transcript

Speaker 1:
[00:00] Starting something new always comes with that voice in the back of your head. What if this doesn't work? What if nobody buys anything? I remember that feeling well when we launched The Art of Manliness store. You're putting something out there and hoping it connects. One thing that made it easier was using Shopify. We've used it for years now to run the AOM store, and it handles everything behind the scenes so we can focus on the actual stuff we do, the content we do on AOM and the products we sold. Shopify is the commerce platform behind millions of businesses around the world and 10% of all e-commerce in the US, from big brands to smaller operations like ours. It lets you manage everything in one place, inventory, payments, analytics, without having to stitch together a bunch of different tools. It also helps you reach customers with built-in email and social media tools, and that shop pay checkout makes a real difference. Fewer abandoned carts, more completed purchases. It's time to turn those what-ifs into success with Shopify today. Sign up for your $1 per month trial of the day at shopify.com/manliness. Go to shopify.com/manliness. That's shopify.com/manliness. We've all had that moment. You're hungry, you've had a long day, and you know there's something healthy that you could make, but you just don't have it in you. That's usually when things go off the rails. For me, eating healthy isn't a willpower problem, it's a set-up problem, and that's why I use Factor. On weeks when we've got a lot going on, Factor takes the pressure off. It's fully prepared meals designed by dieticians and cooked by chefs. Deliver right to your door fresh. You just heat it up in two minutes and then you eat. My go-to, I love it, it's the filet mignon. It fits right into my routine. Solid protein, good portion, and it actually tastes like real food, not diet food. They've got over 100 rotating meals each week, so you don't get bored, and it's ready in about two minutes. No grocery runs, no prep, no cleanup. I use this. I love Factor. You should use it too. Head to factormeals.com/manliness50off and use code manliness50off to get 50% off and free daily greens per box, with new subscription only. Wall supplies last until September 27th, 2026. Again, that's factormeals.com/manliness50off, M-A-N-L-I-N-E-S-S-5-0-O-F-F, and use code manliness50off to get 50% off and free daily greens per box, with new subscription only. Brett McKay here, and welcome to another edition of The AOM Podcast, which since 2008 has featured conversations with the world's best authors, thinkers, and leaders that glean their edifying, life-improving insights without the fluffing filler. The AOM Podcast is just one part of the McKay mission to help individuals practice timeless virtues through thought, word, and deed. Also, be sure to explore our articles in artofmanliness.com, read the deeper dives we do in our sub-stack newsletter at dyingbreed.net, and turn our content into real-world action by joining the Strenuous Life program at strenuouslife.com. Now on to the show. Building substantial personal wealth can feel difficult and out of reach, but my guest says that even those with modest means can, with a few simple decisions and strategies, become millionaires and even multimillionaires. David Bach is the author of the best-selling, newly updated personal finance classic, The Automatic Millionaire. Today on the show, we talk about the money management framework that will put you on the path with free, secure, rich retirement. David explains his controversial latte factor principle, the astonishing power of compounding interest, how setting your finances on autopilot may be the most important financial move you can make, why he still believes in buying a home as an incomparable way to build wealth, the best way to pay down your debt, and more. After the show is over, check out our show notes at awim.is slash millionaire. All right, David Bach, welcome to the show.

Speaker 2:
[03:46] Thank you, Brett, it's great to be with you. I'm really excited to do this show with you.

Speaker 1:
[03:50] Well, it's been two decades since the original release of your book, and I'm sure a lot of our listeners have read this or heard about it, The Automatic Millionaire. And in this book, you lay out a personal finance philosophy that can help people save for retirement and have financial security automatically. But you adopted this or you figured this out when you were a young financial advisor, and you had this experience early on in your career with a married couple that opened up your eyes to the fact that wealth isn't about how much you earn, but how you manage what you earn. So what were these people doing differently from the other people you were advising at the time?

Speaker 2:
[04:30] Well, so let me tell you how I met this couple. And the couple I refer to them in the book is Jim and Sue McIntyre. I used to teach back in the day, this is like in the 90s, I taught a retirement planning course. And people would come to my class, it was actually at a high school, it was adult education. And I would teach these classes at night, usually over four weeks. And we would talk about what you need to do to prepare for retirement. And typically people who came to my class were in their late 50s. Like if someone was 55, it was early. So people would usually come to these classes right around when they're getting ready to retire. And then often those people after a four week class would come into our office to have us do a financial plan for them to see were they in good shape to retire. And we would offer that to everybody as a complimentary thing. And that was how we got a lot of our clients. I used to work at Morgan Stanley and we would get clients from teaching a class on retirement planning and then doing these financial plans. So most people when they would actually come into my office and retire, they would be in their early 60s, somewhere between the ages 60 to 65. And that was very common. And we had people who worked at all the major companies. We lived in the Bay Area at the time and they worked at companies, everything from Safeway to Pacific Gas and Electric to Chevron, AT&T, Pacific Bell. These were a lot of the major corporate companies in the Bay Area of the kind of people we were working with. And they were really mid-level employees, people making between $50,000 to $100,000 a year. They worked as CEOs. They were just your average hardworking American. And they were able to come into our office and retire in the 60s because they had paid themselves first, and they had bought a home, and they had paid their debt down. But the Macintyres were different because the Macintyres came up to me in my class, and they had told me in the class, because you get to know your students, Jim had told me he made a little over $53,000 that year. And he also asked me if he'd come in my office and meet with me for a retirement planning meeting. And this was early in the week. And I said, absolutely. And he said, well, can we come in this week and meet with you? And I said, well, what's the urgency? And he was like, well, I really want to retire. You've got me really excited about retirement. And I'd like to retire on Friday. And his wife Sue was a beautician. She had really spiky blonde hair. And she's like, isn't that great? He wants to retire on Friday. And I was like, how old are you guys? And they were in their early 50s. And so I said, well, sure, you can come in my office. I'll meet with you on Wednesday. And they came into my office. And what I really thought was going to happen, Brett, is I thought I was going to have a really hard meeting. I thought I would end up showing them that probably they weren't ready to retire yet. I just assumed this. And so they showed up in my office with a Safeway bag, actually. He didn't work at Safeway, but he had a Safeway bag. And all of his statements and all of his stuff was in a bag. And he basically dumped it out on the table. And he said, well, I want to show you everything I've got. And I had a yellow pad of paper, and I started adding up what he had. And I looked at his 401k plan. He had over $600,000 in it. And all of a sudden, I noticed he had a home and his home was paid off, and he had a rental house, and the rental house was paid off, and he had some money in saving the accounts and investment accounts, and his wife had money put away. And as I'm totaling it all up, they had nearly $2 million. And they were in their early 50s, and their average income had been less than $50,000 a year over their lifetime. And it blew my mind away. And what happened, and the reason this meeting changed my life, is what happened is I actually stopped the meeting, and I said, I have to know how you did this, right? Like, because I see a lot of people come to my office in their 60s, and they can't even afford to retire. You're coming to my office in your early 50s with an ordinary income, and you've got all this money set aside. How did you do this? And they laughed, and they're like, well, David, we did a lot of what you talked about in your class. Like, you know, we paid ourselves first, we saved money automatically. And they basically walked me through what they did. And I ended up going back to my office, super like, kind of in shock, almost depressed. And the reason I was depressed at the time is that I was earning twice what they were. I had now reached what I thought was a high level of success. I was a young kid making over $100,000 a year, and I was still living paycheck to paycheck. And that had been my experience when I came out of college. I thought if I made $50,000 a year, I would be rich. And then I spent more than $50,000. So I thought, well, it's just not enough money. If I make $75,000, I'll be rich. I'll start saving money. And there wasn't enough money. And then $100,000 is the same thing. And so when I met the McIntyres, they were my wake up call that it's not what you make, it's what you keep. And that moment, it's not what you make, what you keep is what changed my whole life. And then I can tell you what I ended up doing because I changed everything in my life as a result of that. And then ultimately, I went off and taught these lessons.

