investment

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I'm reading the book The Automatic Millionaire by bestselling author David Bach. It is kind of timely that I am reading the book and getting involved in investing now, because a lot of the points he makes were valid until the economic downturn caused by the housing bubble bursting last year.

One of the biggest points that this author makes is that homeowners, not renters, are the ones who have the wealth in the United States. Again, this is something that would need to be viewed subjectively. When this book it was written he notes that the National Association of Realtors reported that there had never been a housing "bubble." Since then many people have lost their homes to foreclosure due to exploding ARMS (adjustable-rate-mortgages) that left them owing more money than their house was worth.

The problem with ARMS were that at any time the interest rate you were paying in your home could go up, and you were locked into this contract for in most cases 30 years. When the interest rate goes up homeowners were paying less on the principle of the loan and more on bank interest. Coincidentally, the National Association of Realtors is one of the heaviest lobbying organizations in the United States of America.

One fail-proof system that is mentioned in this book is to make an extra monthly payment every year on your mortgage. There are varying ways to do this he says, but the most inexpensive and easy is to add an extra 10% to your current monthly payment. Here is a calculation showing this difference on a $250,000 mortgage with a thirty year, 6.5% fixed interest rate.

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At a glance, you are paying off your mortgage 7 years earlier! So if you crunch the basic numbers, $1580*12*7 = $132,720. This is a secret the banks do not want you to know.

Calculate a mortgage here at BankRate.com

investment

I wanted to share some useful tidbits discovered in this book I’m reading by bestselling New York Times author David Bach, titled The Automatic Millionaire.

Obviously I want to be rich, who doesn’t? And I’m not talking about becoming a disconnected billionaire like some of these folks who have been in the news recently. I could settle with having beachfront property in the southeast and a home in the mountains, coupled with a lucrative trust to pass down to the children.

In the book I’m reading there are some very useful and simple pieces of information that can help a person retain wealth. Some of the main points state that you don’t have to have a six figure income to be wealthy. In fact, the author points out that if you make millions of dollars a year and spend it all, you will never become wealthy (unless you hit the lottery, win some massive lawsuit etc.)

This strategy involves cutting useless daily spending (he deems this the “Latte Factor”), purchasing only your home on credit, and paying yourself first. The first two steps in this solution are virtually no-brainers, but allow me to describe the latter.

Paying yourself first involves taking a small deduction (10%) out of your paycheck automatically every time and putting it away into an investment vehicle. He makes the point that once you get used to not having the extra 10% in your pay, and you automate the process, you can sit back and let your money work for you. My calculus teacher in High School taught the same principle; some of you may even know her! So remember before you go and blow that $5 at McDonalds every morning for breakfast to always pay yourself first!