Is it possible to start late and finish rich? One Fool assesses whether an American's intriguing theory can be made into a reality.
Any individual who claims to have 'helped millions of people get their financial lives together' should be treated with a pinch of salt, but that's precisely what David Bach, the author of Smart Women Finish Rich and The Automatic Millionaire, claims in his personal finance book Start Late, Finish Rich.
Unfortunately, starting late and finishing rich is a wild dream for most people, so the premise of his book is unrealistic. However, his book isn't all bad. Here are a few examples in regular 'Foolese'.
Reducing debt vs. increasing savings
Bach claims that most financial experts say: 'Pay off your credit-card debts before saving,' and he criticises this advice. He's being unfair to other experts though, who mean that it's sensible to pay off expensive debts like credit cards before saving money for the short-to-medium term, e.g. in a savings account. However, most experts will agree that it's important to build up a retirement savings pot of some kind from early on, even if you have debts.
Despite bigging himself up at the expense of his fellow commentators, Bach's advice is reasonable. He suggests paying half your spare income into a retirement pot and half into paying off your debts, starting with the most expensive.
Credit cards
Bach mentions some good stuff about credit cards. Paying the minimum payment each month will leave you indebted for a very long time and it'll cost you a fortune as the interest rolls up, so you should pay off as much as you can. He also insists that you switch to cheaper credit-card debt. He's writing mostly for the American audience, so his methodology doesn't work so well here, but you can and should do the same by switching credit cards.
To put it in perspective, if you have a debt of £5,000 on a typical credit card that charges 14.9% interest, and you pay off £135 per month, it'll take you four years to clear and cost you £6,480. However, you could switch to a typical 0% balance transfer card which has an introductory period of 9 months. (These days you normally pay 2% for the balance transfer fee.) Then you could switch to a fixed-rate card charging 6% till the debt is fully repaid. If you pay £135 per month, you'd pay off your debt about six months earlier, at a total cost of about £5,450 - a massive £1,000 less than you'd pay the other way.
Short-to-medium term savings
What surprises me is that Bach doesn't devote a chapter to short-to-medium-term savings. It's possible he felt it didn't fit in with the theme of getting rich quickly and late in life, but since that's virtually unachievable for 98% of us, which he fails to mention, he should have included something on this anyway. Most people lose money on their savings every year as rising prices (inflation) makes the value of their savings worth less and less.
The problem is that most people have terrible savings accounts, paying miserly rates of interest. But there are many accounts that pay over and above the rate of inflation, as you can see in our savings account comparison centre.
Saving for retirement
Bach talks some more about saving for retirement. He says a couple each saving $10 every day for 20 years will have a pot of $461,947 at the end, assuming a 10% return - which is a fair to generous assumption.
Converting to English money, that's £5.36 per day each, which makes about £240,000 over 20 years, assuming 10% returns again. If you're a basic-rate taxpayer and you're investing in a pension, you get tax relief of 22%, which means your pot will be a little over £300,000.
Bach makes this growth sound incredible. He's partly right: it is incredible that investing less than £4,000 a year for just 20 years can turn into £300,000. But this doesn't make you rich. If you were to cash in a £300,000 pension today you'd get about £15,000 per year, which is not much for two people to live on. Even worse, he's talking about getting this money in 20 years time, when £300,000 will be worth far less due to rising prices. To put it in perspective, today an individual needs about £400,000 to be comfortable if she's retiring at 65, but in 20 or so years, she'll need about £1 million to live just as well, as I explained in We Need £1m To Retire Comfortably.
Finishing rich isn't easy, as Bach wants you to think. Still, his book isn't all about tips, as many people will find his book inspiring. I think he might well be the Mr. Motivator of personal finance. So, if you could do with some words of encouragement, this might be the book for you.
> Compare credit cards and compare savings accounts at the Fool.