As a part of our Financial Literacy Movement, we’re turning to experts within the personal finance field to help us educate readers and guide them toward making better decisions with their money. David Bach can certainly be considered one of those experts, and we’re sharing this video he provided us describing the biggest mistake people are making with their money today — and how to fix it.
Watch below to get expert personal finance advice from David Bach.
Hey, everybody this is David Bach, and I wanted to start by saying thank you so much for voting for me as your favorite financial expert of 2011. It was awesome to be part of the competition and I’m thrilled to be here right now.
I was asked, “David, what do you think is the #1 mistake investors make?” And I have an answer for you right now. Super simple. The #1 mistake people make is they don’t make their financial plan automatic.
Now, I wrote an entire book on this, it’s probably the book that I’m the most well-known for, its called The Automatic Millionaire and that book teaches you how to put your entire life on autopilot.
And two years ago, I wrote another book called Start Over, Finish Rich where I updated the automatic millionaire plan. This book–right now–you can go to my website at finishrich.com, put your information in the pop-up box and you can download this book for free. I’m going to walk you through a chapter in here right now so you can automate your financial life in less than an hour.
Here’s what you need to do: The moment you earn money–assuming you’ve got a job, assuming you have a business–when that money comes in, it needs to go automatically into a bank account. What is unbelievable to me is that in this day in age, many of you are still getting a physical check,you’re taking that check, you’re waiting for it to come to you, you’re opening it up then you walk it to the bank and you deposit it. By the way, when you do that you’re wasting an average of 12 hours a year doing that. Ridiculous! You get your money faster if you automatically deposit it. So, you’ve got to have that money automatically deposited into your bank account.
But before that money hits your bank account, you need to funnel off a piece of it– somewhere between I would recommend at least 10%–but something. A percentage of money has got to come right from your income automatically into your retirement account. Now that could be an IRA account, that could be your 401k plan, but that’s what you have to do. This is called “pay yourself first.”
And folks, if you want to be rich–forget rich–if you just want to have basic financial security, you have to pay yourself first. That means that before you pay the government, before you pay taxes, before your pay bills, before you pay anyone, the first person to get paid is you. So money comes right off the top, from your income, into a 401(k) plan, into an IRA account, boom–it’s done, whatever you choose.
Next, your money goes automatically in your bank account. Now you’re going to see here I’ve got 6 places that your money then moves to automatically. And here’s what they are:
The next place your money goes to automatically is an emergency account.
Now I recommend that you have at least 5% of your gross income going into an emergency account. What’s this money for? Emergencies! I’m on the today show every Wednesday and we talk about these issues: Paying yourself first and your emergency account. How much money do you want in your emergency account? You want at least 6 months of expenses. I would tell you ideally you’d like to have closer to 24 months. The only way you’re going to get that in savings is if you start funding your emergency account automatically. This account should not have a checking account with it and it should not have an ATM card. It goes into a separate account that you can’t touch. That’s the third bucket.
The next place it’s going into is a Dream account. People go “David, what’s a dream account?” Super simple. When I was a financial advisor, we’d set up dream accounts for our clients. That could be buying a home, could be a second home, could be college accounts, could be vacation account–whatever it is that you have a dream, something you want to do, money should be moved automatically from your checking account into another account for those dreams. Really simple.
Now you’ve got credit card bills, if you’ve got a credit card account, these should be all be paid automatically from your bank account to your credit card company every month. At a bare minimum, you should be making minimum payments on that account automatically every month.
Let me explain this to you, I don’t want you to just pay the minimum payments on your credit card accounts, but what I want you to do is make sure that the bank pays the credit card account–the minimum amount–before it’s due. People make all kinds of mistakes where they’re just out of town, they’re busy, something is going on, you miss the bill and you get hit with $30 late fees, or $40 late fees, or $50 late fees. Just doing this one thing could save you hundreds of dollars a year by not having late fees. So minimum payments automatically paid, then you go in and you make the rest of the payments after the minimum payment you’ve made.
And that takes me to #6 which is regular bills. All your regular bills should be automated (phone bills, utilities, cable) go through your bills and find out what you’re getting billed for every month. Why are you still writing checks for those things? In my life, everything is automated. All my regular bills are automated, not just personally but many of my business bills are automated–I still go online and look at them–but this is all automated.
And then the last thing is charity, the importance of giving back, and you can make automatic contributions to charity every single month. You can do it from your bank account or automatically deduct onto a credit card.
I just did that really quick–in probably less than 3-4 minutes–setting this entire system up, guys, takes less than 1 hour. You can go online with your bank account and you can set this all up on bill pay in less than an hour.
Want more information? Come back to finishrich.com, and again download this book, Start Over, Finish Rich–says 2010 still applies right now in 2012– my gift to you, enjoy it, let me know how you like the video and read the chapter called Automatic Millionaire 2.0, where I go through all this in detail. I am telling you if you automate your financial life, you will come back to me in a year or two and say to me david, I don’t know why I didn’t do this before. People who automate their financial life build financial security–if you start at a young enough age you can become a millionaire.
And what I can tell you after I spent 9 years at Morgan Stanley, managing hundreds of millions of dollars for individual investors, what I got to see from firsthand experience, is that unless it’s automatic, it’s not getting done. What’s automatic gets done. If it requires you to have discipline, requires you to have a budget, you need to write checks every month, you simply won’t do it. And the reason is you’re busy, just like me, you’re busy, things happen, we don’t stick with a plan. But when it’s automatic it gets done.
Have a great day, thanks for tuning in, thank you for voting, and thanks for being part of my community, God Bless you. Goodbye.