Book Review 003: Automatic Millionaire - David Bach

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Be an Automatic Millionaire - if only it was that easy...right? When I first came across this book, I had just finished my Bachelors degree in Business Administration and was starting my first full time job at a Financial Services Company. I was gifted the book a couple months back from a friend, but pushed it aside until after graduation. This turned out to be perfect timing as this book covers some great basics for beginners.

Key Ideas:

1) Millionaire next door - The average American Millionaire couple earned a combined income of $55,000 (written 2005) during the course of their entire career! This was a big surprise for me as I assumed you needed at least a combined income of $150,000 or more to be able to save significantly. These Millionaires were able to save with a modest income by budgeting, paying themselves first (more details below), and automating their finances. This leads to the next key idea.

2) The "Latte Factor" - The term coined by David which is the idea that you can become a millionaire by changing financial habits that snowball and have an overall big impact to your savings. Being a millennial, I've seen countless articles on "Don't eat Avocado toast if you want to purchase a home", "Don't go to Starbucks and save those dollars". I think its loosely based on the same concept. While I disagree that Avocado toasts and Starbucks are the main reasons why people do not purchase their first homes (i.e. Market prices, Fear of the 2008 crash, prefer to be renters, etc.), I do agree that small habits can give you the option to make the big purchase such as a house, impact your finances greatly, but it is often missed because these expenses are not considered in the aggregate.

If you think about it, $3-5 dollars at Starbucks may not kill your budget, but if you have read other financial books such as Rich Dad Poor Dad (I love this book!), you will know that the rich focus on creating/purchasing assets as quickly as possible, that will continue to build them wealth in the long run. What I mean is, that $3-5 dollars a day, or $1450 a year (rough estimate) can go towards buying mutual funds at a modest 8-12% return, rental properties with $100-200 cash flow per door, or even towards getting that degree that may double your salary, etc. And that is just ONE habit. 

I personally view expenses now in terms of opportunity cost. For example, you might want to take a trip to Vegas with your friends after graduating, but with food, travel costs, and other expenses, you might be out of pocket $500 bucks over a weekend. Now some may argue that they do not want to deprive themselves of fun, and I totally understand, I am merely trying to prove a point and that change in "mindset" is most important.

3) Paying yourself first - This concept I was already familiar with from reading "the Richest Man in Babylon". A simple idea in which you always want to pay yourself first (legally of course), before anyone else - the government, landlord, utility company, and any other bills that may come your way.

Now, how can we do this? There are many different strategies and methods, but one is simply through 401Ks and IRAs. By automatically setting up money to go to your 401Ks and IRAs you are deferring your taxes and growth until retirement.

Simple example: Lets say John makes 50K a year and pays 25% in taxes. Without paying himself first, he will lose 12.5K to Uncle Sam and have $37,500/year or $3,125/month left over to pay the bills. Now lets say he decided to put 15% of his pre-tax income into a 401K (This is very achievable). Now, out of the 50K/year income, 7.5K is going into his 401K Tax free, and he is being taxed on $42.5K which amounts to $10.6K in taxes or overall savings of $1,875. Now this is a very simple illustration and everyone's tax deductions and credits will vary, however, there will be tax savings as  you are reducing your "taxable income" off the top. Note: 401K I used in this example is deferring of taxes, not eliminating it, however, it is taking into consideration that with compound interest (Warren Buffet), we will have a built a sizable portfolio from starting early and often.

4) Automate it, take action NOW - The most important part of this book is automation. Like the title says, these ideas are only good on paper unless you act on it. So David challenges the readers to take baby steps in making changes - 1) increase 401K contributions (Check) 2) automate paychecks to go to different accounts - 401K, checking, bill pay account, etc. (Check) 3) Create a rainy day savings account worth 6 months of expense (Check).

