August 22, 2004
Not Big On Bach
Of course you've seen him. Everyone has seen him. Financial author David Bach is everywhere.
Oh, sure, once you make friends with Oprah Winfrey, blazing stardom and nuclear-powered publicity is just about guaranteed. Mid-afternoon television programming bears witness; that's what happened for Philip "Dr. Phil" McGraw, and that's what is happening for David Bach, bestselling financial author and slick-image money guru. His newest book, The Automatic Millionaire, looks suspiciously like his 2001 book, Smart Couples Finish Rich, which looked suspiciously like his even more previous book Smart Women Finish Rich. (Note: I have read only Smart Couples, and am having a hard time convincing myself that the $20 I'd fork over for an audio download of Automatic Millionaire wouldn't be better spent on, oh, I don't know — maybe a basketfull of those travel-sized boxes of toothpaste or something.)
We've all seen this sort of schtick before, and I'd wager dollars to donuts that all Bach's books say mostly the same thing. The raging cynic in me says that while Bach is probably a very good financial advisor on the individual level, his mass-media work has him now doing little more than (1) telling people what they want to hear, (2) rehashing the same fuzzy ideas again and again, and (3) raking in vast truckloads of cash for himself and his company, FinishRich, Inc..
I see financial websites like Bach's "FinishRich.com" and I cannot help but cringe. I see trademark notes like this at the front of a book . . .
Smart Women Finish Rich, Smart Couples Finish Rich, Purpose-Focused Financial Plan, Value Circle, FinishRich Inventory Planner, FinishRich File Folder System, The Couples' Latte Factor, The Smart Couples' Seven-Day Financial Challenge, and Pro/Active Income are trademarks of David Bach...
. . . and I cannot help but cringe. Putting your product out there with glossy presentation is one thing, and not necessarily a bad thing. But am I mistaken in thinking that there comes a point where all that gloss goes overboard? Does that site not reek of unrestrained self-promotion? It's Anthony-Robbins-esque. And it hints to me that, on the macro level, Bach is not really in the business of helping. He's in the business of selling.
For instance, I notice this slogan on his web page: "Got Seven Figure Dreams But Zero Willpower?" Pragmatists like myself see that and answer it easily: Then you're going to fail miserably. Bach, on the other hand, answers it by filling his arms with copies of his books and parading his myriad products as godsends in the infomercial manner. He slices and dices. He offers up his book-and-CD-set, grinning like the smarmy schooltime acquaintance of whom you were always justifiably suspicious. He wants to make money sound easy, wants to make getting rich sound easy, because that's what people crave hearing. Nobody, but nobody, wants tough sledding. So Bach pitches easy. "Becoming rich," he writes, "is nothing more than a matter of committing and sticking to a systematic savings and investment plan."
To such a statement, I heartily disagree. But people apparently rush to his work like it's The No Action Required Guaranteed Final Answer To All Money Problems.
I write this not because I want to bludgeon the guy for being uber-successful, creating a brand of sorts, and making a buck. Rather, I'd like to attempt to shine a little light on one of Bach's particular "hooks" (ideas devised to make it all sound so simple). In the Smart Couples book and courses, he calls this hook "The Latte Factor."
Here's the "Building a Million-Dollar Retirement Account" chart from Smart Couples Finish Rich. That gets at the root of Bach's "Latte Factor;" i.e., it basically says that all a fellow has to do to get stupid rich is to set aside the approximate cost of that latte he enjoys each day before work. Just do this until age 65, invest that saved money in the stock market, and let it grow to the heavens.
It isn't that there's zero value in this idea. Meager amounts do in fact add up to staggering sums over time. Most folks never bother to factor for that "over time" part; all they see is the daily small number — two, three, or five bucks, or whatever — and on that basis they chalk it up as a won't-be-missed pittance.
But the "Latte Factor" isn't the turbocharged rocket to riches that Bach makes it out to be, either. Let's examine that chart closer, beginning at the top:
"12% Annual Interest Rate"
On page 20 of my edition of Smart Couples, I read this:
"...With this sort of [investment] mix, it's reasonable to expect to earn an annual return on money of around 11 percent. (It's not guaranteed, but that's what these investments have averaged for the past 30 years or so.)"
Not guaranteed? Look, I've said this before, and I'm sure I'll say it again. I cannot see how using projected stock-market annual returns of 10 or 12 percent is even remotely realistic from this point. I've detailed some reasons in articles here and here, and maybe even a few other places. For now, though, I'll leave it at this: For purposes of financial planning, it's always best to use conservative projections. And 12 percent annual returns are NOT conservative in any era — especially when you're only a few years removed from the biggest stock market bubble of all time.
"This chart does not take into consideration the impact of taxes."
Well, maybe it should. Because the impact is considerable. But more on that in a moment.
The 30.4-Workday Month
Poke and prod Bach's chart with a calculator, and you find that he's basing the needed-savings-per-day on something like 30.4 days in a month. This is odd, because I know a lot of hardworking people, and not one of them works 30.4 days per month.
So, using the data from "Starting Age" of 30, let's adjust his numbers to a 21-workday month. Now the necessary "Daily Savings" amount goes from $6.35 to $9.19. Remember that these are pretax earnings converted immediately to savings; Bach suggests early and often that such earnings/savings be invested in some sort of tax-advantaged account (IRA, 401k, etc.). The reason for this? Take away any tax advantages, and now our Bachian saver must earn at least $12.19 (if she's in a 25 percent tax bracket) in order to have that $9.19 available after taxes. The discrepancies are clearer, perhaps, in this chart.
Now bring this into the real world. Enter our good friend Abner Mallity, a 29-year-old guy who earns $14 per hour. Abner works 8 hours per day, 5 days per week. Abner's pretax income is $112 per day, which puts him roughly at $560 per week and near $29k per year. Abner sees David Bach on CNN one morning and hears that if he can just save $6.35 per day, he can have at least a cool million bucks at age 65.
"Six thirty-five a day? That's easy!" Abner tells his bowl of Froot Loops. "Guy like me, making 29 grand a year — I could save that much just by not eating lunch at Denny's every day at work!" And so he heads for the phone, ready to call and request the paperwork to open a Roth IRA.
Maybe Abner could save that much. But that's not what he needs, and therein lies a trap: $6.35 is not to $112 what $9.19 is to $112, or what $9.19 is to $86.63 (Abner's daily take-home pay, after Federal, SSI, and Medicare taxes in a 2004, 15-percent bracket). Tell someone they only have to save $6.35 per day to accumulate vast riches, and they'll gaze at your presentation in glorious wonder — and probably buy your latest hardback bestseller and a planning workbook or two, to boot. But tell someone they need to sock away a bare-butt minimum of 8.2 percent of their pretax income, or 10.6 percent of their after-tax income (which, coincidentally, has been advised for centuries, and without any trademarks or catchy names), and what will they do?
They'll turn the channel.
And dangit, you can't sell them The Automatic Millionaire's PDA Planning Software and Glow-In-The-Dark Daily Savings Calendar if they turn the channel.
August 22, 2004
Play Great Defense