Speaker 1:
[09:25] Yeah, we're going to talk about these lessons because they're simple stuff. It's nothing complex, you don't have to know anything about quantitative investing or anything like that. It's just brass tax things. Let's start with one of the fundamentals that you're famous for. Something I've noticed in personal finance trends is there seems to be like this pendulum effect. It's interesting, a lot of people don't know this. My very first blog that I started in 2005 was a personal finance blog. It was called The Frugal Law Student. And I remember at the time, 2005, this was around when your book came out. There was a lot of emphasis on saving in small ways, like looking for ways you can save money, just sort of nickel and dime it, make some small cuts so you can save more. And then it seems like recently there's been this rise in this ethos of like, well, you don't need to think about that nickel and dime stuff. It doesn't matter. You need to focus on big savings. But you're still a proponent of the idea, which is encapsulated in what is perhaps your most famous. And sometimes I've seen people criticize this idea in the personal finance world. This idea of the latte factor. For those who are familiar with it, what is it?

Speaker 2:
[10:33] Yeah, well, so latte factor, again, go back to teaching my classes. I was teaching a class on how to save and invest and use your 401k plan and pay yourself first. And a young woman said in the class, this is a great idea in theory, but I can't do it. And I said, what do you mean you can't do it? You can't save $5 a day, $10 a day? And she's like, no, I can't do it. And she was literally sitting there sipping out of a Starbucks cup of coffee, her latte. And so I stopped the class, there was a blackboard in the class, and I'm giving you the history of the latte factor. I said, what's your name? And she said, my name is Kim. I go, Kim, walk me through a typical morning. I see you're holding a cup of coffee from Starbucks. What did that cost? And back in the day, that was like $3.50. Today, if you go to Starbucks and you get yourself a big cup of coffee, you're going to spend, you know, in New York City up to $10. So lattes aren't $3 anymore. They're now $5, $6, $7, $8, $9, $10 a day. So I just walked through her morning. You know, she goes to Starbucks, she spends $5 a day at Starbucks, between a coffee and a biscotti. Then she goes and has, you know, Jamba Juice and she spends $5 a day at Jamba Juice. She hasn't even got to lunch yet. And I took the math and I showed her, look, Kim, she worked at The Gap. I said, Kim, I know The Gap has a 4-1-K plan. I know The Gap has a matching contribution to your 4-1-K plan. If we could get you to just save $10 a day, and this woman was in her early 20s, I said, and we took that out over 40 years, let me show you what the compound interest could look like. We ran the numbers for her. We showed her 8%, we showed her 10%, and we showed her 11%. We showed her all the different calculations, and basically showed her that if she would just start paying herself first, and got the match at her company, she could be a millionaire at least, and we ran the numbers for her. It was like, at the time, it was like $1.8 million. She goes, are you trying to tell me my lattes are costing you $1.8 million? A guy sits in the front of the room, turned around and goes, yes, that's exactly what he's trying to tell you. And what happened is, I left that class, and every single person was talking about the latte factor. And they were talking about what their latte factor was. And so the latte factor has always been a metaphor, not about the coffee, it's a metaphor for how do you spend small amounts of money unconsciously not thinking about it, and then telling yourself you can't afford to invest. Because if you don't believe you have the money to start investing, you will never start. And so I became kind of famous for teaching this philosophy of like, fine, we're spending small amounts of money so you can get started. Start with $5 a day, start with $10 a day, start with $20 a day. So the latte factor has always had pushback, but nothing I've done has probably changed more people's lives in the latte factor, because what the latte factor is, the metaphor is a wake up call. People hear it, some people, they get it, and they're like, he's right, I do have this thing. It might not be coffee, it might be something else, it might be cigarettes. I've had people tell me that they stopped smoking because they ran their cigarette factor, and they realized that they literally had spent hundreds of thousands of dollars on cigarettes over their lifetime, and had they invested that money, they would be a millionaire. And I've had people tell me they stopped smoking because of it. Some people have stopped drinking, some people have stopped eating out every single meal, that they actually brown bagged their lunch. So it's changing your behavior consciously, instead of spending money unconsciously. And it's helped a lot of people. And then I think that those who like to hate on it, a lot of people have used hating on the latte factor to build their own personal brands. You know, there's people who go around creating cups, say, you know, you and your latte factor basically. But whatever, you want to keep drinking your coffee, drink your coffee, you want to drink a bottle of water, drink a bottle of water. If you're not saving $5 to $10 a day, and you're spending $10 a day going out to Starbucks and having a bottle of water and coffee, I don't know what else to tell you. You know, it's your life. You want to turn around and be 60 with no money and hope the government can help you? That's your decision. But I can tell you, looking into the future, the government will not be there to help you. All the things that we have been dependent on, thinking we'll have, Social Security, Medicaid, Medicare, ultimately all the safety nets that are in America today are gonna shrink and they're shrinking. And so you have to build your own financial security. You have to build the mode around your house. And my message has always been, you can do it, you just need to get started. And the key to getting started is to start, if you have to, start small, $5 to $10 a day can be a great place to start. And then work your way up. And then make sure you're doing it automatically, so you're not needing to use discipline. You don't need to think about it. It's the money moves for you in the background while you sleep. That's what the Automatic Millionaire is about. Set it and forget it. And I teach you in this book how to literally put your financial life on autopilot in less than an hour.

