Book Review: The Automatic Millionaire by David Bach

A few weeks back I sent out a proposal to a few prospective agents, expecting at least one would recognize the genius – and their own self-interested business opportunity – in my personal finance book proposal.

One prospective agent asked a reasonable question in reply: “What’s the one thing you would like to get across to readers of your book?”

At the time I got his email I was in the process of sitting down to watch a summer blockbuster movie in the theater[1], so I fired off what came into the top of my head, to which he replied:

“Not good enough. You need to give readers something more concrete and memorable, like ‘Bach’s Latte Effect.”

I puzzled over that one throughout the movie, as I did not recall anything about delicious lactose-based caffeinated beverages in my limited knowledge of the Brandenburg Concertos.

Fortunately, when the movie let out I had recourse to The Google.

I learned that one of the most popular personal finance book of the last decade – The Automatic Millionaire: A Powerful One-Step Plan To Live And Finish Rich, by David Bach – makes use of Bach’s Latte Effect as a central, simple concept for getting rich.

David Bach, not Johannes Sebastian, composed the ‘Latte Effect.’

The next day I ordered the book, fully hoping to hate it, all the better to discard the agent’s comment in an ego-protective way.

I’m sorry to say: This book is quite good.

I mean, mine’s better, obviously, but David Bach has the distinct advantage over me of actually having written and published his book. And, it’s got a couple of extraordinarily simple, memorable, easy steps that could help most people get wealthy by the end of their lifetime.

Bach has two, and only two, major points to make, both of which are absolutely correct.


Bach’s first point – The Latte Effect

You do have money to invest.

Nobody thinks they do. Most days I don’t think I do. I mean, the money always runs out first, right? How would I even scrape together an extra $100 a month? It’s just not happening, right? Wrong.

Yes, my barista actually made this Samuel Jackson latte and gave it to me. That’s how good a coffee customer I am. Which is scary.

The Latte Effect, coined by Bach, refers to the correct idea that all of us – ALL OF US[2] – are paying for things on a daily and weekly basis that we don’t have to. Each one of us – were we to track every little, literal, expenditure – buys small things that we do not have to buy.


Me, as an embarrassing example of the Latte Effect

Personally I have gotten in the habit of feeding my Starbucks addiction to an embarrassing level. Let’s say I spend $2.50 on a Grande per day,[3] for a total of $17.50 per week. And let’s say three times a week I grab a ‘classic sandwich’ for breakfast from that smug little green mermaid because I’m in a rush to drop off the girls at school or camp or whatever for a total of $12 more dollars per week. So I spend $29.50 per week at Starbucks.

So, sue me, what’s the big deal?

The big deal is that this tiny little forgettable expenditure, after 52 weeks, comes to $1,534 per year.

And the next big deal is what I’m not building in long-term wealth by spending that $1,534 annually.


How big is the Latte Effect?

Let’s say I saved and invested an additional $1,534 per year in the stock market, and let’s further say I did that for the next thirty years, until I turned 72. How much richer would I be?

Plug this into your compound interest calculators everybody:

At a plausible 6% return from the markets I’d be more than $128 thousand richer by age 72.

At a backward-looking, historically-realized 10% return I’d be more than $277 thousand richer.

What if instead of getting wise at age 42, I had cut out my destructive Starbucks habit and began my caffeine-free living at age 22? Now this gets really interesting.

At the plausible rate of 6% return from the market, I would end up at the age of 72 $472 thousand richer. And if markets returned as much as 10% every year I would be over $1.9 million richer.

So what is my Latte Effect?

Over my working lifetime (age 22 to 72) somewhere between $472 thousand and $1.9 million. Actually I am certain the range of the effect is much higher, as I’ve underestimated both my weekly Starbucks consumption and other unnecessary consumption items, but you get the idea. I should be, and could be, much wealthier.

And so could you. So what’s your Latte Effect?

Your Latte Effect

Now, you may be feeling quite smug because you’re Mormon and you never touch the Starbucks poison. Good for you. You still have a Latte Effect. I guarantee it.

