BizThoughts

Now’s a good time to get rich by doing nothing, wouldn’t you say? Well, perhaps “doing nothing” is too strong a phrase. “With minimal effort” is probably more accurate.

David Bach, author of The Automatic Millionaire, has a terribly easy way of doing this. When you’ll hear it, you’ll either slap your head and go, “Well, duh, why didn’t I think of that?” or think it’s so obvious that everyone must be doing it already. Sadly, not many people really do.

His suggestion encompasses the “pay yourself first” principle, the “out of sight, out of mind” phenomenon, the power of automation and the beauty of compound interest. In short, he says:

Set up an automatic monthly payment to yourself into an account you won’t touch until retirement.

Here’s an example. John is a blue collar guy with a good job and a meager savings account. He faithfully deposits his monthly paycheck into it, yet after bills and groceries, never seems to have saved up a whole lotta cash. After reading The Automatic Millionaire, he decides to give Bach’s technique a try.

1. First, he sets up another savings account that he will use as his retirement account. He makes a pact to himself that he will not dip into this account until retirement, unless something catastrophic happens.
2. Next, he talks to his bank and sets up an automatic monthly balance transfer. The amount doesn’t have to be too high. It should be an amount that he is comfortable with, yet perhaps stretches him a bit. John decides to make his automatic transfer $50 a month.
3. Then he goes about the rest of his life, living off the money from his savings account like he always has. Bills and groceries come out of that account, though he finds that he has to stop splurging on junk food so much. After a while, he adjusts to the money he has and forgets about the $50/month.
4. In ten years, he takes a peek at that retirement account. It’s been earning a 2% monthly interest rate. When he checks the balance, he’s thrilled to see that his $50/month automatic savings is now $24,901.17! And that’s from just $6,000 worth of automatic transfers, which he adjusted to and didn’t miss as he dealt with his bills and groceries. (Plus, he lost some weight by having to cut out that junk food.)

That’s the power of automation and compound interest. It’s not quite a million dollars, but it’s still a good chunk of savings. The more you can spare a month, the better, of course.

The trick to this technique is that your monthly transfer doesn’t strain you terribly. You still need to cover your core expenses. It should be low enough to make you comfortable, yet high enough to store away for your retirement. If you do it right, you’ll forget about this automatic transfer and adjust to living without that extra cash, which is totally the point.

It’s very doable. You may be doing something similar already. If not, give it some consideration, especially now, where cash is king again and other investment vehicles (such as the stock market) whittle away. Good luck!