The Automatic Millionaire, by David Bach

The book by David Bach is one of the most popular books on personal finance of our time. It promises to help create an easier financial future for the reader: “becoming an Automatic Millionaire is not simply about accumulating wealth. It is also about relieving stress and worries about the future – about putting yourself in a place that enables you to enjoy life now as well as in the future”. The author is indeed great in simplifying major personal financial principles and tools (he defines it commonsense financial advice); he proudly shares a no-nonsense/”no-brainer” system to learn about money and reach financial freedom (become a millionaire). While most of the references are US based, the lessons and technics can be universally understood and applied in any country.

David states that we deserve to live the American Dream. Despite the economic challenges we may face, there is a secret “to become a millionaire – steadily and surely – over the course of our working life”. The author states we might even know the secret and the related technics, but most likely, we are not using them yet.

The Philosophy behind the Automatic Millionaire can be summarized in 7 points:

  1. We don’t have to make a lot of money to be rich.
  2. We don’t need discipline.
  3. We don’t need to be our own boss (we can also be employees)
  4. We must apply the Latte Factor.
  5. We must pay ourselves first.
  6. We need to be homeowners.
  7. Above all, we need an automatic system.

The tactic of making our financial plan automatic is non-negotiable here. For David, it allows us to:

  • Focus on our life, without spending a lot of time thinking or worrying about how to manage our money
  • Make sure the system is implemented consistently, removing ourselves from the equation.


To inspire us, the book presents the success story of a hardworking “average Joe” family: the MKcIntyres. Both husband and wife had a modest income, but they could build a Net Worth of 2 million dollars and secure an early retirement in their 50s. They only inheritance they received from their parents was knowledge! Their parents told them: either work all your lives for money and live paycheck to paycheck or learn to make money work for you.

The core system was to:

  • pay yourselves first” before paying for all the bills (needs and wants). In this way, there is no need for a budget; budgets often cause endless arguments among couples. It is better to set a simple automatic transfer of an agreed percentage of our income into a separate saving account.
  • Save for retirement
  • Save for your home: pay for it as soon as possible.
  • Avoid wasting big money on small things (the Latte Factor)
  • Never buy on credit. If we don’t have the money, we don’t buy. The only exception is the house.
  • In case we still need to use credit cards, we must pay them off in the same month.

The main force behind these methods is making sure things are done automatically, “taking the decision out of our hands”, so that it is not necessary to exert discipline. The author points out this is method is even more necessary in a society where “advertising and entertainment – even the government – are constantly bombarding us with temptations to do exactly the opposite” of what makes financial sense. We live in a society where it’s become almost patriotic to spend every coin we have. Such an approach is even sold as the way to pump and fix our economy. Unfortunately, this approach brings us to an endless treadmill, often known as the rat race. When we spend everything we make, or even more, we are subject to a life of stress, fear, debt and the threat of future poverty.

The author puts it in this way: the automatic system protects us from ourselves. These rules help us enjoy life and somehow be free from worrying about money every day.


The author wants to make sure we also understand this point: “the problem is not how much we earn…it is how much we spend!” Most people focus on the ultimate secret for increasing the income as quickly as possible: “if only I could make more money, I would be rich”. Unfortunately, the more we make, the more we spend.  For the author, how much we earn has almost no bearing on whether we can and will build wealth.

The Latte Factor shows we already make enough money to become rich. We have to monitor if we spend for unnecessary wants; the bottom line is that saving small amounts of money can make us rich. And the sooner we start, the better. The author refers to the “latte” (coffee and milk) many people buy once or twice a day, which costs several dollars. He makes this example:

A latte a Day$ 3.5
A Latte a Day for a Month$ 105 (3.5 * 30)
A latte a Day for a Year$ 1,260 (3.5 * 360)
A latte a day for a Decade$ 12,600 (3.5 * 3,600)

The same analysis can be done for other purchases like cigarettes, magazines, etc. It is up to us to find our Latte Factor.