You buy lottery tickets. Or gum. Or tic-tacs. Or Spotify/Pandora. Or Netflix/Hulu/AppleTV. Or internet porn. Or extra leveling-up manna on the Freemium games for the iPhone. I know you have a weakness, you’re just not telling me.

Which is fine. But you should be honest with yourself about your own Latte Effect, if you aren’t coming up with money at the end of the month to invest for your long-term financial security.

Automate Investments For The People

Bach’s second point: Automate the Investing

Not only do we not think we have any money at the end of any month, but very few of us – even if we had the money at the end of the month – have the willpower to turn it over to our long-term investment accounts.

The only surefire way to invest – and here I have to give Bach credit for totally nailing it, although also of course I independently urged people to do this last year[4] – is to set up automatic deductions from your checking account (or better yet, directly from your paycheck) into your investment accounts.

[Why does this work? I don’t know. It has something to do with the idea that money that either doesn’t stay in our checking account – or doesn’t even hit it – is money that we will not be tempted to spend. Humans are weird psychological puzzles when it comes to money. Incidentally, here’s a good book I reviewed that explores all the different irrational things we do with money. Ok, back to our regularly scheduled program.]

The following statement – a paraphrase of Bach’s book – deserves the bold, italic, underlined all-caps designation I’m giving it.


I’ll stop shouting now, and offer a few additional calm thoughts.

  • The first best place to automate investment contributions is to your 401K and IRA, both of which are tax-advantaged, awesome investment vehicles.
  • If you already contribute to your company’s 401K (or 403b for non-profit folks), then check to make sure you are maximizing your annual contributions.
  • Your friendly bank or brokerage company will happily set up a monthly or bimonthly automatic transfer from your checking account into the investment account you open there.
  • If you’re just starting out and don’t think you qualify for the investment to open an account, you can sometimes convince them to waive the minimums, if you set up an automatic investment program.
  • If you’ve never invested before, try dedicating just 1% of your income to your investment accounts through automatic investing. Over time, once you’ve automated contributions, you will see that moving to 5%, and then 10%, of your income is no big deal.

Automatic investing this way is not simply a way to invest, or one way to invest. No. I say with confidence it’s the ONLY way to invest. If you haven’t tried this, but have always wondered how other people actually invest money over time, you may be amazed to learn that the vast majority of people did it, one way or another, based on automatic investing.

So, the TL;DR on David Bach’s book:

You could have money left over at the end of the month if you stop drinking lattes (or whatever), and you could become wealthy if you automatically made contributions to your investment accounts, starting with your tax advantaged retirement accounts.



I have only two caveats about The Automatic Millionaire, and these caveats apply to every single personal finance book I’ve ever read so far.

Who buys this?

First, the type of person who picks up a personal finance book is already different from your average person who needs help with their finances. A personal finance book buyer has self-selected as someone oriented toward financial self-improvement, and asking for outside ideas. Will buyers and readers of The Automatic Millionaire follow Bach’s advice? I hope so. Will the people who need the book the most actually end up buying it, in order to take their first few simple steps toward financial security? I don’t know.

Compound interest

My second caveat is just my personal pet peeve. Bach makes good use of the concept of compound interest, urging his readers to invest early in their lives to get rich later. Multiple charts and tables in the book show how a few thousand dollars invested, for X years, earning Y% return, will result in Z riches. This is great.


Bach, like every other personal finance author who has ever been published, declines to show exactly how the math is done. He decided, the same way every other publisher has previously decided, that book readers cannot be trusted to learn a simple algebraic formula.

With a little attention and a simple spreadsheet, readers should be taught compound interest. Am I the only person who thinks that personal financial advice starts with people understanding compound interest well enough to do the calculations themselves, rather than refer to somebody else’s table in a book?

Apparently, yes.

If I ever spoke with that agent again, I’d like to tell him that the one thing people should understand is the compound interest formula. That is my most firmly held belief.[5]

But I’m afraid it’s not something the publishing world is comfortable with. They don’t trust readers enough to walk them through the junior-high level math. So we get tables and charts instead.

