Financial guru David Bach talks straight
on money, marriage, mortgages, and more

By Elisabeth Boone, CPCU

David Bach is an internationally known personal financial expert, educator, author and speaker. His most recent bestseller is "The Automatic Millionaire."

When it comes to money--and doesn't it always?--many of us simply see red: credit card debt, car payments, college tuition, and those unexpected outlays that seem to come up just as we've managed to set something aside for a rainy day. For too many Americans, living paycheck to paycheck isn't a distant threat but a grim reality--and it's not so much about how much we make as how we use it.

Just as there are no miracle diets, there's no way to become an instant millionaire. But anyone can follow a simple path to building wealth. That's at the heart of the commonsense wisdom of David Bach, internationally known personal financial expert, educator, author, and speaker. The best-selling author of The Automatic Millionaire, Smart Women Finish Rich, and Smart Couples Finish Rich, Bach has appeared on top-rated network and cable television programs like Oprah, The O'Reilly Factor, Today, and American Morning.

Before founding his financial education company, FinishRich Inc., Bach was a senior vice president and financial adviser at Morgan Stanley and a partner in The Bach Group, which managed over $500 million for individual investors.

The Latté FactorTM

At age 37, Bach is a millionaire several times over, but he still researches the most economical home telephone service. Small change adds up to big money, he asserts; just consider The Latté Factor. Simply put, this means the cash we lay out each day without even thinking about it: a latté and danish on the way to work, a midmorning snack from the vending machine, or a paperback we pick up for the train ride home.

"When I was on Oprah in January, we did The Latté Factor," Bach says. "We spoke with a woman who had spent $1,100 on her Latté Factor that month. That included everything from lattés to getting her nails done and having massages to having a wine and cheese party. This was a woman in her mid 30s who was making a lot of money and living an extraordinarily great life but had nothing to show for it; she had less than $10,000 in savings," he says. "We said, 'If you cut a couple of things out you'll save a little bit of money, and you don't have to change your whole lifestyle. Over time you can have more than $280,000 in savings.' Then Oprah rolled out a cart with over $280,000 in cash. This was an amazing visual," Bach says. "When you see $280,000 in cash on a table, it really opens your eyes. That message of finding your Latté Factor, whatever that may be, is changing a lot of people's lives."

What's more, he notes, "The wealthier you are, the easier it is to have a large Latté Factor. If you're making hundreds of thousands of dollars a year, your Latté Factor can be a second or third home that you don't use, or a second or third country club membership, or thinking you always have to travel first class. I always tell people, 'When you go out to work, you're trading a portion of your life for your income, and that income can be used to buy your freedom or to lease your lifestyle.' Many people who are high income earners are determined to make money because they really want to be free.

"What so often happens to people is that as their income level goes up, their lifestyle goes up dramatically, and they find themselves on a treadmill where no matter how hard they work, they don't actually see themselves getting ahead. The way people get in that position is that they don't take any chips off the table to buy their freedom."

The credit card trap

Millions of Americans literally are "leasing their lifestyle" because they're awash in credit card debt. Every day, people are bombarded with "fantastic" offers promising unbelievably low interest rates and ridiculously low terms. Few people bother to read the fine print; if they did, they'd realize that the bad news is always in small type. Short of cutting up every piece of plastic you own, how can you get credit to work for you instead of against you?

The first rule of managing credit card debt, Bach says, is "You can't pay the minimum, because now it's down close to 1%." Second, "You have to find out what your interest rate is. Check your credit card rate, then go to to see a listing of all the available credit card rates," Bach advises. "Then use one of those offerings to negotiate with your current credit card company.... Your goal should be to get your interest rate below 6%."

What's your score?

Back in school days, there probably were times when you were afraid to look at your report card because you dreaded seeing a big red F. As adults, a lot of us experience the same high anxiety when we think about what we might see on our credit report. If there is something wrong, we'd rather not know about it--and that, Bach asserts, is a big mistake. As with The Latté Factor, he says, awareness is the key to making positive changes.

"The key to fixing your credit report is knowing what your credit report says, and the way to do that is to pull your FICO score. Go to and get the all-inclusive report that shows all three of your credit scores," Bach advises. "That's a great start, because your credit score determines about 90% of the time what rate you can get when you apply for a loan. Also, the report tells you why your credit score is what it is, and you can circle a problem and work on it."

The best investment

For most Americans, the most important investment they'll ever make is in their home, Bach observes. "If you're renting, you have to get out of the rent trap and buy something," he declares, "and that home you buy ultimately will turn out to be the best investment you ever made. If you talk to your parents or grandparents, in almost every case you'll find out that's what happened to them. You may not be able to buy your dream home right off the bat, but you need to buy something," he says.

