Financial Lessons from David Bach

You may remember that back in May I told you about an interview on Afford Anything with David Bach, when he introduced us to his new financial book, ‘The Latte Factor’. At the time I was hesitant about buying it, but after having some money left over at the end of that month I splashed out. So especially for Dr FIRE, who commented that he would be interested to read my thoughts, here they are….

If you can afford one of these every day, you can afford to save for your future

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The Story

Through the fictional narrative in ‘The Latte Factor’ David Bach explains his simple formula for accumulating wealth slowly. The main character of the book is twenty-something Zoey, who begins to ask her herself what she is doing with her life. Although she works for a large publishing company she has never been outside of the United States. One day she sees a photograph of a boat on a beach, hanging on the wall of a coffee shop. Although she would love to buy the picture she tells her boss, Barbara, that she can’t afford it, as she isn’t good with money. Barbara advises her to speak to Henry, at the coffee shop, who ‘sees things differently’.

Over a period of a few days Zoey makes several trips to the coffee and chats with Henry, who provides her with the financial advice of David Bach. His comments include:

If can afford the latte you can afford this photograph’ i.e. the ‘Latte Factor’.

Slowly David Bach discloses information about Henry and Barbara, who have followed his lessons. By the end of the book Zoey is on a sabbatical on a Greek island, writing travel articles for her magazine and paying regularly into her pension.

Learn David Bach’s three financial lessons

The Lessons

Henry teaches Zoey the three steps to financial freedom:

  1. Pay yourself first – save the first hour of each day’s income into a pension. He shows her how much she would save, with compound interest, over forty years. He tells her to go and enrol in her workplace pension. According to in the UK you are now automatically enrolled on to a pension scheme by your employer if you are over 22 and earn more than £10,000. You pay 5% and your employer pays 3% as a minimum. Therefore to a certain extent the government has already put this in place for you, although it may not be as much as he would recommend.
  2. Don’t budget – make it automatic. He recommends having the money paid into your pension before your wages hit your current account. He doesn’t agree with budgets, which he believes people have trouble sticking to. He says deduct your savings automatically and spend the rest however you wish.
  3. Live Rich Now – I don’t think that I am completely clear what he means by this. I think for Zoey, being young, she has plenty of years for her money to compound, so she can set up her regular payments and still have enough money to live a nice life as long as she gives up those unnecessary items such as the latte and muffin each morning. For those of us who have come to FI/RE late in life it might not be as easy to ‘Live Rich Now’. It also appears to be linked to having accounts where you save for your dreams. Once again this is automatic, saving money into an account for short term goals e.g. buying a house or a special holiday.

Barbara tells Zoey the three ‘Myths of Money’

  1. Make more money and you’ll be rich – most people think they have an income problem. They don’t. They have a spending problem.
  2. It takes money to make money – you don’t need a huge chunk of money to build wealth.
  3. Someone else will take care of you. They won’t, so you need to take care of yourself.

Some more wise words from Barbara are that the wealthy spend their money on things that truly matter to them. The ‘unwealthy’ spend money on frivolous things.

David Bach’s books are USA-focused

Who is this book for?

Almost immediately after finishing this book I bought ‘The Automatic Millionaire‘, also by David Bach, which is in effect a non-fiction version of ‘The Latte Factor’. I thought that it would give me more detail of how to put his recommendations into practice and that would have been the case  had I been an American citizen. It gives a great deal of practical advice, referencing websites and government institutions, but if you don’t live in the United States its usefulness is limited. The same is true of ‘Start Late, Finish Rich’. As someone who has ‘started late’ I thought that this might be the David Bach book for me. In some ways it was, as it gives guidance about supercharging your savings and increasing your income in order to ‘catch up’, if you are middle-aged. Unfortunately, again much of the practical advice is only relevant to an American readership.

On reflection, I therefore think that even though it is a short novel, ‘The Latte Factor’ was enough for me to understand David Bach’s financial advice and consider how I could put it into practice in my own life. For those of you who are reading this article because you are already an avid follower of the FI/RE movement, ‘The Latte Factor’ probably isn’t going to tell you anything new, but if you have a friend or young relative who is struggling with their money, it might be just the thing to make them start thinking how things could be different. For something that you can read in a couple of hours the book isn’t cheap – currently £14 for a paper copy and £8.99 for the Kindle Edition. It also isn’t really a novel about FI/RE, as he talks about retiring in your fifties or sixties. That is slightly early, but this is not a formula for saving hard for five or ten years and ‘retiring’ in your thirties.

If you are reading this and you’re American David Bach’s books will be a lot more relevant to your situation. I would recommend reading ‘The Automatic Millionaire’ if you want and plan to implement his practical advice, particularly if you are in your twenties. If, like me, you’re further on if your ‘life journey’ then try ‘Start Late, Finish Rich’.

Let me know how you get on and what you think.

The Latte Factor – A Work of Fiction about FI/RE

A cup of coffee - specifically a latte
Cutting out these is a quick win

For those who follow Marc at you will know that he has challenged FI/RE bloggers to write a short story, of no more than 350 words and the first round of his microfiction as he calls it, has to be based on the word FIRE. Several people have taken up the challenge, including Quietly Saving, CashFlowCop and Saving Ninja, but I’m not sure whether it is my forte. I was reminded of this challenge though when I came across this episode of Afford Anything. Paula Pant, host of the podcast, interviews David Bach, author of the Automatic Millionaire (which I admit that I had never heard of) and several other financial books. His most recent book, entitled The Latte Factor, is a work of fiction.

Now even though Marc’s challenge using the word FI/RE does not have to be about the Financial Independence/Retire Early movement, this is exactly what David Bach’s novel is about. It follows a young woman working in New York in the publishing industry who goes on a financial journey. I have not yet read the book, partly because it is not being released in the UK until 16th May, but I have been able to listen to the first three chapters, being read by David, on his new podcast ‘The Latte Factor’.

To me this novel appears to present the perfect opportunity to spread information about FI/RE without trying to persuade your friends to read what they may perceive as a dry financial book. You can give them this, tell them it’s just a novel, whereas actually you’re clandestinely educating them about the benefits of the FI/RE movement.

So, if you live in the States you will already be able to get your hands on this book. You will know from my post on libraries that my first choice would always be to try your local one for any books that you fancy. Unfortunately my library does not hold any of David Bach’s books, so it seems unlikely that they are going to have this new one when it is released. I may just have to spend some money to get a chance to read it. If I do, I will let you know what I think of it, but if you get there first I would love to hear if it delivers on what it appears to promise in the first three chapters.