Speaker 1:
[15:23] Yeah, we're gonna talk about how you can set it and forget it. But I think it's interesting in the past 20 years, there's definitely more things out there that could be a latte factor. I mean, think about all the things that we have now that didn't exist 20 years ago. DoorDash, Uber, in-app purchases, subscriptions, streaming services. So I'm sure everyone can find their own latte factor. You've got to look at what they're spending and be like, okay, do I really need this thing? And if I got rid of it, how could I invest that money so it pays for my retirement in the future? So if someone who is 30 saved and invested $10 a day until they're 65 and got a 10% return, when they were 65, they'd have a million dollars. So as you were saying, I mean, it really adds up. And as I was reading the book, the thing that really hit home to me is that in order to really, I think, understand the power of the latte factor, saving just five bucks, 10 bucks a day, how it can make you lots of money in your retirement, is that you have to understand the power of compounding and finances. And I think compounding is one of those things that people think they understand, but they don't really understand just how powerful it is. So help us understand compound interest.

Speaker 2:
[16:27] You know, compound interest, Einstein said this was like the miracle, called the eighth wonder of the world is compound interest. Compound interest should be taught in high school. Like you shouldn't get out of high school without understanding the miracle of compound interest and what that looks like and what it works. One of the things you need to understand is what's called the rule of 72. How long does it take to double your money? So first, let's start with the rule of 72 and then we'll kind of go to compound interest. So the rule of 72 is, you take 72 and you divide that 72 by an interest rate. Let's say it's 10%. So basically, if you take 72 and you divide it by 10%, if you're going to earn 10% annually and you divide it by 72, you will double your money in a little over 7 years. And if you earn 1%, you're going to double your money in 72 years. Right? So at first, you have to understand that the rate of return has a huge amount to do with how much your money will compound. So some people don't even understand that. Like they go, well, if I save $10 a day, I'm saving, you know, what is that? That's $300 a month. That's $3,650 a year. That's $3,650 over a decade. How is he getting the math? Like where is he coming up with, this is gonna be worth millions of dollars? They're not factoring in the interest rate, what you earn on your money. And how do you earn that interest rate? Are you putting it in stocks? Are you putting in bonds? Are you putting it in real estate? Are you sticking it in an index fund? Are you in the stock market? Those things determine the rate of return on your money. And so what happens is a lot of people just base, they're fundamentally financially illiterate and they don't understand all these basic things. So a simple thing you can do, I'll give you a website you can use that's free. You can go to investor.gov. They have a very basic compound interest calculator and you can run numbers. You can go in and put down, okay, I'm going to save $300 a month. If I save $300 a month and I save it for 10 years at 10%, what could it be worth? And it will show you the calculation. Then you run it again. You go, what if I save $300 at 10% for 20 years? What could be worth? What would it be worth in 30 years? What would be worth in 40 years? And what you'll see is that money grows like a snowball astronomically. Once it gets into the second, third, and then the fourth decade, it just starts to compound and compound and grow and grow and grow and grow. The first decade, you don't see a lot of movement. But by the fourth decade, it's just crazy. It's just your money's making you money. And so for every dollar that you spend today that you don't invest, if you take a dollar today, another way of saying this, you take a dollar today and you invest it. Forty years from now, that dollar is going to be worth $20, depending on how you invest it. So if you go, people go buy cars. They come into money and the first thing you do is buy a car. You take $50,000 and you buy a car. That car is worth, if you're lucky, $35,000 the moment you buy it, after you drive it off the line, it's gone down in value. You take that same $50,000 and you invest it in a simple index fund. You use a Vanguard fund, like a Vanguard Total Stock Market Fund. The symbol is VTI. 3,600 stocks in that fund. And you take that out over 30 years and you run, well, what could $50,000 be worth? 30 years from now. You can go to Investor.gov and run the calculation. You'll see what it's costing you to spend the money. So we're not raised and taught often when we're young, how important the decisions we make around our spending is. And one thing I will tell anyone who's listening is like, go open up your, most of you have Apple phones, go open up your iPhone, go over to the settings, and then go search subscriptions. And go see how many people have attached themselves already to your paycheck. Because you'll be shocked. I did this on a podcast. And one of the hosts, he went through it and he had 24 subscriptions, I think, and he had over $500 in subscriptions. And he realized like, you know, I'm only using three of these. And that happens all the time. Now, that's maybe an extreme example, but my normal experience when I'm doing a money makeover for somebody, is that the average person is spending a couple hundred dollars minimum a month on subscription services they don't really need. I just can't get over it sometimes. A friend of mine was in town and I know he doesn't have a lot of money in savings, he doesn't have a retirement account. And he was telling me, he was asking me about, he's told me about a bunch of different shows. And I'm like, what do you watch that show on? He's like, I'll watch it on HBO. I'm like, you have an HBO subscription? He's like, yeah. And they told him about another show. What do you watch that on? I'm like, a Hulu. I'm like, I'm in a Hulu. You have a Hulu subscription? Yeah. He said, well, we have all the subscriptions. This guy's got like 10 different subscriptions for television shows. And he's not using his retirement account. So I don't have any of those subscriptions. And I have plenty of money in my retirement account. But people just don't think. They don't think about the fact that they're doing all this hard work and they're just giving their money to everybody else. And all I want to do is help people to free themselves financially so that they don't give all of their money to everybody else. At least keep 10 cents out of every dollar that you earn. Yeah.

