‘Start Late, Finish Rich’ by David Bach – the perfect book for this blog!
This is the title of the latest personal finance book I’ve read, or to give it its full name, ‘Start Late, Finish Rich – A No-Fail Plan for Achieving Financial Freedom At Any Age’. Never can a book be more apt for this blog!
It was written in 2005 by David Bach, a US financial advisor-turned author, and is the 7th in his ‘Finish Rich’ series of books.
How can I not love a book specifically aimed at those of us in our thirties, forties, fifties or older, that gives the message of hope that it’s never too late to sort out our finances? One of the first chapters deals with ‘giving yourself a break’ which is great advice – after all, the one thing we can’t do is turn back time so our younger selves can start being more financially savvy. We must let go of whatever has happened in the past, and take action based on our current situation – the most important message being do it now!
So what exactly does David recommend we do?
We must cut back spending on small everyday items that cumulatively build up into larger sums – he calls this the ‘Latte Factor’. For those of us who are older, we have to redouble our efforts and also tackle our larger fixed expenses, eliminating all those that are non-essential – the ‘Double Latte Factor’.
Pay off our credit card debt – consolidate if possible into one 0% interest card, overpay the minimum by at least $10 a day – but crucially, do NOT wait until the debt is paid off before starting saving. He says this is the single biggest mistake that people make, and that we must split our payments 50/50 between paying off our debt, and saving. He gives figures to show that the benefits of compound interest mean we ultimately end up richer doing this, and says there are also psychological benefits related to feeling you are making progress that make this worthwhile.
Save into a pre-tax retirement account. This is a US book referencing US financial products, but essentially he’s recommending we save into a pension where contributions are deducted automatically from gross pay, ideally taking advantage of employee matching in workplace schemes. He says that for those of us starting later, if we try and save from our net pay, once the government has already taken a chunk of our salary in tax, we’re probably doomed to fail.
I’m already saving into a pension, and was planning to start saving into a stocks ISA too. However, I’m now re-assessing whether the tax relief on pension contributions means I would be better off making larger pension contributions instead and knocking the stocks ISA on the head.
Save 12.5% – 25%! How much?! Yes, into this pension, we should be aiming to save a minimum of 12.5% of gross income, ideally 25% if we are starting in our 40s or 50s and want to stop working in our mid-60s. A quarter of our pay! This is a lot, obviously, however he believes it is achievable if we decide to go for it. He recommends we build up to this, perhaps starting at 6% and increasing to 12% after 6 months, then again to 18% after another 6 months, until we reach 25%. Or try increasing by 1% a month over the course of a couple of years.
1/3 property / equities / bonds. He believes our assets should be split 1/3 in property, 1/3 in equities and 1/3 in bonds. If we are homeowners we should include any equity in our property in this calculation, so if this already amounts to 1/3 we should invest the rest in equities / bonds. Simple!
Diversified index funds. With our equity / bond investments, we should choose a mix of equity / bond index funds via our pension that track the whole market. He gives a specific example of splitting money between 4 US equity index funds, and 4 US bond index funds, but for those of us in the UK we could obviously alter this to suit our preferences, possibly including UK or world index funds. Alternatively, pick one balanced fund that includes a mix of equity / bond funds to achieve a similar diversification.
His calculations throughout the book are based on achieving annualised returns of 10% through these investments, which seems high to me, though he does give examples of funds that have achieved this. However, I’m reminded the book does not seem to have been updated since 2005, so I’d need to check returns on funds I’m considering to see whether this is still realistic.
Buy your own home. He says this is essential if we want to get rich. He discusses high loan-to-value mortgages, fixed long term, and gives examples of the size of mortgage we could obtain at differing interest rates if our rent payments were mortgage payments. He quotes a US Federal Housing Administration rule of thumb saying most of us can afford to pay 29% of our gross income on housing expenses, rising to 41% if we have no debt. I’m not going to open the can of worms that is getting a foot on the UK housing ladder, but suffice to say that he believes this is a key area of focus for future wealth.
Increase your income, and save the extra. This is the final piece in the puzzle, once we’re spending less and saving more. He spends several chapters describing how it’s possible to do this, for example he gives a 4-week plan for how to ask for a raise, and describes some ways of setting up a business on the side. We’ll need to commit 1-2 hours a day, but could consider selling on eBay, direct selling, franchising, or investing in property.
I’d recommend the book!
It’s out of date, and US-focused, but I found it useful and think the broad concepts are relevant. He makes it clear that if we’re older we need to work harder, but equally I found the book motivational. His savings target of 25% of gross income is very ambitious, but he acknowledges that we can work towards this in baby steps. I like the simplicity of his investing plan and I feel more inspired to make a decision about which funds to use for my stocks ISA. I’m also going to check what my pension is invested in. I’ve come away from the book with a short list of things I’m going to do, which surely must be the ultimate goal of a book about sorting our finances.