Once I decided to take action, I have to admit it took me less than 15 minutes to automate my expenses and also create a savings account to save up for a 6 month rainy day fund (This step is critical as I personally ran into Car issues couple months later and it wiped out my savings. Luckily, I was able to rebuild it and I didn't have to rely on loans, credit cards, or anything else due to my rainy day fund).

Overall, I think book provided a great basic foundation for my finances and helped me pay for my wedding all cash, save up for a downpayment on my house, payoff any loans all in the span of 4 years. Write down your thoughts below!

Good Luck!

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Book Review 002: Rich Dad Poor Dad - Robert Kiyosaki

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One of my all time favorite books on personal finance is Rich Dad Poor Dad. I can honestly say that it was the catalyst for changing my perception on finance, wealth, and even accounting basics such as an asset and liability. This book written by Robert tells of a story of his two Dads: his biological father (Poor Dad) and his best friend’s father (Rich Dad). These two dads had a stark contrast when it came to dealing with finances which is evident all throughout the book.

Robert Kiyosaki talks about key principles that will change your life forever:

1) Why the Rich get Richer

One of the early lessons taught by Robert’s Rich Dad is that the Rich have money work for them, while the poor and middle works for money. The key difference is their understanding of assets and liabilities. Poor Dad would encourage Robert to take the traditional path of go to college, get a good education, get a job and if you save throughout, one day you can retire and live on the beach. Rich Dad, however, had a different perspective and encouraged his son and Robert to both educate themselves financially, create assets/businesses that create cash flow as early as possible.

Rich Dad explains to Robert that the poor and middle class struggle financially because as they work harder to increase their income, their expenses also increase. They work to make their business owners wealthy, pay the government taxes, and pay off student loans and mortgage debts. The Rich on the other hand, use their income to pay themselves first, buy assets/investments that create cash flow and repeat the cycle to generate even more income each month. They are taking full advantage of what Einstein dubbed the “eighth wonder of the world”, compound interest.

A story in the book tells of young Robert and his best friend working hard to make their “income” and buys comic books to read. After working weeks for limited pay, Robert and his friend end up buying used comic books and create a reading library business for other kids to pay and enjoy. This allows Robert and his friend to realize that they have created a cash flowing business, where they are not working harder, but smarter for more income.

2) Importance of Financial Literacy

There is so much information out there that sometimes the danger is what we may think we know, that just isn't true. This may be the case of people assuming that their primary house is an asset. As Rich Dad explains, “An asset puts money in your pocket, a liability takes money out of your pocket.” As your mortgage has principal, interest, property tax, insurance payments going out each month and not creating cash flow, by definition, it is a liability. Further, it comes at an opportunity cost where you are not able to invest the money into a new business or rental property that creates cash flow and enhances the velocity of your portfolio’s growth.

Robert mentions that the amount of money you make is not as important as how you spend (and keep). Imagine this, who makes more money, a Nurse with a modest but comfortable living arrangement who makes $100K a year with no debt, and is able to invest 20% of her income, and keeps over $40K after taxes. Compared to a Doctor at the same hospital who makes $300K a year, but has student loans of $250K, a mortgage payment of $10K a month, drives an expensive car to “keep up with the joneses”, you get the idea. Most people mistakenly view wealth in terms of net worth or assets minus liabilities, true wealth is measured in the number of days you could continue to live your lifestyle should you have to stop working today.

3) Getting Started

The most important idea shared in the book for me was getting started. A lot of people are provided with the same information, and one person may be enlightened to take action, and the other will sit on the information for years. A favorite quote of mine is “action without knowledge is dangerous, but knowledge without action is useless.” Robert points out a couple reasons why someone may be hesitant to take action:

  • Fear: The fear of losing money and making a fool of yourself may be a reason for you not taking action. However, to those people I ask, what happens if you don’t take action and it's too late? It's not surprising to hear according to Northwestern Mutual's 2018 study that surveyed 2,003 adults, that 21% of Americans have nothing saved up for retirement, a third has less than $5,000, and that 33% of baby boomers have $25,000 or less in retirement savings. Additionally, 78% of Americans say they are extremely concerned they will not have enough money for retirement and another 66% believe they will outlive their retirement savings.