Speaker 1:
[21:28] So I just put the example you used. So let's say instead of paying $50,000 for a car, you take that $50,000 and invest it. So I did this on investor.gov. If you estimate a 10% return in 30 years, you've almost got a million dollars. And I think you can think about house cost the same way too. So if you buy a $600,000 house instead of a million dollar house, and you only need to put down a $100,000 down payment instead of a $200,000 down payment, and you invest that $100,000 saved, in 30 years, it's almost $2 million. And then in 35 years, it's like I think it's $3 million. So choosing the more affordable house, it's like you just made yourself $3 million automatically. I mean, it's really cool. And I think the big takeaway for me on compound interest is that it starts off like a snowball. Like that first decade, you're not going to see much. You're probably going to be thinking, why am I even doing this? But in the second and third decade, that's really when things start picking up. And by that fourth decade, you're looking at the numbers. You're just like, wow, this is crazy. And the book gives this great hypothetical with three different people that really brings us home. So you've got three different people. Person one starts investing $3,000 a year at age 15 and does it for five years and then stops. So total amount invested, $15,000. By age 65, that $15,000 has grown to $1.6 million. Person two doesn't start investing until age 19, and they invest $3,000 a year for eight years. So $24,000 total. So this is more money than person one. But at age 65, they end up with $1.5 million. So they put in more money but got out less because they were in the market for fewer years. Then person three doesn't start investing until age 27 and invest $3,000 every year until they retire at age 65. So that's $117,000 total. So it's way more than the other two. But their ending balance is $1.3 million. So it's the least. They put in the most money over the most years and ended up with the least. And it's simply because the person that invested just $15,000 earlier, even though it was less money and it was earned over just five years, they gave their money more time to compound. Their interest was compounding on interest year after year after year.

Speaker 2:
[23:47] That chart that you're talking about, Brett, that's another chart that changed my life because that chart was given to me in a training class at Morgan Stanley by an advisor who was retiring. And he said, you know, guys, you're all going to be hopefully successful financial advisors and you do a great job for your clients. Make sure you do a great job for yourself. And he showed us this chart and he said, I'm telling you, so many financial advisors, so many people in our office who have made a lot of money, who have done a great job for their clients, have not done a great job for themselves. They haven't paid themselves first. They haven't used their IRA accounts. They haven't funded their 401k plans. So at a minimum, make sure you do this. And that was one of those moments too. It's like sometimes a chart can change your life where you look at this and you're like, my God, like I have to do this. And it's interesting. The book, the book I wrote before, well, the last book I wrote before the Automatic Millionaire update was a book called The Latte Factor. And it's the first book that my kids really read cover to cover, because it's a shorter book and it's a parable. And my kids are like, well, dad, I want one of these IRA accounts. How do we get them? And I opened up a Roth IRA for my 12-year-old, and he's now 16. And so we've been funding his Roth IRA. We put him on the payroll and he's been funding his Roth IRA now, fully funding it for three years and he's already got a $32,000 Roth IRA. And he's going to have, if we keep funding his, you know, helping him and then eventually he does it on his own, his Roth IRA could be worth over $10 million tax-free money by the time he's in his 60s. $10 million.

Speaker 1:
[25:18] That's crazy.

Speaker 2:
[25:19] And it is crazy. And that's why like Trump just, you know, they really have these Trump accounts to get kids started really young at birth. And that's all about compound interest. That's why Michael Dell came in and said, hey, we'll help with this because if we can get families starting off their kids at birth, it's just a game changer. So we need to be doing more to inspire young people to save and invest.

Speaker 1:
[25:41] Yeah. This chart is something you want to show to a young person like, look, you can be basically financially set if you start investing early. And so we're clear like on these charts and these estimates, we're assuming a 10 percent annual return. Of course, that could change like every year is different. There's going to be downturns. But even if there's a downturn, like compounding is still happening. You might not get the same returns as a 10 percent return. But it's better than just putting your cash in a mattress or a bank account.

Speaker 2:
[26:12] Well, and also Brett, you just said something is really important, because there's always people that are like, yeah, better. So like, yeah, but in 40 years, $4 million won't be worth that much. It's worth a whole lot more than not having $4 million, right? Like the pushback on the Automatic Millionaire, people are like, well, $1 million won't be worth that much when I turn 60. Well, it's worth more than zero. If you don't get going, you won't have anything. People go, well, I can't earn 10%. Great, so you don't think you can earn 10%? Put in a balance fund. Go look up the Vanguard Balance Fund, one of the most generic balance funds, 60% stock, 40% bonds. Go look at the returns of the balance fund. Look at it from inception. You're going to find it's like 8%. Use that number. Okay, well, that's not going to get me the same place you were talking about. Guess what? Then you need to save more. So people throw out, come up with all these excuses, it won't be worth that much because of inflation. I'm going to have to pay taxes. I can't earn 10%. And then you show them, okay, well, so if you don't think you can earn 10%, what do you think you can earn? I think I can only earn five. Great, then you need to save 20% of your income. Well, I can't save 20% of my income. The question you have to ask yourself is, are you going to make excuses or are you going to take action? And as I kind of wrap my career up here, I decided to update The Automatic Millionaire book one more time to reach the next generation. I wanted to book for my kids, my kids' friends, and all my friends' kids, and another generation. And I think the younger generation is probably more financially literate than my generation even was. But in some cases, they've also been super misled. Young people have been super misled down the social media road of get rich quick. And the truth of the matter about getting rich quick is it doesn't work. I'm 59 years old. I haven't met too many people who have gotten rich quick. I've met a whole lot of people who spent their whole life trying to get rich quick, and they're still broke.

Speaker 1:
[28:00] When I look at social media and how young people talk about personal finances, they're definitely talking about it more than I was talking about it when I was their age. But I noticed a lot of pessimism about it. And yeah, I can see where it's coming from. Houses are more expensive. We'll talk about that. Job prospect might seem a little... But I don't think it's helpful to think, well, everything's crappy, so I'm not going to do anything.