Please see related post All Bankers Anonymous reviews in one place!

Please also see related posts on:

Compound Interest and Wealth

Compound Interest and Debt

The Humble IRA

Become a Money Saving Jedi


automatic millionaire


[1] 22 Jump Street, if you must know. What? Whaaaat? My wife tells me Channing Tatum is quite a good actor. But I still haven’t convinced her to start calling me “Magic Mike.” I don’t know why she refuses me this simple courtesy.

[2] Ok, obviously not all of us. Because there is real poverty everywhere. And I know there is food insecurity within a few blocks even of my own house, so I should not exaggerate. But many, many, many, more of us – pretty much anybody who is gainfully employed right now and not on complete federal assistance – has their own Latte Effect were they to examine their daily habits scrupulously.

[3] I happen to know my Starbucks habit is much, much worse than this, but I’m not about to confess this to just anyone on the Interwebs. I mean, I have some pride. Also, there are some crazies on the Interwebs, have you noticed? Sheesh.

[4] I’m just bragging here so that any book agents reading this know that I’m totally all over this topic.

[5] That, and also the firmly held belief that Rihanna would totally prefer me over both Drake and Chris Brown, if she was ever given the opportunity. Sorry, RiRi, I am happily married.



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Book Review: The Millionaire Mind by Thomas J. Stanley

The Millionaire Mind by Thomas J. Stanley did not win the acclaim of its predecessor The Millionaire Next Door, but I consider it an equally valuable resource for personal financial education.

As with The Millionaire Next Door, which I reviewed earlier, Stanley conducts a type of ethnographic study of multi-millionaires, surveying them on attitudes, life experience, purchasing behavior, and habits of mind.1

A number of these insights stuck with me throughout the years, a good indication to me that Stanley’s got quite a bit to offer.

Small Business Owners

Many millionaires own their own businesses, and they typically either started it or continued a family-owned enterprise.  Further, their businesses often lack the prestige of professions celebrated in the popular press.

Stanley takes pains, for example, to highlight the story of Mr. Richard, a junk-yard operator worth over $10 million, with an annual salary above $700,000.  Avoiding the prestige professions is not only an accident, Stanley argues, but a strategy to avoid competing with other very smart people.  Stanley returns frequently to this theme of wealth accumulation through entrepreneurship, which, of course, I believe in myself.

Not the best students

Interestingly, Stanley claims that his cohort of millionaires tends to be made up of people who received Bs and Cs in high school and college – but who found a vocation, after their school years ended, at which they excelled.

The traditional A students, he points out, tend to seek out competitive, prestigious professions such as law and medicine that require a flawless educational transcript. Many lawyers and doctors earn generous salaries but frequently do not join the ranks of multi-millionaires.  There can be a huge difference at the high end of wealth creation between a good salary and ownership of a profitable business.

Cheap Cheap Cheap

Stanley’s favorite theme – sounded throughout The Millionaire Next Door as well as The Millionaire Mind, is that wealthy people are frugal.

This makes sense, as of course the less you pay for everything – from your car to your morning coffee – the more you have left over in net worth.  On the other hand, much of the Advertising Infotainment Industrial Complex is dedicated to convincing us that the more you have, the more you need to show what you have, through a fancy watch2 or a second home, or by hiring Rod Stewart for your 60th Birthday.

Other insights

Stanley describes other characteristics of multi-millionaires.  They tend to be long-term married (and only once), they tend to have iconoclastic ideas (somewhat), they show courage and respond well to setbacks, they seize business opportunities that others did not see, and they tend to reduce their borrowing once they’ve achieved some financial success.