"The next question is: How do you finance your home?" The choice you make, Bach says, "really depends on your level of financial sophistication. Some people still go with a 30-year mortgage. I don't think there's anything wrong with a 30-year mortgage, but I do think paying for your home over 30 years is silly," he comments. "If you take 30 years to pay for a $250,000 home, you'll spend over $400,000 in interest."

What's the solution? "What I suggest to people who have a 30-year mortgage is to make bi-weekly payments," Bach replies. "You split your monthly mortgage payment in half and pay half every two weeks. A biweekly mortgage shaves your 30-year mortgage down to between 25 and 22 years," Bach explains. "On a $250,000 mortgage, you'd save about $119,000 in interest payments. In my experience as a financial adviser over decades, people who pay off their homes early retire five to ten years sooner."

Stop fighting over money

You can have the best relationship in the world--but when it comes to money, you and your partner may find yourselves at sword's point an alarming amount of the time. Why do couples fight over money, and how can they stop?

"The first thing to understand is that you probably married your financial opposite," Bach says. "In money as in life, opposites attract, and usually someone who was born to budget will fall in love with someone who was born to spend. So if you're fighting with your significant other about money, the chances are you're normal. But that can lead to a lot of stress. In most relationships," he explains, "one person takes over the role of CFO in the household: opening the mail, paying the bills, balancing the checkbook. The problem with that system is that the other person is very uninvolved with where the cash flow is going--and that leads to a lot of the fights. I think it's critical that if one person has that role of CFO, the couple needs to sit down together once a month and have a financial meeting to review where the money has gone this month. Even if it's just for 15 minutes or half an hour, sitting down and looking at what you've spent this month can really help a lot," Bach asserts.

"My grandmother told me that three kinds of people go to McDonald's: those who go to eat, those who work there for minimum wage, and those who own the place. She said to me, at the age of seven, 'If you want to be rich, you want to be an owner.' "

"The key is to manage your money as a team," Bach says. "You talk about your goals as a couple when it comes to money; you talk about your values. I think values are critical. In my belief system, that's the core of everything within the family. What are your values? What are you trying to accomplish as a family? And then make financial decisions that will help support your values."

Teach your children

Back in the days when Dad worked and Mom kept house, your allowance was a quarter a week, and your biggest decision was whether to spend it on one 10-cent comic and three 5-cent candy bars, two comics and one candy bar, or even five candy bars. The United States is now well into its second generation of two-income families, and that has dramatically changed the kid-money equation. Many parents, feeling guilty about their long hours at work, try to make it up to their kids by lavishing gifts on them and handing out cash whenever they ask for it.

Not surprisingly, in David Bach's view, this approach is dead wrong. "I used to go through this whole dissertation about how important it is to teach your kids about money, and when I did the Oprah show I learned something," Bach comments. "We had a couple in their early 30s actually cut up their credit cards on camera. They were about $28,000 in debt.

When they got home, their four-year-old daughter grabbed onto her mother and said, 'Mommy, what are we going to do? How are we going to eat?' That was an 'aha' moment for me," Bach says. "We are teaching our kids about money, and they learn by example. The parents of this four-year-old didn't have to sit down and explain to her how money works; she knew how money works. She knew, at age four, that those credit cards were really important. After that show, I realized that what we teach our kids about money can really affect their future," Bach remarks. "So I think the question becomes: Are you teaching your children the lessons of life financially, based on your actions, that you really want them to learn?"

What's more, he says, "I think you should proactively teach your kids about money. My grandmother helped me buy my first stock at age seven, in McDonald's, and that profoundly changed my life. My grandmother told me that three kinds of people go to McDonald's: those who go to eat, those who work there for minimum wage, and those who own the place. She said to me, at the age of seven, 'If you want to be rich, you want to be an owner.' She taught me how to become an owner in America's greatest companies, and that changed my life," Bach remarks.

Finding a financial adviser

When it comes to choosing a financial adviser, many of us do it the apparently easy way: We get a business card from someone we meet at a cocktail party, or we sign on with our brother-in-law because he's just starting out, or we send in the reply card from a direct mail invitation. If we profit from entering into such a relationship, that's great--but it's mostly a matter of luck and not a carefully researched choice. How do you find the financial adviser who's right for you?

