the complete winning the game of money -...

How to Eliminate Your Debt, Achieve Financial Freedom, and Finish Rich

The Complete

Winning the Game of MoneySuccess Coaching & Training Package

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Session Transcript

JA Hey everybody, this is John Assaraf, and welcome to our “Show Me the Money” month, and with me right now is my buddy, David Bach, who happens to be vacationing, of all things, in San Diego, and so David Bach, as you may have seen him on Oprah. He’s got 11 consecutive best-selling books, New York Times best-selling books. He used to be a Vice-President with Stanley Morgan or Morgan Stanley with $500 million under his management. He’s got a phenomenal sense around finances, debt, around how to get yourself out of debt, how to manage your money, how to retire rich, whether you’re male, female, young or old. He’s studied it, he learned it, he teaches it all over the world, and he’s got a show on every Wednesday called the Today Show, Money 911 – I love that. Many of you need Money 911 right now. Go to his website as well. It’ll be available on this document, davidbach.com, and...

DB Finishrich.com.

JA Finishrich.com. Subscribe to his stuff so you can really stay above the fold when it comes to making money and managing your money well, so we’re going to be talking about reducing your debt. We’re going to be talking about financially living a better life, and more importantly, getting a hold of your finances and finishing the game of finances rich. David, thank you so much bud.

DB Sounds good to be here. Yeah, and ya know, I’m really am on vacation. I’m going to prove it to you guys, ya know, this is probably. These are thongs, ya know, this is only my first time doing an interview with thongs on. John’s all dressed up here, but I told him I couldn’t get dressed up, I’m at the beach today. So anyway.

JA Even at the beach; he’s been in shorts and t-shirts most of the time so getting him to come in in a shirt and a pair of pants and slacks and thongs is fine. So David I want to, I want to just get right into it.

DB Yeah.

JA The people that are watching are clients of ours from all over the world. Some are financially well off, some are struggling where they’re in financial trouble right now. But I don’t think that we can talk enough about managing your money properly and really understanding, ya know, what is good debt, what is bad debt?

DB Yeah.

JA What should I do with the debt that I have? Should I invest? Shouldn’t I have? Shouldn’t I invest? The market right now is driving everybody, even the best of people, all of us, berserko, if you’re in the market. So let’s talk about some of the stuff that you teach people around money and we can start wherever you like; whether it’s, ya know, what to do with your debt?

DB Yeah.JA Or getting people into the flow of, how should they be thinking about their money, first of all?

DB Well, ya know, I don’t know when people will be watching this, but as we’re sitting here, this has been – the last two weeks have been some of the most volatile two weeks in the stock market in our lifetime.

JA Right.DB I mean I grew up in this business. I literally star-, I going to my father’s investment

classes at the age of 7. So I’m 44. I’ve been doing this for, ya know, if... JA 37 years.

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DB A long time if you start back at 7 years old, but my dad was a financial advisor, still is in fact. My sister is a financial advisor and I was a financial advisor. And I literally started going to my dad’s classes at 7 years old; it wasn’t to learn it was basically to spend the night with my father and I would watch him teach these investment classes and I, ya know, would learn it through osmosis to the point where by the time I was like 12 years old, I was literally teaching my friend’s parents how to buy municipal bonds.

JA Wow.

DB Ya know I’d hear them talk about CDs and I’d say, oh, Mr. and Mrs. Jones, why would you buy a certification of depreciation when you could be buying a tax-free municipal bond paying, ya know, “X” percentage? And so I was a little strange, but that was just because that’s how I grew up. And I became a financial advi- - I went to USC down here in Southern California and I got in. I went into real estate first. I was in commercial real estate and then I made a lot of money in commercial real estate, traveled around the world and then I came to business with my father in 1993. And in 1993, I went through a training program at Morgan Stanley; it was almost a year long. Lived in New York City, moved back to the Bay Area and started managing money for people primarily getting, approaching retirement.

