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Interview With David Bach

Aired December 29, 2002 - 11:23   ET


FREDRICKA WHITFIELD, CNN ANCHOR: If getting on the path to riches is one of your new year's resolutions, we have got a plan for you, although it may cost you a little latte here and there a day. The "Finish Rich Workbook" has tips on financial success, and on January 1, you can even get parts of the book for free on AOL. And joining us live from New York is the author, David Bach. Good to see you.
DAVID BACH, AUTHOR, "FINISH RICH": Good morning. Great to be on your show.

WHITFIELD: All right. Well, of course we're all thinking about new year's resolutions, as we're just a couple of days away now from 2003, and always at the top of the list is getting your financial house in order. And you've got some rather creative ideas for us. And it means just kind of letting go of what our daily vices just might be to save a little money?

BACH: You got to give up a little to get up a little. And one of the things I've become very well known for all over the world has been my concept called "the latte factor." The latte factor is a simple idea that you don't have to be rich to become an investor. If you're wasting $5 a day on little things like a latte at Starbucks or a muffin, you can become very rich if you can cut back on that, and actually took that money and put it in a savings account at work, like a 401(k) plan or an IRA account.

WHITFIELD: In fact, we have a little visual aid to help folks follow along with exactly what you're talking about. If you're spending $4 or $5 a day on a latte or $3.50, then in a week it amounts to about $24.50 approximately. And then if you do that, do that math and cover the entire year of your workweeks, then we're talking about $1,260 and for a decade, $12,000 and some change on a cup of joe or a fancy cup of joe.

BACH: Now, that's interesting. When you look at this chart, this shows you how had you taken what is $3.50 a day and invested it for one year, five years, 10 years and 30 years, in 30 years you have a quarter of a million dollars in savings. That's only $3.50 a day.

Now, I'm not here to pick on Starbucks. I happen to like Starbucks. I go there myself sometimes. The entire message here is a metaphor. And we all do this. It can be cigarettes, bottled water. Anything that you can find that can be $5 to $10 a day, if you can redirect that money into paying yourself first, you really can become rich. We've done courses for people in their 20s and shown them, look, in your 20s you can actually be a multimillionaire by the time you reach retirement by simply finding your latte factor and paying yourself back.

WHITFIELD: And you stalk about starting early. And it's not out of the ordinary, or it shouldn't be out of the ordinary, you believe, to start as early as 14. Get your kids started. Open up an account or teach them how to start saving, because it certainly can amount to some pretty nice wealth in the long term, for example.

BACH: Here's a really powerful idea. And you can actually start your teenagers doing this, because parent -- if a child is earning any income at all, they can put it into a Roth IRA; $2,000 a year if they do it from the age of 14 and they stop at age 18, they are going to have over $1,184,000 at age 65. That's unbelievable.

Now, what if you waited a little bit longer? What if you waited, say, until you were age 19? Well, it's still pretty good. You can put $2,000 a year away, do it for eight years. Stop at the age of 27. Never put another dollar away. You'd have over $1 million at age 65. That's the miracle of compound interest.

WHITFIELD: Wow, and if you start at 27, say, for example?

BACH: Now, this is interesting. At 27, you actually have to fund this account every single year for 39 years. You'll have $883,000, but you've put a lot more money away, you had to do it for 40 years almost.

So there is a couple of messages here that are very important. First of all, start young, obviously. But a lot of people who are watching are saying, well, I'm not that young, what should I do? Start today. You know, it's not timing the market; it's getting in the market that matters.

And that doesn't have to be stocks. It can be a combination of stocks, and it can be bonds. It can be cash. The key is to take a part of your paycheck and pay yourself first, but instead of saying pay yourself first, here's what I tell people. Take a look at your income. What do you earn an hour? The first hour a day that you work should be for yourself and for your future. So whatever it is -- if you're earning, let's say, $20 an hour, the goal should be to save the first $20 that day that you earn. Best way to do that is not pay taxes.

The only way to legally get out of paying those taxes is to sign up for your 401(k) plan at work or go open it -- open up an IRA account. You can go down to a bank or brokerage firm. Do it the first week of January. Start the new year off right. Open up that account. Automate everything so you don't have to have any discipline; have the money automatically taken directly from your paycheck and put it automatically into your investment account.

WHITFIELD: And you know, and we talked about those examples and we have that visual aid to help us out. You know, there was a 10 percent return. That may be difficult to find, but, you know, you really are making the point that it doesn't really matter what you're going to get back in terms of, you know, that interest on that, but perhaps you need to be looking in terms of long-term by paying yourself first.

BACH: That's right. And the 10 percent, the way you come up with that number is that that's what the stock market has annualized out at over 30 years. Now, obviously, the last three years, the market's been down. That actually bears very well for next year. Statistically, the market should be up next year, and statistically the first quarter of the year, they call it the January effect, very good time to invest is the beginning of the year.

But the key thing is always paying yourself first.

Now, another thing you can do at this time of the year is focus on your debt. If you've got credit card debt, the "Finish Rich" workbook is how do you get out of the credit card debt at the beginning of the year. One of the things you want to do is refinance that debt. Chances are if you've got a credit card...

WHITFIELD: Oh, there are offers all the time. I mean, how many times do you get something in the mail about, you know, consolidate, 2.3 or 1.9, et cetera. Take advantage of that, huh?

BACH: Very simply. Here's something you can do today. After the show is over, pick up the phone, call your credit card company, ask them, what are you charging me from an interest point?


WHITFIELD: We're out of time, sorry. But you're giving us some great advice, and of course folks can go at AOL, because they can get some more free advice from you, right?

BACH: That's right. Keyword is finish rich at AOL. They're actually launching it today, so if you're an AOL user, go to finish rich keyword, or You can read a free chapter of the book.

WHITFIELD: Very cool. All right, thanks very much, David. Appreciate it.


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