Speaker 2:
[28:24] I think if that's your plan, that's a tragic plan. And I actually think the next 10 years are going to be the greatest opportunity to build wealth in our lifetime. And I think if you miss this opportunity, I don't know what's coming behind it, but the next 10 years, we've just gone through a phenomenal 10 years. People said you couldn't make 10 percent. When I put the book out 20 years ago, they said you can't make 10 percent annually in the stock market. Well, you've made much more than 10 percent annually. The last 10 years, you've made in many cases 12, 13, 14, 15 percent annually, depending on what index fund you've been in, because the market has been so strong. If you've been in real estate, between real estate and stocks, it's just housing prices have gone up fourfold, and the stock market's gone up sixfold, sixfold since the book came out 20 years ago. And so the two primary asset classes that matter to be an investor in is real estate and the stock market. And yet young people are still looking at cryptocurrency, option trading, they're pretty much done with NFTs, but the amount of things that people would ask me about, five years ago, what do you think about NFTs? What do you think about this cryptocurrency? What do you think about that meme coin? What do you think about GameStop? Like, oh my gosh, you're just going to get wiped out financially. Like, you know, I can't remember the name of the car that was the truck that was going to be the electric truck right now. Blanking, the guy went to jail and Trump partied him. I had young people coming up to me telling me they were investing in that truck company and it was going to be the future. And that whole thing was was fraud. Right. And they lost everything. And so, you know, young people are told, you know, you should take risk when you're young. And I completely disagree. I think when you're young and you're working really hard, take risk in your career, like go for your dreams. But you don't want to be risking your money in your 20s and your 30s because what will happen is you'll turn around and you will have lost everything and you will believe the system is rigged against you and you will never get going. And that's happened for a lot of people.

Speaker 1:
[30:19] Yeah.

Speaker 2:
[30:19] And I don't want that to happen for people. It shouldn't happen for people.

Speaker 1:
[30:22] We're going to take a quick break for a word from our sponsors. There's always something I'm trying to get better at. And for me lately, it's been managing my work in a way that doesn't feel like constant busyness. So I went to the masterclass platform and listened to Cal Newport's new class. Cal's been on the AOM podcast five times. And in this class, he lays out his slow productivity philosophy. The big takeaway for me is focusing on fewer things at a deeper level, not trying to do everything but doing the right things well. What I love about masterclass is how easy it is to actually use. I'll listen in audio mode when I'm walking or driving. The lessons are short, so you can fit them into your day without blocking off a bunch of time. And with an annual membership, you get access to over 200 classes across business, writing, health, and more. And a lot of these classes are taught by former AOM podcast guests. It's practical stuff you can actually use. Masterclass keeps adding new classes, so there's never been a better time to get in. Right now, as a listener of this show, you can get at least 15% off any annual membership at masterclass.com/aom. That's 15% off at masterclass.com/aom. Head to masterclass.com/aom to see the latest offer. So I've got a few friends who run businesses where they have to hire a lot. And one thing they all say is hiring is one of the hardest parts. Not just finding someone, but finding the right person. Because when you get the wrong hire, it creates more problems than it solves. And when you're the right person fast, this is a job for sponsored jobs with Indeed. What I like about Indeed Sponsored Jobs is that it helps you reach candidates who actually match what you're looking for. And people are finding quality hires on Indeed right now. In the minute I've been talking to you, companies like yours made 27 hires on Indeed, according to Indeed data worldwide. Sponsored jobs boost your post and search results. You can connect with candidates who can actually move your business forward and you only pay for results. Spend less time searching and more time actually interviewing candidates who check all your boxes. Less stress, less time, more results. When you need the right person to cut through the chaos, this is a job for Indeed Sponsored Jobs. And listeners of the show will get a $75 sponsored job credit to help get your job the premium status it deserves at indeed.com/podcast. Just go to indeed.com/podcast right now and support our show by saying you heard about Indeed on this podcast. Again, it's indeed.com, so it's indeed.com/podcast. Terms and conditions apply, need the right hire fast, this is a job for Indeed Sponsored Jobs. And now back to the show. So yeah, the power of compounding interest, it's time. Like the more time that money is in the market, the more time it has to grow. And eventually, that second, third, fourth decade, it's just going to start growing exponentially. But what if you're a listener and you're in your 30s, 40s, 50s, and you haven't really saved much for retirement? And they might be thinking, oh, geez, I'm hosed. Is there a retirement hose because they missed those early years of compounding? Or are they able to still take advantage of compounding even if they got a late start?

Speaker 2:
[33:17] So it's harder if you start late. When I sit in a room with people that are over the age of 50, and I asked, how many of you wish you had started when you were younger? Almost every single hand will go up in the room. It's just a universal regret that people have, they didn't start investing when they were younger. And when there's young people in the room, I'm like, look at these people over the age of 50 and learn from them right now. Because you're going to blink your eyes and you're going to be 50. Now, when you're in your 20s, you see somebody who's 50 and you think, oh my God, they're so old, like I'm never going to be there. And the next thing you know, you later like snap your fingers and you're 50. And then you're 55 and then you're 60. So do for your future self. You may not want to do it now, but I was doing an interview with somebody else, Chuck Jaffe. He was a very famous reporter and he said, he did everything right for himself. And now he's getting to, I think he's almost 60. And he said, when I was in my 20s, I didn't want to show up at 60 and have my six-year-old self say, dude, what were you thinking? Why didn't you save any money? I wanted my six-year-old self to be like, dude, good job. And he's like, and I'm there. So to somebody who's in their 50s and they're not there, I would say, this is your day to show up for yourself now. And it's never too late. The secret is to start. The beauty of being in your 50s is that usually the kids are out of the house, and now it's just you and maybe your significant other. You can start to buckle down and focus on really using the next 10 to 15 years to start to build wealth. And I would again go to investor.gov, run the calculations. Well, what if I save $1,000 a month? What would that look like in 15 years? What if I save $500 a month? What could that look like in 15 years? Run the calculations and then immediately look at what can you cut expense-wise so that you can start to save more money as fast as possible on an automatic basis. And that will change your life.

