themselves. No mutual fund puts all its assets into just stocks or just one category of stocks. They spread the money across many companies in many sectors and they have sizable holdings of bonds and cash equivalents.

In my opinion, spreading your investment money across a bunch of different mutual funds dilutes your holdings. If you only had $100 to invest a month, why would you put it in four different funds: one bond, one aggressive growth, one money market, and one blue chip. That’s exactly the calculus many asset allocation drones preach, but you’re unnecessarily limiting your upside potential. I think it’s better to pick at most two funds and throw everything at them. Personally, I like to put my money in a fund that’s earning a lot and put some more in an S&P 500 index fund. That way, I’ve always got a portion of my money in a fund that’s representative of the market as a whole and consistently providing a decent return over time. Simultaneously, I’ve got the rest of my money working really hard.

Second, he calls the phenomenon of long-term investing “compound interest.” Perhaps this is a niggling point, but compound interest is a term specific to banking. It is the effect of earning interest on interest or, in lending, paying interest on interest. It has nothing whatsoever to do with the stock market or any other form of investment. If I were generous (I’m not), I’d say that Bach was trying to explain the issue in terms that the average person would understand. Instead, I think he may not really understand the difference. In the stock market, you never realize any gains until you sell the security. They are called “paper profits” for a reason. If I buy $10 worth of stock at age 25 and it’s worth $1,000 at age 65, it’s not because of any sort of compounding—it’s because the value of the amount of stock I bought at age 25 has risen over 40 years. This could be because the price has risen, the stock has split, the company has bought back its own stock, or another reason entirely. It’s exactly not like savings.

Finally, I hate how talks about the automatic mortgage payment. He recommends splitting your monthly mortgage payment into biweekly installments. The purpose is to make an extra payment a year, which will save you a bundle over the course of your mortgage repayment. He drones on about this at length, but he can’t easily gloss over the fact that you’re paying an extra payment every year. My mortgage is over $1,200 a month. I can’t imagine paying an additional $600 two months out of the year. I’m not sure most people could swing that either. It strikes me as disingenuous to prattle on about how becoming a millionaire is as simple as foregoing your morning latte (amounting to $50-100 a month since everyone who gets a latte before work works a seven-day week) but not including the extra $100 per month it would cost to make an additional mortgage payment.

Bach’s book does discuss an interesting approach to paying your debts. Basically, you make minimum payments on all your debts and then put half the money you save every month towards one of them. Once you’ve finished that one off, put the half plus the minimum payment of the paid-off debt towards the next debt. And so on and so on. It would be an interesting approach if every other book on the market didn’t already mention it.

Stylistically, the book is boring as hell. It repeats the material endlessly, uses obviously concocted anecdotes to illustrate points (boy do his friends say awfully convenient stuff in oddly similar style to his own), and relies on crutches excessively. The benefit of reading the book instead of listening to it is that you can glaze over the boring parts; there’s really no audio equivalent to skipping a few pages since it’s virtually impossible to know when sections and chapters begin and end.

If you’re looking to get rich or get out of debt, take the money you would have spent for this book and use it towards those ends. Instead, read this excellent—and free—essay on the subject called “Get Rich Slowly”. You’ll be better off because he’s a better writer and the advice is more pertinent.