David Bach on Having More Money

David Bach, an expert on having more money, is the author of seven consecutive national best sellers including two consecutive #1 New York Times best sellers, Start Late, Finish Rich and The Automatic Millionaire. He is regularly featured on television and radio as well as in newspapers and magazines. Bach continues to appear as a featured money coach on “The Oprah Winfrey Show's” runaway hit series, “America's Debt Diet.” Bach is a featured contributor and columnist with Redbook magazine and on Yahoo!, where his column, “The Automatic Millionaire with David Bach” appears biweekly. Prior to founding FinishRich Media, he was a senior vice president of Morgan Stanley and a partner of The Bach Group, which during his tenure (1993 to 2001) managed more than half-a-billion dollars for individual investors. Here, Bach gives us straightforward advice on how to have more money.

Why do so many people find financial matters challenging?

The truth is most of us are not taught about money when we grow up. We learn how to read and write, we take science classes, we learn about history and really don’t get any education about personal finances. Without an education in money, a lot of us are just financially illiterate. The system takes advantage of us. The corporate [entities] out there know how to separate us from our wealth and the system is really set up to keep most people poor. The system keeps you working paycheck to paycheck—70% of Americans right now are living paycheck to paycheck. It’s a really a war for your wallet and it’s about winning the battle. It’s a game and you need to know the rules and how to play.

What keeps people from having more money?

I think the biggest myth out there is if you made more money, you could finally be rich. If you made more money you could get out of debt. If you made more money, you could finally start saving. If you made more money, you could finally stop renting and buy a home. What we’ve seen across all income levels is if people make more money, they simply spend more money.

The first concept I teach people is the Latte Factor. This is a metaphor—and I get made fun of because I’ve talked about it for 15 years. Everywhere I go, people think I’m the guy that’s trying to take away your coffee, but I’m not. What I am trying to teach you is we spend money today on things we don’t even think about. Say you go to Starbucks; you are not getting out of there for less than five bucks. Millions of us go into Starbucks every day without even thinking about it—it’s just brown water, and we don’t even think about it. Five bucks a day is $150 a month and adds up to $2,000 per year, and that’s more money than the average American saves.

I try to get you to look at where you’re spending those little amounts. The average people could get themselves out of debt and get on what I call an Automatic Millionaire Plan. It’s getting back that $5-10 dollars a day. It’s starting there.

In The Automatic Millionaire, you talk about “paying yourself first.” What does that mean?

“Paying yourself first” is the idea that when you’re earning, the first person who gets paid is you. What I’ve been teaching people is that you go to work from 9 until about 12:30 to pay taxes. There’s only one legal way to avoid working half the day to pay taxes and the only way is to pay yourself first, automatically like the government does, all in a tax-deductible return account. And those would include 401(k) Plans, IRA accounts, self-employed retirement accounts. The secret to making your plans work, is to have one hour’s worth of your income per day moved automatically from your paycheck before you can touch it right into that retirement account. That’s how you pay yourself first, and the real key again is it has to be automatic. If you have to write a check or go down to the bank and put the money away, you won’t do it. But when people save automatically, that simple thing can help people have wealth for life.

What does a solid 401(k) or IRA look like?

Let’s say you work for a company and you have a 401(k) plan. I’ve hit you over the head about paying yourself first and signing up for it. The second thing I hit you over the head with is this. Where are you going to put the money? The 401(k) plans are now offering target-dated mutual funds. These are also known as asset-allocation funds—funds that divide your money between stocks, bonds, money markets, real estate, global investments, and they break it all down for you. It’s automatically managed and it’s automatically rebalanced. It makes it really simple. What we’re seeing is people who invest in automatic mutual funds like this are getting much better returns and they are doing better with their money.

If you don’t have a fund like that in your 401(k) plan, and maybe you have opened up an IRA account, go back to your bank or your brokerage firm, and ask them if maybe they have target-dated mutual funds. There are just some phenomenal funds out there that have 10-20 year track records that have an average return of over 10% per year.

How would you guide people through the first 30 days of having more money?

If I were to come in your life and help you fix your finances in 30 days, there would be a handful of things I would do. I would get you to pay yourself first. If you had a home, I’d have you look at doing a biweekly mortgage. If you do a biweekly mortgage, you go from paying one payment a month to paying half of that payment every two weeks so let’s say you’re spending $1,000 a month right now on your mortgage; if you split that in half, and you paid $500 every two weeks, you would pay a 30-year mortgage off in 23 years. The average person who listens to this advice would save over $50,000 in the interest payments by just making that one change.

The other thing I would have you do is really track where your money is going. In the first 30 days, you can really figure out where are you spending money. I challenge you to find your latte factor at finishrich.com . You can plug in how many years out you want to save the money for, and it will give you a calculation of what you could potentially have. We’ve also created a tool on our web site which will help you track all of your expenses automatically, called the “automatic money manager.” You can take a free tour of this tool and actually try it for 30 days. What it will do is help you track where all your money is going automatically, because if you don’t know where your money’s going, it’s very hard to create an investment plan. So whether you use a tool like the one we’ve put online, or you bring around a little pad of paper and track where you’re spending all your money, the key is to know where your money is going.

What keeps some people on track and what makes some people give up in the first 30 days?

People try to do too much too fast. I have seen the real key to being successful financially is to do it in baby steps. So some people, when I ask, “can you save one hour per day in your income?”—that’s 12% of your gross income—that absolutely blows their minds away. We’ll get letters and emails from people saying, “how dare you tell us to save that much of our income? Do you know how impossible that is?” And my response is, “Don’t.” Save 1%. I’ve never had anyone look me in the eye who couldn’t save 1%. Then in another 9-10 days, she can increase it. I’ve seen people go from saving nothing to 20% of their income in two years.

Should money be in stocks or bonds? How do people decide where to put everything?

I’ll give you a really simple strategy. It’s called the “perfect-pie approach.” One third [of your money] goes in real estate, one third goes in stocks, and one third should go into guaranteed investments. The key to building wealth is to not lose money, and the way you don’t lose money is you don’t bet too much on anything. This year the stock market is doing well but the real-estate market is going down, [For balance], you’ve always got your guaranteed investments.

I invest almost exclusively now in exchange for trading mutual funds. So I am using index-based mutual funds—what are called ETFs. It’s the lowest cost way to invest. ETFs are 90% less expensive than a typical mutual fund. They are most tax efficient and they are phenomenal.

You are also looking at the green [environmental] market. Is that something that people should take a look at seriously now?

When I look at opportunities in the next 10-15 years, I think it is going to be green investing. By going green, not only can we protect the planet, but we can also save money. I’ve been studying all the opportunities in the green space. Companies that are making a conscious effort to do right by the planet are actually becoming extremely profitable. They are making more money as a result of going green. And the companies that are helping other companies go green are also making a lot of money.

I think the green space, if you will, is similar to what we saw with technology in the 1980s and in the 1990s. The green space is at its beginning stages and I will personally be putting money into [this sector] because I just see so much opportunity there. I’m not recommending any individual green funds yet, because quite frankly I haven’t completed my due diligence on that.

SIGNATURE QUESTIONS

What is the belief you personally go to during times of change?

What I really believe at my core is that change is good. I am such a believer that when you close one door, a window opens, as they say.

The best thing about change is…

…it’s life. It’s the juice of life.

What is the best change you have ever made?

The best change I ever made in my life—and it was my most difficult decision—was to leave Morgan Stanley, stop being a financial advisor and truly go for my dream, which was just to teach full time.

For more information on David Bach, visit www.finishrich.com.