Speaker 1:
[35:12] Yeah, and you talk about there's some, like some of these retirement accounts, they allow for you as you get closer to retirement to invest more tax-free. So kind of make up for maybe lost investment opportunity that you had. So it's never too late. It's going to be harder, but it's not too late. All right, so what we're doing, we're looking for small ways we can save, finding our latte factor, whatever that is, so we can invest in our retirement. But as the book title is, it's The Automatic Millionaire, your approach is that the investing needs to be automatic. So you advocate that people pay themselves first each time they get a paycheck. So how much do you think people should set aside for retirement from each paycheck before you pay any other bills, or even before you pay the government?

Speaker 2:
[35:54] So the millionaire formula, we know exactly what the numbers look like. It's at least you want to save one hour a day of your income. So if you work a 40-hour work week, whatever you earn an hour, the first hour a day that you go to work should go to you. You should keep it. You need the money that you make to flow directly to you first. Not pay taxes, not pay your mortgage, not pay your rent, not pay your car payments, not go to Starbucks. It needs to go to you for the future. So one hour a day of your income is 12.5% of your gross income. And I say we know the formula because there are now over a million millionaires in 401k plans. Fidelity has got probably the most of them. I think it's over 650,000 millionaires now are in the Fidelity 401k plan. And they've looked at the numbers and what is their savings rate. And on average, their savings rate is 14% in their 401k plan. They got there because they paid themselves first. One hour a day of their income and their employer had a match on top of that. And it took about, I think the number is 27 years to get to millionaire status doing that. And their portfolios were typically 70% stock and 30% bonds. So they weren't even 100% stock. So I would tell you, your goal should be to save one hour a day of your income. Now, a lot of people are, average American who is saving is maybe saving 3% or 4%. And that is just remotely not enough money. You have to save more. One of the things that's changed since I wrote The Automatic Millionaire is that it used to be you went to work for a company, your company gave you an enrollment package to sign up for your 401k plan. By the way, that enrollment package, the companies that still do that, that meeting the day that you were given an enrollment package or you were sent an email to sign up for your 401k plan, the decision you make at that moment in time, what percentage you will put in your 401k plan, will be the single most important financial decision you make in your life. It is a decision that determines if you will have wealth or not have wealth. And tragically, many people don't pay attention. They talk to their person they're sitting next to in their cubicles. They asked a friend over lunch, what do they do? They might have a stupid friend who said, we don't want to use the 401k plan. It's a terrible way to make money. Or they might have a friend who says, oh, just do the minimum. That's what I did. I'm not putting anything more in that plan. I'm only putting in the minimum. That's the absolute worst decision you could ever make. But the ones you go ahead and actually, max out their plan, put away 10, 12, 13, 14, 15%. Those people will be financially secure and ultimately financially free. Now what's happened with the new tax, the new laws like Secure Act 2.0, companies are starting to automatically enroll you in 401k plans. So you get a job, they enroll you, but they enroll you at 3%. So if you don't go in the plan now and yourself increase it, you are now at the wrong rate. So you have to be proactive. You have to go look at your planning of what percentage of my saving. And then I'm telling you, I'd rip off the bandaid and I would try to get to 10% minimum and ideally more than that, even 12, 13, 14, 15%. And if you don't think you can do it, move it 1% a month until you hit those goals, because you won't notice the change of your money to 1%. But here's the thing, people change jobs a lot more now. So when you change your job, if you're smart, you're going to move this money from one 401k plan to the next 401k plan, or you're going to move it into an IRA. If you move it into your next 401k plan, or you just simply go get a new 401k plan, we've seen people that were saving 10, 11, or 12%, and then they go to the next employer, and the next employer ops them in at 3%, and they never get around to bumping it back up again. Vanguard just did a study that says that that single mistake, changing jobs, and having the savings rate go back down to the bottom, and not increasing it again, is costing retirees $300,000 in retirement money at retirement. When I wrote the book, there was like 7 million millionaires, and there's now 24 million millionaires in America. Most of these millionaires have become millionaires who are saving money automatically. Like the bulk of wealth has been built in two buckets, real estate and stocks. It's people who own homes, it's people who've used automatic saving and investing in their retirement accounts. And so a lot of this stuff is really simple, and it's simple to listen to, but the key is to take action. It's timeless advice that works. The tax laws have changed, the investment vehicles have changed slightly, but the advice is timeless. The Macintyres, what do they do? They bought a home, they lived in San Leandro, California, the couple in the book. They bought a home in a blue-collar neighborhood, and they focused on paying the mortgage down early, and then they turned around and they rented that house, and they bought another house on their street, so that when they came into my office, they had two homes paid off for Inclear, one had been paid off by the renter that they put in it, and then they owned their second home for Inclear. One thing they said to me is like, we could have moved, we could have sold the house and bought a bigger home and moved out of our neighborhood. We made a decision not to do that. And again, this is like over 25 years ago when they told me this story. They said, you know, we used to have mortgage burning parties in our backyards. And we made all these friends in our neighborhood and we all agreed that our goal was gonna be to retire in our 50s when our kids were off in college or out of college. And we would celebrate each other paying off their mortgages. We would have these mortgage burning parties where you burn your final mortgage statement because you're dumb. And the timeless advice of like, buy a home, pay your mortgage off, be debt free, your overhead goes down. That stuff was like old school 25 years ago. It's still old school and it still works. I've never seen it. What I've seen people, why would I want to pay my mortgage off? Well, because people who pay their mortgages off, on average, in my experience, having done this for 33 years, people tend to retire five to 10 years earlier. When they have no debt and their overheads have gone way down, they realize they don't need as much money to retire. And should you retire early if you can afford to? I mean, everybody is different, but I will tell you that most people run out of life before they run out of money. We've got people focusing so much on how much money they're going to have and are they going to run out of money. And really what ends up happening often is people run out of health. I talk about health expectancy. Health expectancy is the actual age in every country that the World Health Organization knows that the average person will get an illness that fundamentally changes their life. And in the United States, it's age 63. And having now lived longer, I've seen it. Average age of widowhood is 59. I talked about that in The Suburban Women Finish Rich, my first book, that women, you have to know what's going on with finances because chances are it's all going to be in your hands eventually. And if you don't know, you don't go. It doesn't go well. So you have to know what's going on with finances. But I've had three best friends pass away and they didn't get to 57. They passed away in their mid 50s. So I think this game about money, money is a freedom tool. And the sooner you get serious with your finances and you automate, and you do all the basics, then you can go back to all the other stuff you do in your life. Like the thing about the automatic millionaire approach is it doesn't take a lot of time. Like once you have an automatic investment plan, I don't know if you spend five to ten minutes a month just looking at it, and then you're done. Like you don't need to do anything.