All sounds like reasonable advice to me.

millionaire mind

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  1. Once again a scientist versed in the scientific method could easily critique his approach.  He sent out surveys to a randomly selected number of households in certain zip codes likely to have millionaires.  From there he received 733 completed responses from households with at least $1 million in net worth.  Problem #1 – Survivorship bias.  Just because these folks have a $1 million+ net worth, doesn’t negate the fact that many other people, or even a majority of other people, with exactly the same characteristics, are not millionaires.  We can’t know how powerful the effect of these variables are without a study designed with a ‘control group’ to correct for survivorship bias.  Problem #2 – Methodological tautology. Stanley targeted particular zip codes on purpose.  He then makes comments about the types of neighborhoods millionaires live in, such as the fact that many millionaires live in older, well-established neighborhoods.  That’s probably true, but you can’t make a scientific correlation between neighborhoods and millionaires if you picked the neighborhoods first!  Nevertheless, I still think Stanley’s insights have the ring of truth, if not the scientific gold standard of proof.
  2. “You never actually own a Patek Philippe, you merely look after it for the next generation.”  Also, it even tells time!  Similar to, although not quite as well as, a digital watch that is essentially free at this point.  Or like the free time-keeper that comes with your mobile communication device.

Book Review: The Millionaire Next Door – The Surprising Secrets of America’s Wealthy

 It seems overly dramatic1 to write that Thomas Stanley and William Danko’s book The Millionaire Next Door changed my life, but actually it kind of did.

Let me dispense with the major flaw in the book first.

The authors conducted a study in the 1990s of close to 350 millionaires, with an average net worth of $3.7 million, surveying them on their behaviors, spending patterns, lifestyle choices, and attitudes.  From that review Stanley and Danko describe a composite “average millionaire” and explain the lifestyle factors correlated with US millionaires.

The real point of the book, the only reason to purchase it, is to learn how we, the readers, can replicate their success.

Yet the caustic financial critic Nassim Nicholas Taleb blasted their book in his own Fooled by Randomness for a statistical flaw.  As Taleb points out, simply interviewing 350 millionaire ‘winners’ does not take into account the possibly thousands or millions of people who might have behaved in ways similar to the 350 but who did not end up millionaires.  The study underlying The Millionaire Next Door suffers from “survivorship bias.”

This same “survivorship bias” leads to our thinking that all hedge fund managers in 2013 are rich – and have good investment track records – because we only look at surviving hedge fund managers, not the tens of thousands who have disappeared from the investment scene or gone out of business.2

Having pointed out the logical scientific flaw in their method, however, I would argue that Stanley and Danko are still worth reading.  Even if their research does not rise to the level of a randomized placebo-controlled double-blind study that you’d require for true science, their correlations seem useful and right.

So what do Stanley and Danko say about millionaires?

They live below their means. 

They allocate their time, energy and money efficiently, in ways conducive to building wealth.

They believe that financial independence is more important than displaying high social status

Their parents did not provide economic outpatient care

Their adult children are economically self-sufficient

They are proficient in targeting market opportunities

They chose the right occupation.


An enduring image from the book, introduced in Chapter 1, is the ‘big hat, no cattle’ phrase referring to people who appear wealthy, but really have little actual wealth.  They spend money on showy things but finance their purchases with debt.  (Now that I live in Texas, I enjoy hat and cattle references more.)

They state this point, re-state it, and then argue it some more, that the appearance of wealth – a fancy car, expensive trips, a three-story house in the right zip code – are not wealth itself but in fact – in many ways – the opposite of wealth.  To the extent these raise the cost of people’s lifestyle, wealth is harder to achieve for those with expensive needs rather than ordinary needs.

One of the great things about Stanley and Danko’s “steps to being the millionaire next door” – in fact the key attraction of their best-seller – is the applicability to everyone’s life.  “Live within your means,” as a step 1, works for anyone, with either $999,000 saved – or just starting out.

Please see related post The Millionaire Mind, by Thomas Stanley

Please see related post: All Bankers Anonymous Book Reviews in one place.


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  1. And leaves me feeling uncool and easily teased.  It’s kind of like admitting that Huey Lewis and the News was my favorite band in 1986.  It just doesn’t make me look good.  Forget I even said it, ok?  But Sports – in its 30th Anniversary Year! – is a really good album.
  2. What? Are you talking to me? Are you TALKIN’ to me?