David Bach on Paying Yourself First, Automating Your Savings and Owning Stocks and Real Estate

High-Level Overview

Lewis Howes talks with David Bach, the bestselling author of The Automatic Millionaire, Smart Women Finish Rich and the parable The Latte Factor, about how ordinary earners build wealth. Bach's case is that it does not come from budgeting, discipline or a lucky bet. It comes from being an owner: of stocks and of real estate, bought steadily over decades with money that is taken out of your paycheck automatically before you can spend it. He illustrates this with his grandmother, who started saving 50 cents a week at 30 and helped him buy his first share of McDonald's at age seven.

The tone is upbeat, fast and practical, with Bach firing off numbers, charts and opinions on new cars, student loans and startup investing. Near the end it turns personal, as he talks about his grandmother's deathbed regrets, a recent hospital scare with his wife, and what he thinks money is really for. The conversation moves from family stories to investing mechanics to real estate, then to a three-step action plan, and closes with life lessons about love, risk and forgiveness.

The Discussion Explores:

• Why Bach calls stocks and real estate the two escalators to wealth, and why life works like a game of Monopoly
• The case against budgets and for a system that runs automatically and needs no discipline
• Paying yourself first by saving one hour a day of your income, and what compound interest does with small daily amounts
• Why he thinks your own home is the easiest first real estate purchase, and how leverage and tax rules favor it
• Index funds, diversification, the Rule of 72 and how much to keep in an emergency fund
• The money traps he rails against: new cars, student debt, subscriptions and so-called play money
• Why women in particular need to take charge of their own finances
• His three truths: love fully, take the riskier road, and forgive

Deep Dive into Main Ideas

Be an owner: lessons from Grandma and McDonald's

Bach says the two primary escalators to wealth are investing in stocks and in real estate, and he compares life to Monopoly: if you only circle the board collecting a paycheck and paying rent, you cannot win. You have to own assets that grow while you sleep. He complains that none of this is taught in school.

His own education came from his grandmother. At 30, with no college education and a job at Gimbels department store in Milwaukee, she told her husband they were broke and decided to change it. She brown-bagged her lunch, saved 50 cents a week in a coffee can, and at the end of each year took it to a brokerage firm to buy stocks. Bach says that changed the destiny of his family, and that she built wealth over a lifetime, not overnight. "People who try to get rich quick stay broke long," he says.

When he was seven, she pointed out the three kinds of people in a McDonald's: workers earning minimum wage, spenders, and owners, and told him owners get rich. She showed him the ticker symbol in the Wall Street Journal and helped him buy one share. Disney came next at nine. He now does the same with his sons, who own Shake Shack, Disney and Amazon. His rule of thumb: invest where you spend. If you will not give up the $5 coffee, buy the company's stock as well.

Why he does not believe in budgets

Asked directly whether he believes in budgets, Bach says no. He compares them to diets: people hate them, couples fight about them, and they do not last. What works, he argues, is a system that requires no discipline and no time. He says the real secret behind The Automatic Millionaire is that ordinary people who built wealth did it by saving automatically, without thinking or stressing about it.

He adds that technology has made this far easier. At Morgan Stanley, he recalls, setting up an automatic $50 a month took 11 pages of paperwork. Today an app can do it in minutes. He mentions Acorns, in which he discloses he is an investor, as one that lets people save spare change into a diversified portfolio.

He also clarifies the latte idea, which Howes notes his friend Ramit Sethi likes to poke at. Bach says it was never about coffee. It could be bottled water, cigarettes or eating lunch out every day. The point is that small daily spending is money that could be buying your goals, and that dreams should be bought, not borrowed for on a credit card.

Pay yourself first and let compounding work

Bach calls paying yourself first the first of three secrets in The Latte Factor. Most people, he says, effectively work the morning to pay taxes and the afternoon to pay for housing, cars and everything else, then hope something is left to save. He calls that completely the wrong philosophy and urges people to become financially selfish by carving out the first money for themselves.

He walks through a chart from the book. A person who saves $2,000 a year from age 19 to 26 and then stops has over a million dollars at 65. Someone who starts at 27 and saves $2,000 every year until 65 ends up with $805,000, despite putting in far more. His 15-year-old son read the book in two hours and worked out that it comes to $5.41 a day.

His formula is one hour a day of your income. He says that works out to 12.5% of gross income, and with a typical employer match about 16%, which he describes as roughly four times what the average American saves. Using his charts at a 10% return, he says $15 a day grows to $92,000 in 10 years, about a million in 30 years and 2.8 million in 40. "It's decades, not days," is how he puts the general principle.

Real estate: start with your own home

Howes raises the Grant Cardone view that you should rent where you live and own rental property instead. Bach agrees that most American wealth is built in real estate, but says the easiest first property is your own home: it is the easiest loan to qualify for, the mortgage interest is deductible, and you have to live somewhere, so you can eventually own it free and clear. Renters, he argues, pay the landlord's taxes, insurance and maintenance anyway through rising rents.

He pushes back on a CNBC comparison that favored renting and investing the difference. Stock returns have been higher statistically, he concedes, but he calls the comparison misleading because of leverage: put $20,000 down on a $100,000 home, and if it rises to $110,000 you have made $10,000 on $20,000, a 50% return. He also points to the tax rule that, as he describes it, lets a single person keep up to a quarter of a million dollars of profit tax free on the sale of a personal residence after two years, and a married couple half a million. He says he has done this three times.