"That's the number one question I get every single day," Bach responds. "It can be very hard to find a good financial adviser. I think the best way to find one is the best way to find anybody who's really good--a CPA, an attorney, an insurance professional--and that's through a referral. If you get a referral from somebody you know, trust, and respect, who appears to be doing well financially, you need to ask more than just: 'Do you like your financial adviser? Is he or she good?'" Bach advises. "Ask your friend, 'How long have you dealt with this person?' One year is not a benchmark. Ask, 'What have your results been over 10 years?' If your friend says, 'I've averaged over 10% a year for 10 years; he's helped me double my money,' this adviser may be someone you want to talk to."

The next question to ask your friend, Bach says, is: "Does your adviser have a financial plan for you?" Perhaps the adviser has made your friend a millionaire--"but without a plan, how does he know what's happening to his money and how it will work for him when he retires?" Bach asks. "Ask your friend, 'What kind of plan did your adviser give you?" Would you mind showing me the plan?'"

"I think it's important to hire someone who's been in the business for at least five years and has at least $50 million under management. If an adviser doesn't have at least $50 million under management, he or she doesn't really have a successful business. You can't make a very good living on less than $50 million.

"What I don't want is someone who, when you tell them what you want, immediately becomes a specialist in that area. You need to ask questions before the adviser tells you about himself," Bach asserts. What's more, he adds, "You should interview more than one financial adviser; five is a good number. After you interview them, you should compare them side-by-side. When you do that, you should be able to make a better decision."

Once you've hired a financial adviser, Bach says, "The relationship is critical. The adviser should be checking in with you regularly. I meet so many people who have financial advisers and they say, 'My adviser hasn't called me in a year.' You shouldn't work with that person; that person is not really looking out for you." A good adviser, Bach explains, doesn't just manage your money. He or she communicates with you about your life, your dreams, your values, your family, and your fears as well as your investments, suggests changes when market conditions shift, and makes it clear he or she values you as a client.

Market moves

To wrap up, Bach offers his take on where the stock market, and the economy overall, are headed this year. "Like a lot of people, I believe we'll have an up year in the market, and the Dow will end at over 11,000," he says. "We'll see double-digit returns again this year, and we'll see interest rates move toward the end of this year, close to or after the election. We'll definitely see rates spike next year. From a bond standpoint, I certainly wouldn't be buying long-term or even intermediate-term bonds right now; I believe investors need to have their fixed income portfolios in very short-duration instruments--everything from quality, A rated corporate debt to triple A rated municipals to government bonds. I wouldn't go out more than five years right now. I think the NASDAQ and the technology stocks are becoming very overheated, and that we're seeing almost a repeat, in many ways, of what we saw in the late 1990s with the dot com bubble," Bach observes.

"I think the opportunities in the market right now are in the high-quality, value stocks that pay dividends--and that frankly have been shunned in the last 24 months. The Value Index in the stock market has gone up the least of any index. I think now is the time to be looking at value versus growth," Bach continues. "It's certainly not the time to be looking at gold, which is what many people are buying. The money magazines put gold funds on the cover, and people think they should buy gold. Gold historically has under-performed short-term Treasuries."

How can individual investors weather stock market fluctuations? "I've always been a big believer that the way you get through good markets, bad markets, and average markets is to have a balanced portfolio that has 30% to 50% guaranteed return, fixed income securities, and 50% in a well-diversified equity portfolio," Bach says. "It sounds boring, but it works. You have growth and you have value. It's never been easier to build a portfolio than it is today, because the exchange-traded mutual fund market has really made it easy for people to build well-diversified, low-cost portfolios," he observes. "I believe most people should be looking at building a portfolio using either managed money mutual funds or index funds, versus trying to pick individual stocks."

When it comes to the overall economy, Bach says, "The problem we have right now is jobs. For some reason, economists seem to be missing what's going on in the job market. I believe we'll see a million to 2 million jobs created this year," he asserts. "The recent numbers don't look like we're on track for that. There's not a lot of clarity about what's going on in the economy right now from a jobs standpoint, and that can really hurt us as we go into the election. It could at least slow down the stock market. What I see here on the ground in New York City--and I think New York City is a pretty amazing barometer--is that people are hiring again," Bach says. "Business is up, the cab drivers and limousine companies are busy, the restaurants are packed, the bonuses are back, and there's money again. There's money in New York City, and usually when there's money in New York City, that means there's going to be money on Main Street."

Whether you're on Main Street or Wall Street, David Bach's message is clear: Know where your money is going, set and pursue goals as a team, and be aware that every financial choice you make sets you on the path either to lease your lifestyle or buy your freedom. *

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