The book promotes “the latte factor challenge”: monitor our expenditures for one week to identify our Latte Factor. This is not a Budget. The author is strongly against family budgets: they are like diets, they don’t work; what is more, they cause too many conflicts among couples. The Latte Challenge is different: It will be done only for one week, focusing on identifying our Latte Factor. We will then extrapolate how much we spend in a month in a year. We will then be able to adjust our expenditures and improve our system accordingly:  pay ourselves first and make the saving/investments process automatic.


The next step is to analyze what would happen if we invest them after saving such amounts.  If we save $5 a day, we can secure a monthly investment of $150 (30 * $5). If we invest in financial products with 10% average annual returns, these would be the compounded results:

1 year$ 1,885
2 years$ 3,967
5 years$ 11,616
10 years$ 30,727
15 years$ 62,171
30 years$ 339,073
40 years$ 948,611

If we decide to save $10 a day instead of $5, we can secure a monthly investment of $300. Using the same financial products with 10% average annual returns, these would be the compounded results:

1 year$ 3,770
2 years$ 7,934
5 years$ 23,231
10 years$ 61,453
15 years$ 124,341
30 years$ 678,146
40 years$ 1,897,224

The tables demonstrate the necessity of letting compound interest work its magic. If we feed our investments, time will work on our side.

So far, we are merely talking about saving 5$, or 10$ a day. It is probably less than one hour’s worth of pay to be saved and invested for ourselves. The question is the following: are we willing to work one hour a day for ourselves, save it, invest it and secure our financial future? Our freedom?

The author makes the point to overcome any “Yeah, but”:

  • Yeah, but…I will never be able to earn a 10% return on my money in the current market.
  • Yeah, but…1 million won’t be worth much in 30 years.
  • Yeah, but…there is no way I can save small amounts and invest it.
  • Yeah, but…I am now wasting any money, and there is no way I can find my Latte Factor.

As such, It is necessary to overcome any excuse and resistance. Any additional results will be better than no results at all and will bring us closer to our financial freedom.

To further motivate us, he moves the discussion from the money to the time spent to work. He quotes this slogan: “Who we work for is waiting for us at home”. The reason most of us go to work is ourselves and our loved ones. Are we truly helping ourselves while working?

We should try to work 1 Hour a day for ourselves and save (put aside and invest) more than 10% a month of our gross income.

David describes the following profiles:

  1. Dead Broke: spend more than he makes. Borrow money that can’t pay off.
  2. Poor: spend everything and save nothing.
  3. Middle Class: pay myself first 5 to 10% of my gross income
  4. Upper Middle Class: may myself first 10-15% of my gross income
  5. Rich: Pay myself 15-20% of my gross income
  6. Rich enough to retire early: pay myself first more than 20% of my gross income

For David, the only way to secure a financial future is to buy it: decide not to be financially dependent on government, employer, family…and look for a stress-free life after retirement. To do that, we need to invest the money we saved for our future the money.


The author believes there is no better way to get rich/financially free than paying ourselves before paying taxes. In America – like in several other countries – it is possible to access PRE-TAX retirement/investments accounts. If that is not our case, any other investment account will be good enough.

Whether we earn 1 per cent or 10 per cent on such investment accounts largely depends on how we invest. First and foremost, it is mandatory to avoid any gambling and invest wisely. The first rule is to diversify: don’t put all the eggs in one basket. The author uses this pyramid diagram to graphically guide us on how to allocate our money based on our current age.

The base of the pyramid rests on the safest investments (cash and bonds). The rest is structured based on the risk level. The mixture of risk categories depends on our age (time horizon).

The second advice is on where to specifically put our money. He promotes mutual funds or ETFs using balanced funds, asset allocation funds, or robot advisors. In the book he lists several US based companies. It is up to us to select the most appropriate service based in our country or region.

David also shares a secret that he learned: in order to be an investor that does well in both good times and bad time, managing our money should be boring! There will be nothing to brag about a simple diversified investment portfolio during cocktail parties, and that’s ok.


