“What if I told you that in just an hour or two I could share with you a system that would slowly and surely transform you into a millionaire?”
Sounded like a bad sales pitch to me...like I was going to have to dish out $200 to a pyramid scheme before I could receive my millions. In fact, I almost took the CD out of our car stereo right then and there. Thankfully, I pressed on and let the man talk.
Liz and I were on our way back from Tennessee. It was a fantastically relaxing trip, filled with reading, hiking, and many daytime naps. We desperately needed it and were so happy we made the trip. On the way back, I decided to turn my brain on again to learn a little something about our personal finances. I popped in the book on CD, “The Automatic Millionaire” by David Bach. With the opening line above I was certainly skeptical, but if you want to truly become an automatic millionaire I would recommend this recording every time.
How to Become an Automatic Millionaire
Within his book, David repeatedly preaches the fact that budgets don’t work and we should all just stop trying this ridiculous method of handling money. Stop budgeting? This sounds a little backwards doesn’t it? Here’s a well-known personal finance guru telling everyone to get a handle on their money, but that they shouldn’t be budgeting in order to do it. I don’t know about you, but that made my brain hurt a little.
But here’s the secret.
If you want to become an automatic millionaire, you don’t necessarily have to budget every little item that will cost you money. You really just have to plan what you want to save and automate it! Before I get too far ahead of myself though, let’s go through the steps to become an automatic millionaire.
1) Get Out of Consumer Debt
As Erik states so well in his recent Money Crasher post, “Get Out of Debt, Stay Out of Debt,”:
“Millionaires don’t have car payments, and they don’t carry a credit card balance. They don’t need to borrow money, because they HAVE money. If you minimize the monthly payments that you pay every month, you’ll have more money to invest and pay for large purchases.”
Consumer debt will only keep you down. If you want to treat your finances like a millionaire, then you’ll want to ditch your debts.
Want to dig more into how you can get out of debt? Check out one of my more popular posts for more info: The Absolute Best Way to Get Rid of Debt.
2) Figure Out How Much You Need
You already know how much money you need to survive today – you do that month in and month out. The tricky part is figuring out how much you’ll need when you’re 65 and ready to retire.
Most retirement calculators have built in assumptions that can be confusing and never really tell you how much money you’ll need in your nest egg to survive. For me, I like to keep things simple. To figure out how much Liz and I need for our retirement years, I went through a simple 3-step process:
First: I thought about what income we could comfortably live on today. The answer: $50,000 per year.
Second: I considered inflation. Because of it, the purchasing power of the dollar is cut in half every 20 years or so. We plan to retire in 30 years, so I figure we need 2.5 times the comfortable yearly income from today. This equates to: $125,000 a year by the time we retire.
Third: I converted this to a lump sum. Assuming we can earn 4% interest on our nest egg in retirement, we should be able to spend that amount each year without decreasing our savings. I’d love to model my nest egg after this approach so that Liz and I can live a stress-free retirement. $125,000/4% gives us a nest egg amount of: $3.1 million.
Alright, so I have to be honest. $3 million bucks sounds a little scary. Can we actually save enough today to accomplish that by the time we’re 60 years old? Sounds like it’s time for step #3….
3) How Much Do You Need to Invest?
Figuring out how much to invest to hit your number really isn’t that hard. Basically, you can just enter your real numbers into an investment calculator (I like the Dave Ramsey calculator – it’s super simple and easy to understand) and hit “Calculate”. If you’re coming up short, either you’ll need to increase your contribution each month or you’ll have to extend your retirement date.
Let’s say that Liz and I have $100,000 saved up in our retirement accounts and we can contribute roughly $1,200 a month. Unfortunately, in 30 years it looks like we’re going to be a little short of our number.
So, like I stated earlier, we’ll either have to bump up our contribution to more than $1,200 or we’ll have to move out our retirement date to something like 32 years instead of 30. To figure out your exact numbers, just keep entering in estimates until you get close to your desired nest egg amount. The next step to becoming an automatic millionaire is to pay yourself first – automatically.
Automate Your Future Millions
Liz and I are debt free. Even our house and rental house are completely paid for. But, we’ve never been great budgeters.
I like to live by a budget (actually, I like to live extremely UNDER budget), but I don’t like to dictate every single expense of my wife – and honestly, she wouldn’t take too kindly to that either. She’s a saver. I don’t have to worry about every little expense she makes. Sure, she goes over budget sometimes, but it’s always for good reason. In short, the budget just wasn’t working for us.
If you can relate to our scenario, then maybe it’s time to become an automatic millionaire. Heck, even if your scenario is entirely different, I still think you could benefit from this method to millions. Liz and I are excited about it, and I think you will be too!
How to Become an Automatic Millionaire
In it’s most basic form, becoming an automatic millionaire is just about paying yourself first. Before you pay the mortgage, the utility bill, or even the groceries for the month, you must put money aside for your future retirement. How do you do this? With automatic distributions from your paycheck (you can easily set this up with direct deposit through your employer). With this method, you can put away the money before you even see it!
Forgive the bad artwork in the visual above (it’s pretty obvious that I’m digitally challenged), but put that aside for a minute and I think you’ll understand what I’m trying to help you visualize.
Liz and I basically have three income sources: this website, our rental property, and my day job. Additionally, I have a quarterly bonus and a 401k match from the company I work for, which I put in the “Extra” bubble. The size of these bubbles depicts the amount of money relative to the others. It’s pretty obvious that my day job is bringing in the majority of the income.
Alright, so that’s the income side. Now we have to see where the money’s going – either to investments or expenses.
After analyzing our automated money, we realized that our…
- retirement contributions,
- the insurance,
- the taxes, and
- the living expenses
…were all automated already! In other words the money for these items was already coming directly from my paycheck to these categories. So, Liz and I were actually doing pretty well! Become an automatic millionaire? Yes please!
What’s Not Automated?
Before we hosted a party in celebration of our successes, we decided that we should probably take a look at our shortcomings as well. The savings for the next rental were not automated at all. This money is coming from the website profits, the current rental income, and the leftovers from the day job income. If we really want to become automatic millionaires we’re going to have to figure out how to put this on autopilot as well. Otherwise, we’re liable to spend it without ever realizing it!
Mostly, setting up the automation will be easy. Liz and I just have to agree on the amount that we’d like to contribute from the day job and I’ll simply fill out a form stating that I want $X,XXX dollars of my paycheck to go to a different account. And, the checks for the rental will just get deposited in full to the proper account when I go to the bank. It’s not perfectly automated, but it’s pretty close!
Decide to Become an Automatic Millionaire Yourself
I was a little long winded in this post, but you have to admit that the process is simple. So simple that you might not believe it will turn you into a millionaire. Set up the proper accounts, contribute the appropriate funds, and it can absolutely happen for you! We fully expect to become millionaires in our lifetime and it will come without arguments or finger pointing…because it’s all automatic!
Will you become an automatic millionaire?
My name is Derek, and I have my Bachelors Degree in Finance from Grand Valley State University. After graduation, I was not able to find a job that fully utilized my degree, but I still had a passion for Finance! So, I decided to focus my passion in the stock market. I studied Cash Flows, Balance Sheets, and Income Statements, put some money into the market and saw a good return on my investment. As satisfying as this was, I still felt that something was missing. I have a passion for Finance, but I also have a passion for people. If you have a willingness to learn, I will continue to teach.