His practical guidance: buy as early as you can, borrow less than the bank will lend, put down a good old-fashioned 10 to 20%, and have six months to a year of mortgage payments set aside. He bought his first home, a fixer-upper, with his best friend and rented bedrooms to friends to cover the mortgage. From The Automatic Millionaire he repeats the idea of three homes over a lifetime: two rented out and paid off, and one you live in debt free. He is not talking about flipping, and warns about free seminars that lead into $30,000 coaching programs.

Reviewing Lewis's finances: dashboards, defined benefit plans and owning your building

Howes lists what he already does: retirement accounts, a defined benefit plan, whole life insurance, real estate funds, and investing in his business. Bach says he is doing nearly everything right. He calls a defined benefit plan the single greatest vehicle for a self-employed person without many employees, saying it can shelter over $200,000 a year, and says wealthy people focus on legally not paying taxes. He likes Roth IRAs too. On startup investing, both men admit it is a hard way to get wealthy; Howes says he has not made money on about eight startups.

Bach's main additions are organization and property. He urges Howes to put everything on a dashboard, even a simple spreadsheet, so that family would know where assets are if something happened. And he tells him to buy a place, suggesting a condo held in a separate LLC that his business rents. His wealthiest Morgan Stanley clients, he says, often got rich by accident because they owned the building their business was in.

Index funds, the Rule of 72 and emergency cash

Howes says he uses index funds after giving up on picking stocks. Bach calls that a great way to go, noting Warren Buffett's advice to his wife to put the money in an index fund. Bach himself owns Berkshire Hathaway, index funds, ETFs, individual stocks and bonds, and says the real key is diversification. He co-founded a registered investment advisory firm that he says has just passed seven billion dollars on its platform.

He aims for 7 to 9% a year, enough to double his money about every 10 years, and explains the Rule of 72: divide 72 by your rate of return to get the years it takes to double. At 1% in a bank, that is 72 years, so he says only emergency money belongs in a bank account, and it should earn at least 2%.

On how much cash to hold, he says it depends on what lets you sleep. He personally wants two years of expenses, but calls that extreme, citing Federal Reserve data that four in ten Americans could not get their hands on $400 in an emergency. Saving $10 a day for 100 days, he says, would put you ahead of most Americans.

The traps: new cars, student loans and subscriptions

Bach calls new cars the dumbest thing Americans spend money on. His rule is to borrow only for assets that can go up in value. He cites an average new car payment of $533 a month, close to $1,000 with insurance and gas, for something that drops 20 to 40% when it leaves the lot.

He is equally blunt about student debt, calling the loans handcuffs that now last decades and cannot be discharged in bankruptcy. He is not against college, but advises taking on as little debt as possible, for example two years at a junior college or a state school before transferring.

His three steps to start today pull this together. First, pay yourself first, one hour a day of income, through a 401(k) or an IRA. Second, track where your money goes without budgeting, using an app such as Clarity Money or Mint, and cancel forgotten subscriptions; a $50 monthly box is really $600 a year. Third, automate savings for your dreams through services like Acorns, Robinhood, Stash or Betterment.

Women and money

Howes describes his mother at 68, living on roughly $2,000 a month from Social Security and a pension after a divorce. Bach says this is exactly why he wrote Smart Women Finish Rich. He states that 80% of the poverty-stricken elderly are women and that most women die widowed, and says wives often delegate finances to husbands and are unprepared when they are gone. In The Latte Factor, a mentor tells the main character, Zoe, "Prince Charming is not coming." He also suggests Howes ask his mother what she still wants to do and plan it now, while she is healthy.

The best money advice, and three truths

The best advice Bach ever received came from a former head of Dean Witter: benign neglect, meaning buy quality investments and leave them alone. The second was to invest your own money as carefully as you would a client's. He also objects to the phrase play money for speculative bets like cryptocurrency, saying that if you worked for it, it is work money. He tells the story of how a late-night dinner with Paulo Coelho in Geneva pushed him to write The Latte Factor as a parable with co-author John Mann.

His three truths are to love fully, to listen to the little boy or girl inside you at a fork in the road, and to "forgive the people you're mad at." The second comes from his grandmother, who told him at 86 that each of her regrets came from taking the safe road. It is also why, at 52, he is moving his family to Florence for a year. His definition of greatness is listening to your soul and using your God-given gifts, and he says financial freedom matters because it is hard to hear that voice when you are worried about the bills.

Conclusion

Bach's message is that wealth is built slowly and almost boringly: pay yourself first, make it automatic, own quality stocks and your own home, and leave them alone for decades. He would rather people skip budgets, new cars, heavy student debt and get-rich-quick bets, and instead save an hour of pay each day and track where the rest goes. By the end he makes clear that the money is a means. In his telling it buys the freedom to take the riskier road, love fully, forgive, and use whatever gifts you were given.

This is a summary of "Budgets Don't Work, Automation Makes You Rich | David Bach" from The School of Greatness, giving you the GIST so you can decide if you want the REST. Listen to the full episode.