The Automatic Millionaire: David Bach's simple formula to get rich

The only way to get rich easily is to pay yourself first, automatically putting aside at least 10% of your income into savings, a pension plan or investments. It’s not sexy, but saving is the foundation of all wealth. Most people who don’t do this will lose over $1m long-term.

We all enjoy treats, but what if the $5 you spend on coffee every morning was put into a pension plan invested in the stock market? Assuming a return of 10% a year (the stock market average over the last century), that would amount to over $1m in 40 years.

Financial expert David Bach has a chart he shares in his seminars, called ‘The Time Value of Money.’ It tracks how much $3,000 would be worth at retirement age if invested while you’re still young. Most people’s reactions to it are, “I wish I had seen this earlier.”

Automation + compound interest = serious wealth. Even if you start saving at 40, you could still be a millionaire by retirement. Over 30 years, $3,000 invested annually comes to $117,000. If compounded (i.e., with all returns reinvested) at a 10% return, that’s $1,324,000.

It may seem logical to pay your credit card debt off before saving, but you’ll be more motivated by doing both simultaneously. Put half your ‘pay yourself first’ money towards monthly debts to repay them quicker. Bach calls this strategy “bury the past and jump to the future.”

Paying off your home loan quicker than planned can also save you a fortune in interest. If, for example, your monthly repayment is $1,834, paying 10% extra each month will end up shaving around $129,000 off what you pay over the life of the mortgage.

Have a cushion. Set aside a ‘rainy day’ fund that will cover all your living expenses for at least three months if you lose your income or encounter unexpected problems. The main factor is how much you feel you need saved to get a good sleep at night.

Having meaning in our lives, rather than money, is what makes us feel good. Tithing, or giving away 10% of what we earn, is common to many cultures. It could be more or less, but the main thing is to feel joy in giving – because you can give.

Tithing is your way of saying ‘thanks’ to the universe. As with paying yourself, Bach says you should keep your tithing automatic. Make sure the organization you are giving money to is officially a charity, and you’ll also get tax benefits on what you contribute.

Your salary doesn’t need to make you rich. With enough diverse investments (even if you put everything into one pot) the consistency and long-term scale of Bach's approach means that market fluctuations will affect you less. Wealth starts to become inevitable, not just a hope.