Thursday, December 18, 2008

The Automatic Millionaire summary

I mentioned that I was reading The Automatic Millionaire and that it was making me poorer. That was obviously tongue-in-cheek and generally I think that this is a good book. I learned nothing from this book because I already knew or was doing everything mentioned and more.

The one thing that I very much disagreed with the author (David Bach) on was the rainy day (emergency) fund that he recommended that people set-up. Personally I think that this is a bad thing if you own a house.

Your emergency fund has a multiple of your monthly spending to tide you over if you are unemployed or otherwise need emergency cash. This is sitting in a rolling CD or savings account earning 2%. It is also money that you will hopefully never need and so will most likely sit there for years. You are also being taxed on this 2%.

A much better option, in my opinion, is to put that money into your mortgage where it will save you 6% to 7% (tax free). Then setup a HELOC against your house that you never use except for that emergency. If you do the math, then you'll see that the cost of using an 8% to 9% is very cheap compared to the rainy-day fund because you will never or rarely use it and when you do you'll pay it down first instead of making extra payments to your mortgage.

1 comment:

Bill Brown said...

I too was not a fan of the book. I can tell you from recent experience that having a HELOC as an emergency backup is not a good idea. When the mortgage industry goes south (which, um, recently happened), they made the available amount equal to the balance. I would never have thought that would happen except that it did.

Instead of a CD, it should really be in a money market mutual fund that earns a better return.