In this day and age, the promises of work hard and save to retirement or “accumulation mindset” that was conveyed to our parent’s generation just does not seem to apply anymore. More often I see retirees re-entering the workforce and taking minimum wage jobs to support their lifestyle.

  • Cynics: There will always be skeptics and people who like to criticize rather than be a doer. Cynicism typically comes from lack of knowledge and excuses. People might tell you investing is real estate is dangerous, “look at the crash of 2008, I heard my friend gets 3am calls to fix toilets, etc.” If you educate yourself, you can take cautionary steps to mitigate the risk of your portfolio crashing as it did in 2008 (i.e. not over-leveraging, maintaining reserves, buying 20% below market, etc.) you can’t prevent a recession, but people who held on during the tough times, made 3x greater returns coming out of the recession. Further, if you don’t want to be a plumber and fix toilets, hire a competent property manager that will take care of your property. It will be well worth the expense and allow you to truly scale your business.
     

  • Laziness: There may be people who don’t take action simply because they prefer to status quo and would rather avoid their future problems than face it head on. As I have discussed in the previous book review “Automatic Millionaire” the key is to take small steps, actions that automate your progress towards wealth building and financial freedom. It’s not about money, but freedom, and buying back your time instead of working 3-40 years hoping that your retirement nest egg will be large enough to support you, you are taking action now to take your future into your own hands, taking back the control from wall street.

Robert offers a couple tips to getting started

  • Find your why: This will be your reason behind why you do the things you do, and it will be a key factor in keeping you motivated and the fuel to your fire. When you set out to create a future that is greater than your past, and pair it with hard work and consistency, you will achieve great success.

  • Master a formula (then move onto the next step): You may have heard the term “jack of all trades, master of none”. Similarly Robert explains that you want to master a formula (i.e. Malcolm Gladwell’s 10,000 hour rule or Dean Graziosi's working on your strengths) and stay focused before you start additional ventures

  • Pay yourself first: This idea is repeated in many different personal finance books: Richest Man in Babylon, Automatic Millionaire, and I will teach you to be rich. The idea is that you are paying yourself (and hopefully investing it) before any taxman (IRS), landlord, credit card company, or other expense vendors get their hands on your money.

  • Circle of 5: You may have heard the phrase, “you are the average of the 5 people you spend the most time with.” This rule of thumb seems to apply whether it's a good or bad group of 5. If you want to learn to be financially free, hang around other people who have done it, or are on track to do so. If there are people in your life who are always complaining, not taking action, or in a state of helplessness, you might soon find yourself on the same boat.

In conclusion, Rich Dad Poor Dad has been a hit among millions of readers who seek to achieve financial independence, grow their wealth, and break free from the status quo. Although there has been controversy amongst critics who question the existence of Robert’s Rich Dad, the way that he has made his fortune, etc. There is no denying that it is a thought provoking and mind-set shifting book. I highly encourage people to take a day or two to read this book so that you can find out for yourself.

Good Luck!

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Book Review 001: Never Split the Difference - Chris Voss

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Never split the difference, negotiating as if your life depends on it is a book by Chris Voss, former international hostage negotiator for the FBI. This book is written with key concepts and ideas with multiple stories to support the claims. It provides readers with a field-tested approach to high stakes negotiation that we can all use and leverage whether we are at home, at work, or working on our real estate business.

