A New Take on an Old Theme

By Kevin Vanderlaan

If you have read this column with any frequency, you then know that I have written before about stashing money away for the future by knocking small expenditures out of your life, items you will not miss. My first published illustration of this principle referred to that tempting daily Mochaccino.

Well, I recently picked up a book called The Automatic Millionaire by a guy named David Bach. The first sign that I knew I would like this book came from a subtitle that caught my eye. He calls it “The Latte Factor”. Bam, I was sold. He includes things like dry-cleaning and fast food lunches under that heading, but the theory is the same: Where to stop money that slips through your fingers? Answer: All over the place.

Basic cable or none at all. No extended warranties. Home slumber parties for kids'birthdays instead of Chuck E. Cheese. No credit card usage, more cash purchases.

As you know from previous articles, there is no great secret to saving money. Make whatever income you make and spend less Ð that's all the genius necessary to grow your bank account. Mr. Bach takes this one step further: Make whatever income you make and be sure that you pay yourself from that sum before looking on any of it as disposable income.

Our earlier articles were a little less sophisticated than this. They said “cut out the little things and you will save all this money; that's good”. Yes, it IS good BUT as we are human, our tendency leans towards saying, “We scrimped and saved and now have all this extra money, so let's reward ourselves by blowing it all on a vacation to Costa Rica!” That's bad.

Spending creeps upwards in many quiet and nefarious ways, even as we think we are getting ahead. For instance, there is the fact that as we climb the social and economic ladder, our expenses tend to go up. Let's take for example a completely fictitious character named Tom. Tom starts his economic journey with a paper route, and then, when he is old enough, gets a job at the local record store. The pay isn't great, but the hours are flexible and he can wear what he wants, and piercings only increase job security. It is enough to allow Tom some pocket money and keep gas in his Plymouth Horizon, a rust and duct-tape fiasco that somehow gets him from point A to point B.

Then Tom finishes high school and works as a waiter at the Olive Garden during college. His piercings must go, and now there are dress codes to deal with. He makes more but the job is a bit more stressful, and requires more prep time and personal hygiene. The Plymouth has to go; the manager won't allow such an eyesore to sit in his parking lot. That's okay, because with the extra cash Tom can easily afford to upgrade the car. However, as the car is upgraded, insurance coverage becomes more expensive. By the time he is through college, Tom is making a good deal more money but his expenses have gone up in step. He's not feeling any further ahead because he's not. The relationship between savings and earnings hasn't hit him. At this point, my father's ever-audible mantra should enter his subconscious; “It's not what you earn, it's what you save.” Even with an admirable work ethic, Tom has let spending creep upward to the point that he is no longer making headway. He makes the money, keeps it in hand, and, as night follows day, he spends it on what seem to be “necessities” for his ever-expanding lifestyle.

David Bach takes the approach that if you don't have it, you can't spend it. This means getting it out of your hands before you can do any damage to yourself. His solution? Automate. That is, your tithing, saving, spending Ð everything -- is automated, as much as is practical. What you don't see, you don't miss. Automating deposits into retirement accounts, automating mortgage payments (and accelerating those payments as much as your financial situation will allow), automating mutual fund purchases, all of it is possible to do, and keeps you from taking the money and spending it.

In The Automatic Millionaire, Mr. Bach introduces us to the McIntyres. In their mid-50's, they were ready to retire. They had never made much more than $50,000 with two incomes (Mrs. McIntyre worked part-time outside the home) and yet were worth almost $2 million -- and were ready to retire by 55 years of age. How? Well, they sweated the small stuff. Fewer meals out, fewer vacations, but retiring ten years early simply by taking relatively minor day-to-day savings, putting them away, and standing back to admire the long-term results. They have homes, cars, and a good quality of life, but have kept within their means.

I will leave you with one of the keystones to their strategy: Never buying on long-term credit. When they did use a credit card, it was paid off at the end of the month. The McIntyres paid cash for almost everything except a home. On that, they accelerated their mortgage payments, paying every two weeks to get it out of the way faster and make it an automatic withdrawal from their paychecks. Their lack of credit card debt made life much easier.