5 Money Rules That Will Change Your Life & Create Financial Freedom

KEYPOINTS

• 01

  Either you have a plan for your money or someone else does

  David Bach, author of The Automatic Millionaire, has spent 30 years teaching personal finance. He says seven in 10 Americans live paycheck to paycheck: picture seven of every ten houses on a street. The 'automatic economy' of subscriptions and autopay either makes you rich or keeps you poor, and whether yours works for you or against you is up to you.

• 02

  Making more money won't make you rich unless you keep some

  He calls this the biggest money myth. His core rule is to pay yourself first, automatically, with the first hour of every workday's income. That's about 12.5% of gross pay, sent to a pre-tax retirement account (a 401(k) or IRA) before you ever see it. Because the money skips income tax, it costs you closer to 75 cents per dollar saved.

• 03

  There's evidence that ordinary people get there

  Bach cites Fidelity data showing about 565,000 people are 401(k) millionaires, averaging $1.4 million. On average they took 26 years, are 59 years old, and saved about 14% of gross income (roughly an hour and 10 minutes a day) plus employer matches. 'You don't get rich in days. You get rich in decades.' He notes about $44 trillion now sits in US retirement accounts.

• 04

  Rip the band-aid off, or climb 1% at a time

  Ideally you jump straight to 12–14%. He says you notice it the first month, less the second, and not at all by the third. If that's impossible, raise your contribution by 1% at a time. Even monthly 1% steps get you to 12% within a year, about four times what he says the average American with a retirement account saves.

• 05

  No 401(k)? Automate a Roth IRA yourself

  Many workers lack automatic retirement plans, so you have to set one up. Pick a firm (he lists Fidelity, Schwab, Vanguard and others), open a Roth IRA, which he says has a $7,500 limit this year and grows and comes out tax-free, and have $50–$200 pulled automatically on each payday. Keep everything at one firm to make it easy.

• 06

  Build three automated buckets

  Retirement is the first bucket, at 12–14%. Second, a 'security' account for emergencies, held in a liquid money market fund paying about 4% at the time of recording. Third, a 'dream account' for things like a trip to Mexico. 'The way dreams come true is you fund for them.'

• 07

  Keep investing boring

  Most 401(k)s default to a target-date fund, a professionally managed mix of stocks and bonds that rebalances toward your retirement year. Outside that, he favors broad index funds such as Vanguard's Total Stock Market ETF (VTI), which owns about 3,500–3,600 companies, making you 'an owner of America.' He calls real estate and stocks the two 'escalators to wealth.'

• 08

  'Take risks while you're young' is a myth

  Young people hear that advice on social media and pour money into meme stocks, meme coins and NFTs. They lose it all, save again, lose again, and by their early 30s decide 'this game's rigged' and stop investing. If they'd bought an index fund, he says, they'd have something to show for it.

• 09

  Never cash out a 401(k) when you change jobs

  People cash out small balances, say $10,000, for a trip, and lose much of it to taxes and penalties. He says that $10,000 alone could be worth $50,000–$100,000 in 40 years. Do a rollover into your new plan or an IRA instead.