“You Have to Take Charge of Your Financial Life”
One of David’s biggest pieces of financial advice may really surprise you. He wants you to throw your budget away. It sounds crazy, I know! But it makes sense. Here’s what he told me:
“What most people hope through budgeting is that somehow they’re gonna have a little money left at the end of the day to save — completely wrong philosophy.” – David Bach
This is key. You can’t expect to save whatever money you have left over at the end of the day and have enough money for the lifestyle you hope for!
But what should we do instead? If we don’t start off by paying our bills and our taxes, how should we plan to spend our money each payday?
“Number 1 thing: Make a decision today to become financially selfish, and here’s what I mean by that. Decide today to pay yourself. The formula to pay yourself first is 1 hour a day of your income. … your first-hour-of-your-day income , especially in your 20’s, you’d have financial security by the time you reach retirement.” – David Bach
Pay yourself first. What that means is, before you even start figuring out how you’re gonna pay your bills this week, set aside one hour’s worth of your daily income. Make $10 dollars an hour? Set aside $10 a day. $15 an hour? Save $15 a day. $100 an hour? Same deal. Just one hour’s worth of your income per day is enough to make the difference, because you’re gonna start putting that money to work.
Now, David wants to make this very clear: it’s about creating systems for your money, not about budgeting. These systems require discipline, just like budgets — you have to be responsible and, as David says, “track where your money is going.” But the real key is that you also have to find ways to make sure your money is growing. That’s how you save up enough money to achieve your dreams.
In David Bach’s new book, The Latte Factor, one character says, “You have to take charge of your financial life.” By paying yourself first, you can truly make your money work for you.
So how exactly can we do that? I’m glad you asked…
“Invest Where You Spend Money”: How to Make Your Money Multiply
David told me an interesting story from his childhood that really serves as the basis for his financial philosophy. He told me about his grandmother, and how one day when he was little she took him to McDonald’s.
“You can get rich at McDonalds,” she told David. She explained to him that there are people who go to McDonalds to buy food, and they’re called spenders. But then there are the owners… the people who actually own the company. Then, when David was 7 years old, she bought him his very first stock in McDonalds. Two years later, when David was 9, she helped him buy his second stock, in Disneyland.
Investing money in stock doesn’t have to be difficult. I asked David for the best piece of money advice he’s ever heard from someone else, and he had an interesting phrase he’d heard from a top business leader:
“‘Benign neglect’ … And I said, ‘What do you mean?’ And he said, ‘Buy quality investments, and leave them alone. I can’t tell you how many things I’ve sold in my lifetime that went higher.” – David Bach
It doesn’t matter so much where you invest. What’s important is that you buy that stock and just let it sit. The longer you hold on to it, the more money you’ll make. It’s as simple as that.
And if you’re intimidated by the actual process of investing, don’t be! You don’t have to call somebody on Wall Street and spend a lot of money paying someone to help you invest your money anymore. Today, there are plenty of apps that can help you invest in the companies you care about and track how those investments are doing.
Now, the point of all this is not that you should buy stock in McDonalds and Disneyland. In fact, today, David’s kids own stock in Shake Shack, instead. The key is that they invest their money in what they care about.
“So, I always say, like, if you don’t want to give something up like that $5 at Starbucks over your coffee then buy the company stock. Invest where you spend money.” – David Bach
Invest where you spend money. Invest in things you care about! If you care about a company, chances are, other people care about it too! That means the company will grow, and over time your investment will grow too.
The Latte Factor: It Doesn’t Take Much
You may be wondering, though, how much money you need to invest. This is where “the latte factor” comes in. In his book The Latte Factor, David Bach uses the example of a simple latte. Say that the latte you like to get at your favorite coffee shop every day costs about $5. Now, you could continue to spend that $5 dollars a day on lattes. Or, you could invest that money in the coffee shop.
And it doesn’t take much. Just $5 dollars a day — just the cost of a latte — can make a huge difference over time. That’s why you don’t have to be rich to live right — just by investing small amounts, you can really grow your personal wealth.
“We put out a little meme yesterday saying that, ‘You say you don’t have enough money to go on a trip, but if you just made your lunch at home for the next 90 days you’ have enough money.’” – David Bach
And this is where David’s point about paying yourself comes back into play. Remember that great tip he had? “The formula to pay yourself first is 1 hour a day of your income.” Say you’re making $15 an hour, and you’re following David’s advice by setting aside $15 a day to work for you. David says that if you invest that money at a 10% rate of return, in just 10 years, you’ll have $92,000. In 30 years, that’ll be up to $1,017,000, and in 40 years it’ll be $2.8 million.
That’s a lot of money.
Maybe you’re like David’s kids, and you really love Shake Shack. David’s advice would be to buy yourself some stock in Shake Shack and hold onto it for two or three decades or more. That way, your investment will have plenty of time to grow into thousands or even millions of dollars.
Listen to the Little Boy (or Girl!)
David told me one other story about his grandmother that I think is really inspirational here. He told me about how his grandmother shared one more really important lesson with him before she passed away, and it’s absolute gold:
“She said, ‘… I came to a fork in the road and there was one road which had more risk which is where the gold was at the end of the road. It was what I really wanted to do.’ And then there’s a safe route and she said ‘Every regret [I have was when] I took the safe route.’” – David Bach
Take big risks. I know the idea of throwing out your budget sounds scary, but taking a risk and choosing to pay yourself first can have a huge payoff, literally. And don’t be afraid to invest your money in something you’re passionate about!
Now, that’s not to say you should be financially irresponsible. David had another great piece of wisdom that had been passed down to him about how we should think about investing:
“‘If you invest for yourself the way you invest for your clients [as a financial advisor] you will be extraordinarily wealthy.’” – David Bach
So don’t throw all of your money into a random investment and forget all about it. Invest small amounts of your money. Invest it intentionally in companies you care about. Keep track of where
your money is going and how much it’s growing. If you follow those rules, you’ll set yourself up to live rich and finish rich.
David continued on with his story, and shared more wisdom from his grandmother:
“‘Like you’re gonna get into this fork[ed] road, and there’s gonna be a little boy inside you [that] wants to take this risk. And then there’s a big boy inside of you that doesn’t. Listen to the little boy and let him come out and play so that you don’t turn around at 86 and wonder what you should have done with your life.’” – David Bach
Listen to that little boy (or girl!) inside you. Take risks, and make the life you’ve dreamed for yourself a reality!
Why You Should Listen Right Now
Let’s be honest — we all want financial freedom in our lives. We all want to stop worrying about making rent payments, paying off our student loans, and keeping track of tight budgets. And we all want to be able to live the rich, comfortable lifestyles we dream about.
Those dreams really can become real, and America’s most trusted financial advisor can teach us how to get there.
As usual, I asked David for his definition of greatness. Here’s his answer:
“So, I think greatness is listening to your soul, not your head, whatever it is. … It’s very hard to hear your soul and hear a higher power if you’re worried about money and how you pay the bills. … I think greatness is listening to your soul consciously as much as you can throughout your life and make space for that.” – David Bach
Those are some inspiring words. It’s so important to pay attention to the dreams and aspirations we have in our souls. After that, all we have to do is follow David’s advice for being wise with our money.
You, too, can learn how to live rich and pursue the dreams in your soul. If you’re ready to learn the rest of David’s tips and tricks to do that, check out Episode 791. You won’t regret it.
To Greatness,