Most of our clients were, ya know, average working, hard people making $50,000.00 to $75,000.00 a year that had built a nice nest egg up. We’d help them prepare for retirement and then manage their money during retirement so they didn’t run out of it. I mean, that’s really the goal. And, ya know, my background, so I did this for a living. Ya know, every day meeting with, ya know, five, six, seven, eight, nine families a day, almost like a doctor’s office where we’d sit down for an hour and go through your financial dreams and your goals and financial planning. And then along the road I wrote a book called “Smart Women Finish Rich” because I had a lot of women clients and they wanted the information I was teaching in a book, and that’s what led to this whole journey I’m on. I’ve got 12 books out now and ironically this year, the book, I mean I don’t if it’s ironic or not, the book I put out this year is called “Debt Free for Life.”

JA Yeah.

DB And we’ll go through how to get out of debt. But, ya know, going back to the stock market, okay, I’ve grown up in this business. These last two weeks have been gut-wrenching. I don’t care how well-diversified you are. I mean I have an extremely diversified portfolio, and we’ll talk about that today. Ya know, I’ve this system I call a “perfect pie approach,” which I’ll teach your audience how to use.

JA Awesome.

DB But this ye-, these last ten days, it didn’t matter where you were.

JA Right.

DB In fact the only asset class that hasn’t dropped in the United States has been muni bonds. If you’ve had global investments, if you’ve had high-yield bonds, if you’ve – well gold hasn’t dropped either, I’d say 98%...

JA Yeah, gold’s over $1,700.00 yeah.

DB I’d say 98% of investments have dropped. It’s been gut-wrenching, especially for retirees, and it’s almost like an eye-opener. I think what you need to look at today, if you’re watching the stock market, is do you really have a plan in place? I mean we can really talk about how to really have a plan. But more important than worrying about the global economy, I always say, John, the key right now is you got to focus on your own economy.

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JA Okay.

DB And I know you have a lot of entrepreneurs that, ya know, are in your program, ya know there’s two parts to your own economy; money coming in, money goi-, and where’s it, when the money comes in, where does it go? So certain amounts of money go towards what you have live off of.

JA Right.

DB And the rest has to go into investments that make you money. And, it’s your own personal economy that is what this game is really about. Because you and I have no control over, ya know, the people in Congress and Senate, and we have no control over what’s going on in France and Italy and Spain and Portugal and Greece right now. The only thing you and I have control over is our own economy and that’s what we have to focus on.

JA I hope you all caught one thing that I want to help you catch, if you didn’t was, ya know, your own personal economy, but your own personal finance plan as well. Because most people that I meet around the world, had zero plan, let alone a finance plan for what they’re doing with their money.

DB Okay, so, when we go out, you and I just had a lovely dinner together with our wives, and we’re very positive people so we’re always talking about opportunities, but if you go to a cocktail party right now one thing everybody talks about is debt, ya know? And that’s what’s happening right now, ya know, the deficit, the debt ceiling. People have conversations for hours about $14 trillion in government debt, what are we going to do about it? And I say, forget about the government’s debt. Let’s talk about your debt. Because as I went into this year, I wrote a book called “Debt Free for Life.” It came out January 1st. My single guiding principle that I have been teaching all year long, way before this year, was the most important financial decision you can make right now, specifically in this economy with this recession with what’s going on, the single most important financial decision you can make is to pay down your debt. The faster you pay off your debt, the faster you buy your freedom.

JA Any kind of debt? Are you talking about mortgage debt, loan debt, credit card debt, what are you, ‘cause I know there’s good debt and there’s bad debt?

DB Well see, this is the interesting thing. That’s what we’ve been taught.

JA Okay.

DB For our entire lifetime we’ve been taught, there’s good debt, there’s bad debt, which I believe, and I used to believe that. I used to believe there was good debt and bad debt. I’ve got to tell you something John...

JA Uh-oh, I might be wrong here.

DB I no longer believe there is good debt and bad debt. I think what this recession has shown is that debt is debt. Ya know, we used to say, credit card debt, it’s bad debt. Car loan debt, it’s bad debt. Mortgage debt, it’s good debt. I used to say, mortgage debt was good debt. But you know what?