Key Ideas:

1) Be an active listener
In the beginning of the book, Chris discusses how the way we perceive negotiation may be different from fact. Although we may view negotiation as mathematical, it is one of the most emotional exercises we can go through. People have a innate need to be understood and accepted, as such we must learn to demonstrate empathy and show a sincere desire to understand the other person’s emotions and what they are going through. One mistake a lot of people make is talking too fast. If it appears that you are in a rush, people might feel as if they are not being heard and you may end up losing the trust and rapport that was built. Chris talks about three types of tone and voice that may be heard in negotiations:

- Late night DJ voice: By using the right tone and voice, you can create an aura of authority and trustworthiness without triggering defensiveness from the counterparty.
- The positive/playful voice: By using the voice of an easygoing, good-natured person you are conveying to the other party that you are positive and encouraging (“let's figure this out together”)
- The direct or assertive voice: This voice should rarely be used as it will trigger the other party's defenses.

2) Mirroring

Chris discusses an effective way to make the other party reveal secrets by using the skill of “mirroring”. Mirroring is simply revealing the last (or critical) 3 words said by the other person. It's in our human nature to fear what's different and draw closer to what we view as similar. As we insinuate similarity through mirroring, it helps facilitate bonding with the other party and also may lead to the other person revealing their strategy.

Being a good negotiator means asking probing questions to uncover more information to leverage in making the deal. It is not a process of battling or a give and take, but more a process of discovery and getting people to feel safe and secure to talk about what they really want.

3) Labeling
Labeling is a way of validating someone’s emotion by acknowledging it. Give someone’s emotion a name and you show you identify with how that person feels. It gets you close to someone without asking about external factors you know nothing about.

The first step is to sense the other party’s emotional state and understand where they may be coming from by using words such as “it seems like, it sounds like, it looks like….” Typically, the other person will give a longer answer than a simple yes or no. If they push back and don’t agree with the label, you have room to take a step back and say, “sorry, it just appeared that way” and relabel the situation. Finally, use the power of silence to listen quietly and hear the other person speak and present their emotions, as emotions will guide their behavior.

The power of labeling is that it allows the user to diffuse any negative emotions and help reinforce positive emotions. The best way to establish a working relationship is to acknowledge the negative and diffuse the situation. Remember that when you are dealing with people and their emotions, they want to be appreciated and understood, so use labels to create a bond and build rapport.

4) The 7-38-55 Percent Rule
The 7-38-55 rule created by Albert Mehrabian, states that only 7% of a message is based on words that are said, 38% based on the tone of your voice and 55% relates to our body language and facial expressions. This means we need to monitor people’s tone and body language to ensure that it agrees with the words that are being said. When you detect a mismatch, use labels to discover why there is disagreement and show the other party you are actively listening and empathizing with them.

Dubbed the “Pinocchio effect”, Harvard Business School professor Deepak Malhotra and his coauthors found that liars, on average, use more complex sentences and third-person pronouns such as them, he, she, they, than truth tellers. They are attempting to create distance between the lie and themselves and it is a good indicator when looking for clues of a mismatch between your observation of the speaker and the words that they are saying.

5) Bargaining using the the Ackerman Model
Chris discusses the use of the Ackerman model to execute a six-step offer counteroffer with the seller as show below:

  1. Set your target price (i.e. $100, with a listing price of $150)

  2. Set your first offer at 65% of your target price ($65)

  3. Calculate three raises of decreasing increments to 85, 95, and 100% ($85, $95, $100)

  4. Use lots of empathy before sharing your offer

  5. When presenting the final amount, use precise, non-round numbers like $65.80 or $85.67. It will feel more permanent to the seller and appearance that you have carefully thought of the offer.

  6. With your final number, add in a non-monetary item that the seller may not want, to show you’re at your limit.

Using this six-step process will give you opportunities to stand your ground and not be lured by the first counter-offer being made. Further it will give you opportunities to take deeper discounts when provided and use the aforementioned steps of actively listening, mirroring, and labeling to allow the seller to reveal their thoughts and strategy.

I highly recommend anyone looking to enhance their negotiation skills to pick up a copy of this book and start applying it in their daily lives whether it be a traffic ticket, upgrades at a hotel, or negotiating your salary, Never Split the Difference will give you tangible skills to apply and get more of what you want.

Good Luck!

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