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  • Late Start Earner

The Automatic Millionaire - David Bach

Updated: Feb 1, 2021

I recently read my first David Bach book, The Automatic Millionaire, borrowed from my local library on my 2015 Paperwhite Kindle. It was short and sweet, had a down-to-earth inspirational story interwoven throughout that truly makes virtually anyone, no matter their salary level, feel like they could retire a millionaire, and clearly stated advice on how to get there. I probably read about 80% of the book, and skimmed through some parts that didn't apply to my current situation, like encouraging people to pay off credit card debt.

What I did not expect to find

There are a few phrases you hear thrown around in the personal finance world:

"Pay Yourself First"
"The Latte Factor"

I think it is worth reading this book (or likely, any one of David Bach's books) in order to go conceptually deep on these two phrases so that you can really let the concept sink in. I've heard these phrases often, mostly from the older Suze Orman Show, but never realized there was a written out philosophy behind them.

What I found to be surprisingly weird advice

Part of the "Pay Yourself First" philosophy really advocates for taking advantage of pre-tax retirement plans. Why pay the government (taxes) when you can pay yourself first (with pre-tax dollars) and pay the government later (at withdrawal)? This might make sense for some folks whose income and expenses are relatively flat and will continue to be the same in retirement, and assumes that tax rates will continue to be similar in the future.

I doubt this to be true for most people, and it is definitely not the case for me. Don't get me wrong -- I'm maxing out what I can with pre-tax dollars to lower my tax liability and dumping the rest in a mega backdoor Roth 401k + Roth IRA. However, it did make me rethink the investment strategy I've crafted for my boyfriend, which is solely based on his Roth IRA + Roth 401k. I still believe the Roth-only approach is better for him, since his tax bracket will be painfully increased when we are married.

What I learned and left me thinking

Bach strongly recommends to pay off your mortgage. Like, it is crystal clear: Pay off your mortgage.

He even walks through the math of biweekly mortgage payments and how, if applied correctly and appropriately by your mortgage lender, it will shave off years off your mortgage. He was so convincing that I even went back to my mortgage lender and re-discovered that, indeed, they offer a biweekly mortgage payoff plan provided that (even in the modern and electronic world of 2021) you fill out and sign a paper form, and mail it to them along with a check for one month's mortgage payment in advance. Up until a few months ago, I was paid twice monthly rather than biweekly, so it made less sense to put myself on a mortgage payment schedule that was off-cadence with my paycheck. Now that I'm back on a biweekly paycheck, Bach's clear depiction of the direct mathematic savings made me want to take the 15 minutes to connect my printer and get things rolling on the biweekly payment plan. (I know I said "want" there.....I haven't actually connected my printer yet because I don't have enough in savings for the one month advance mortgage payment check required. I should have that in a couple months when we receive our performance bonus.)

Now, I am very much inclined to debt payoff and probably research on a weekly basis whether or not it is more beneficial to pay off your mortgage rather than invest (and yeah, of course you can do both!). I had convinced myself after reading Grant Sabatier's Financial Freedom book that I should focus more on investing in the stock market and allowing gains in the market to outpace my mortgage rate.

Well, Bach got me thinking, and I did a few calculations and realized that in my situation, I do get ahead quicker by paying off the mortgage. Why? Because my fixed expenses go down, and therefore I need to save a lower FI number. In fact, here's the difference:

FI number with unpaid mortgage: $5,500 X 12 X 25 = $1,650,000

FI number with paid-off mortgage: $3,850 X 12 X 25 = $1,155,000

Difference: $495,000 <--- 6.9 years of savings at 72K/year

My outstanding mortgage balance sits at about $300K, which means that I get to FI faster by $200K by simply paying off the mortgage and eliminating it from my fixed expenses.

I love the idea of paying off the mortgage early! Peace of mind, higher monthly cash flow, and less pressure to keep a high paying job is totally worth it. What do you think?

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