David discusses the importance of creating an emergency fund to cover our monthly expenses for “x” months in case we lose our job, because “stuff happens”. It is up to use to choose the right “x” amount of money to make us feel save and sleep well: it could be 3 months to 12 months’ worth of expenses. This cushion can give us the freedom to make decisions about our life. This cushion must be easily accessible (easy to get the cash if needed) but also provide some interests. As such, it is ideal to select money market accounts or high yields deposits accounts.


The author promotes home ownership as long as we pay for that automatically so we can be debt-free before we are too old to enjoy it. He is adamant about it: we cannot get rich renting. Landlords get rich, renters stay poor. “Many people don’t realize that the same amount of money they spend on rent today could buy them a home tomorrow”.

Over the long term, owning a home is a great investment and also provides a great sense of security. For David “we are not in the game of building wealth until we own some real estate”.

  • Home ownership is a kind of forced savings program for one of the best investments around: home equity
  • Buying a home, we can borrow money and leverage our down payment
  • OPM: other people’s money. In order to reach financial freedom, it is mandatory to make money work for us. Well, we can also make other people’s money work for us. We can borrow at competitive interest rates OPM while our own money compounds at higher interest rates in our investment/retirement account.

As usual, it is important to be smart about how we do things, how we pay for a mortgage or a bond without wasting a fortune. A good rule of thumb reported in the book is that “most people can afford to spend 29 percent of their gross income on housing expenses – as much as 41% if they have no previous debt”.

Buying the house is the easiest part. The challenge is getting the right kind of mortgage/bond. The interest rates historically change over the years, and also based on the currency and the country we purchase the real estate. As such, the best advice is to shop around, and negotiate the best deal possible. David clarifies that long-term mortgages (30 years or more) are more profitable for the bank than for us. It is important to secure a short mortgage and pay it as fast as possible. For those who get payed every two weeks (a popular option in US), he suggests paying the mortgage with 2 installments per month (every 2 weeks). This method largely reduces the due interest payments and reduce the numbers of years necessary to fully repay it.


The only time when it makes sense to borrow money, is when we buy somethings than increase in value (like a home); borrowing is not something to be done for consumption, to support lavish lifestyle.

In this regard David quotes a great way people in Texas describes someone who tries to look like more than he really is: “big hat, no cattle” guy. In other ways, someone who wants to look like a wealthy rancher but in fact has no cattle at all. The author recalls that, due to the consumeristic culture we live in, the average household in US holds $8,400 in credit card debt. This figure does not include car loans, mortgages or other debt. With cards that easily charge 18% to 29% of interests, that is a risky habit.

To become an Automatic Millionaire, we cannot run up credit card balances and pay only the minimum due. It is necessary to get rid of the credit cards, negotiate our rate, consolidate our debt on only one card. David does not suggest directing all our savings to debt reduction, but to keep around 50% of our savings for debt reduction, while keeping an automatic transfer of the remaining towards our retirement/investment account. He says that this is an emotional and financial strategy to secure long-term success.


For David wealth is not simply a matter of money; it is about a way of life. He quotes this phrase: “we make a living by what we earn – we make a life by what we give” (Winston Churchill). In the last part of his book David warmly introduces the tithing system: a proactive practice of giving back. It defines it as a spiritual principle common to many traditions and promote the action of sharing 10% of what we have received. While promotes it as a way to feel good, feel joy, he acknowledges that such act of abundance tends to flow back to those who give. The more we give, the more we receive back, because givers attract abundance into their lives rather than scarcity.


David knows most people want to do well financially, but they never find the time or the energy to set themselves up for success. If we haven’t yet begun, now is the time to start with a simple and automatic system!


David Bach is a very active writer and you-tuber. As a great communicator, he managed to distill very important financial principles in an easy to read book full of success stories, personal anecdotes as well as hard core financial tables. We must recognize he was the inventor of the “Latte Factor”, a concept that became extremely popular and is still very helpful whenever we want to control our consumption habits. For these reasons the book is definitely in our top 10 list of books on personal finance and, more importantly, one of the first to be read.

If you like the contents of the book as we do, we definitely suggest buying it. You can easily get it on Amazon.

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