Speaker 1:
[43:14] Yeah. All right. So the takeaway there, make it automatic. If you have a job with 401k, you can set up a system so that whenever you get your paycheck, it automatically invests 10 percent, even more if you want, before you even get your paycheck. And then some of those companies they have matching. So if you invest a certain amount, they're going to match that up to a certain amount. And this is all tax free. It's going into 401k, it's a retirement account. If you're self-employed, you might have to set this up by yourself, but it's easy. You can set up a system with your bank account, so that every month a certain amount of your income goes into an investment account. And then your big proponent, when once you get that money into retirement account, keep it simple. Your big proponent of like the target investment funds. So these are funds designed for like, if you're going to retire in 2032, well, here's what the stock and bonds makeup will be, and then it will shift as you get closer to retirement. Or just a simple index fund like the VTI, the matches that. So just keep it simple, it's all about keeping it simple. You're not wanting to check the stock market, you're not doing option investing or any of that crazy stuff you see on Wall Street bets on Reddit. Super simple, you don't want to even think about it. I want to talk about this home ownership thing. So you said that the biggest past the wealth are stocks and real estate. And home ownership, lately, I've been seeing this sentiment online that home ownership is a bad investment compared to just sticking to the S&P 500. So it's like, why would you buy a home? Because you would earn more in investments than you would pay in interest on your mortgage. So why are you losing out on that? But like you said, you still believe that the home is one of the ultimate investment tools for the middle class. So why is that?

Speaker 2:
[44:50] Well, okay, so let's just look at the facts. And interestingly enough, the facts haven't changed that much over 20 years, except that home prices have gotten even more and more and more and more expensive. So anybody who bought a home 20 years ago has done phenomenally well, right? Even the last five years, they've done phenomenally well. So the reason people are against home ownership right now is it's extremely hard to buy a house. It's expensive. There's 50 markets in the United States where the average person can't afford to buy a home, and it's cheaper for them to rent them by. The problem is, renting's a trap. So when you rent, if you rent in your 20s and you rent in your 30s and you rent in your 40s, you're literally going to turn around your 50s and your 60s, having not probably built any net worth unless you're paying yourself first automatically. But even if you pay yourself first automatically and you use your 401k plan, it's like a boat with one engine or two engines, right? Like you have one engine and you're saving 10% of your income. Great. That's phenomenal. But you didn't buy a house. You didn't get any of the opportunities of all the wealth and equity that comes from building a home. There's like $40 trillion in America in home equity. Again, it's the second amount of money. The most amount of money that's in the average American's net worth statement is in homeownership. And the thing about homeownership is that you have to live somewhere as long as you're alive. As long as you're alive, you got to live somewhere. Like you can't live inside a mutual fund. So people go, oh, well, you can just buy an S&P 500 fund. You can buy the index fund. It's going to close up 10% annually. First of all, it doesn't always go up 10% annually. Second of all, you can't live inside a mutual fund. You have to live somewhere. Well, it's cheaper for me to rent right now than to buy a place. Okay, that might be true, but guess what? Rents are going to go up. Rents have gone up so much. I mean, in New York City right now, go look up the average cost of rent in major cities. New York, Chicago, Los Angeles, San Francisco. You know, it's $3,000, $4,000, $5,000, $6,000 a month for one bedrooms, like not even two bedrooms. Like it's just, it's unbelievable what rents are costing. And I promise you where those rents are going in the next 10 years is higher. And in 20 years, it's higher. So the cost of renting is always going to go up. Why is that? Because everything's more expensive with inflation. You have taxes and you have insurance and you have maintenance, and the people who own the home or the apartment building that you're renting are not doing it for charity. They did it for an investment. So they pass on all of their expenses to you so they can get rich. So you just have a choice. Like, are you going to make your landlord rich or are you going to make yourself rich? Now, is it harder for the average person to buy a home in major cities? Absolutely. You know, when people are doing who really want to own, they're moving to the next 50 markets where it's affordable. You know, I was a co-founder. I'm still technically still a co-founder of a registered investment advisor called AE Wealth Management. Huge company based in Topeka, Kansas. And it's interesting because I just heard from one of my partners, my co-founder, Cody Foster, he just sent me a message yesterday. And he's like, you know, 10 years ago, we were talking about the fact that Topeka, Kansas, let's just give me an example. You said 10 years ago, I came out and I did an automatic millionaire talk to all of our employees. And it's so interesting because in our office, you know, I'd say the average age of people in our office were between 25 and 35. So like, you know, millennials. And I had hundreds of people in the room. I'm like, how many of you want to buy a home? All the hands went up. How many of you already own a home? And interestingly enough, here in Topeka, over half the room, average age was like 27, had already bought a home. 27 years old, they already own a home. Now, why could they own a home in Topeka? Because Topeka, housing prices are affordable. I don't know what they are today, but back then, the average housing price was like $65,000 for a home. So, they were able to, you know, it's the American, I say, you know, Cody, the American dream in Topeka, Kansas is totally available. You can go get a great job at a company like we have here, and people can get married, buy a home, go to church on the weekend, take their kids to baseball. The American dream's still here. And the interesting thing about that is the American dream's all over the Midwest, and in lots of places. And, you know, the average homeowner in America is worth 43 times what an average renter is worth. Average renter has a net worth in the United States of less than $10,000, and an average homeowner has a net worth of over $400,000. I mean, the number's in the data. And so I just think it's tragic. Like, it's one thing to say, I just can't afford to buy a house right now. I don't have enough money for a down payment, mortgage rates are too high. That can be true. But to tell yourself that it's gonna be cheaper for you to rent over the next 10, 20, 30 years than to own something and pay the debt down and be debt free one day, it's just not true. And so I hope for a lot of young people, here's what's gonna really happen. There's $125 billion in wealth transfer that's gonna take place in the next 20 years. And it's an enormous level of wealth transfer that's gonna go from one generation to the next. And you know what the first thing these people are gonna do to have them buy a home when they inherit money from mom and dad or grandma and grandpa? They're gonna buy a house. And the families that actually will have inheritance to pass down, you know why they have an inheritance to pass down? Because they bought a home. So when you look at demographics and you go, who has money in America? It's families that own homes, because that's the thing that determines wealth gets transferred from one generation to the next. That's how generational wealth gets created. So I feel for a generation of young people that I think are really being, in many cases, by financial influences, really led astray.

Speaker 1:
[50:19] All right. So if you own a home, you encourage people to pay it off faster. And there's a simple approach. It doesn't mean you have to pay it down super fast. It's as simple as making an extra payment or two a year. And that can really add up because you're saving money that would have gone to interest instead.

Speaker 2:
[50:37] Yeah. One of the simplest ways to do is buy weekly mortgage. You can keep your mortgage, but you just split your mortgage payment in half, you pay half every two weeks. And that trick allows you to actually make one extra payment a year. And making one extra payment a year takes a 30-year mortgage and pays it down in 25 years typically. And that will save you for the average mortgage over $100,000 in interest payments. Getting a 15-year mortgage is another, it's harder, but getting a 15-year mortgage is another phenomenal way to get home paid off early. Now, when rates were low, this was much easier. Today with rates being six and a half, seven percent, it's gotten much harder. But rates will come back down again. And you'll be able to refinance and hopefully get a lower rate. But even at seven percent right now, rates are still on a historical basis. It's actually, people don't realize it, but seven percent is a pretty decent rate compared to where it's been. There have been years where it was over 10, 11, 12 percent. So only a home takes, it requires you to make lifestyle changes. Like a lot of people, when they buy their first home, you can't buy the dream home. You will probably buy something that's not as nice as what you can rent. And you may have to move into a neighborhood that's not where you actually want to live right now at first, just to get your feet in the door of buying your first home.

Speaker 1:
[51:45] Yeah.

Speaker 2:
[51:45] But that's how people get started.

Speaker 1:
[51:48] Last thing I want to talk about before we end our conversation. So we've talked about you're finding small ways to save, you're going to invest that money automatically, take advantage of the power of compound interest so that can grow into wealth over time. Home ownership can be a part of that as well. But a lot of people today might have a lot of consumer debt. So it could be credit card debt, car loans, student loans. How do you balance paying that stuff off while still saving for retirement?

Speaker 2:
[52:16] It's a great question. So in The Automatic Millionaire book, there's an entire chapter, there's a section on how to pay your debt down. And one of the biggest miss or things that I don't believe to be true, to say that, is that you should pay your debt off first and then you should save and invest. What I've seen is when people do that approach, they get depressed and they don't see themselves making enough progress and so they kind of give up. And so I teach the approach that you should put whatever you can save, let's say it's $100 a month, you should put $50 towards the future investing in a retirement account and you should put $50 towards your debt to pay the debt down. So you're doing both at the same time. And the reason that's important is if you can see yourself starting to build a nest egg and pay your debt down a little bit each month, you'll see yourself shrinking your debt and saving for the future. And that combination will be a winning combination. Now, there's all kinds of strategies on how to pay your debt down. And I teach you how to go and get your rates lowered on your debt, because it's not the debt that kills people, it's the interest rate. And so you've got to get the interest rates refinanced. You have to get these cards down. If you're paying 20% interest rate, it's really hard to pay a credit card off. So you have to play the game of getting the interest rates lowered. And then I teach approach that is, I call it DOLP, done on last payment, that you take your smallest debt. So let's say you have five credit cards, you start with your smallest card, you make minimum payments on everything, and you focus on getting the smallest card paid off. You get that one paid off, then you go to the second smallest card, you get that one paid off. And that process is like a snowball approach to paying down your debt, just like the snowball approach to building wealth. Instead of snowballing to build wealth, you're snowballing to shrink your debt.

Speaker 1:
[53:55] Gotcha. And so you're doing this the same time as you're investing. You may not be able to invest as much as you're paying down this debt, but what's nice about it is you do this snowball thing, this adult thing, once you make that last payment on your consumer debt, whether it's a car loan, credit card, student loans, like all that money you were paying towards paying off your debt can now go into investments.

Speaker 2:
[54:15] Exactly. Exactly.

Speaker 1:
[54:18] Well, this has been a great conversation. Where can people go to learn more about the book and your work?

Speaker 2:
[54:22] Well, Brett, thank you. I really enjoyed our time together. They can come visit me at davidbach.com. davidbach.com. And the book again, the new book is The Automatic Millionaire. And by the way, you go to my website, front page of the website, I have a podcast, The David Bach Show. I put the first three chapters of the book on the podcast. You can go listen to it for free and see if you enjoy it. And we've got a whole bunch of great resources and we'll have your podcast on our website later. And yeah, I'm also on social media, Instagram and Facebook and X. So come find me and I'm constantly putting out free content. I don't have anything to sell. So you can get my book in the library too if you can't find it. If you don't want to get in storage, you can go get it in the library. Go get on the waiting list because I know they're backed up right now.

Speaker 1:
[55:02] Fantastic. Well, David Bach, thanks for your time. It's been a pleasure.

Speaker 2:
[55:04] Brett, thank you. Have a great day. I appreciate you.

Speaker 1:
[55:07] My guest today was David Bach. He's the author of the book, The Automatic Millionaire. It's available on amazon.com and bookstores everywhere. You can find more information about his work at his website, davidbach.com. Also check out our show notes at AOMIS slash millionaire. We find links to resources and we delve deeper into this topic. Well, that wraps up another edition of the A1 Podcast. If you haven't done so already, I'd appreciate it if you'd take one minute to give us a review on the podcast player that you used to listen to the podcast. And if you've done that already, thank you. Please consider sharing the show with a friend or family member who you think we can something out of it. As always, thank you for the continued support. Until next time, this is Brett McKay reminding you how to listen to A1 Podcast with Put What You've Heard Into Action. Before you hit stop, here's another episode to check out. It's episode number 767, where we strip fat loss down to the essentials. No gimmicks, no extremes, just the basics that actually work and stick. If you're trying to simplify your approach and see results, this one's worth your time. Go to aom.is slash fat loss. Again, that's aom.is slash fat loss. It's episode number 767. Hope you enjoy it.