JA I still believe that so, bring it on baby, bring it on.

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DB So, here’s the thing. It’s, debt is debt and whenever you have debt, if you can’t afford to pay it back you have a serious problem. When you look at the millions of homes that have been foreclosed on right now, those people who are losing their homes is because they can’t pay their debt.

JA Right.

DB Ya know if your home drops in value 50%, and you can make the mortgage payment you don’t lose your home. But if you can’t make the mortgage payment, the bank comes and takes that home away. So what I’ve been saying to people today is, look, I know, for instance, mortgages today, you can get a mortgage for 3- 1/2%, extremely low rates.

JA Great rates.

DB And, but I’ll tell you what? In this marketplace, I don’t know that I can guarantee you a rate of over 3-1/2%. Now the truth is sophisticated investors I would tell you, ya know...

JA You mean appreciation?

DB Yeah, well I mean, first of all, most people watching do not have 3-1/2% mortgages. Most people watching right now, their mortgage payment, their interest on their mortgage is 5%, 6% or 7%.

JA Depending on where you are in the world.DB Depending on where you are in the world. And the reality is paying off that debt is a guaranteed invest-, is a guaranteed return on your money. So... JA So...

DB I...JA ...okay keep going.

DB ...so let me just. So when you look at debt, there are categories of debt. Credit card is obviously, most cases, the worst. Here in the United States, the rates are up to 30%.

JA Wow.

DB So you chunk down the bad debt first. You chunk down the credit debt. You chunk down, ya know, car loan debt, which is ridiculous, in my opinion, to have car loans. Then you go towards mortgage debt. Now people say David, do you believe that I should pay my mortgage off faster? And I do, and I can teach, ya know, your audience how to do that. But I’m a huge believer in the faster you pay these mortgages down, the faster you’re free because about 50% of people’s overhead is simply interest payments.

JA Wow.

DB Just payments on, and in many cases right now, it’s more than 50%. So ya know they get their paycheck, half of it’s gone just in interest payments, not principal payments, just interest payments. And the faster you pay that debt down, now you’re chunking the principal down.

JA So when you’re taking a look at the interest you’re paying on your credit cards, your car, loans that you might have at the bank.

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DB Yeah.JA Plus your mortgage, 40%, 50%, 60% is what averages for people? DB And I’ve got to tell you, in the U.S. it’s amazing.JA Wow.

DB We’re seeing more than that. I mean, here’s the good news, there’s a huge movement in the U.S., and also abroad, to pay debt down, because what happened in this recession; it’s been a huge wake-up call. People have been, in the last three years, on a massive movement to pay debt down. So we’re seeing, ya know, two years ago when I was researching debt-free for life, we went out and we interviewed all the non-profit credit card counseling agencies in the United States, the major players.

JA Yeah.

DB Average person that was going to a non-profit credit counselor was $27,000.00 in credit card debt. Now when I was doing the Oprah Show, we did a series with Oprah called the Debt Diet Series. We had people with $50,000.00; $75,000.00; $100,000.00 in credit card debt. Now you can pay that credit card debt off in less than two years if you have a plan. Most people’s plan right now, it takes them 25 years to get it done.

JA Wow.DB So, I’ll give you simple examples. We still see, one out of three people still make only minimum payments on credit cards. If you make a minimum payment on your credit card, it takes you 25 to 30 years to pay it off. If you take that minimum payment and you just doubled it, you paid that same credit card off, in most cases, in less than three years.

JA Wow.

DB That’s simple, simple trick.

JA It’s like your mortgage, instead of paying monthly paying bi-monthly or weekly if you can, and you take a 30-year or 25-year mortgage and you got a 10- or 15-year mortgage.

DB Yeah, you take, I mean, I wrote, I talk about bi-weekly mortgages all the time. If you got a 30-year mortgage and you call the bank up and you say, I want a bi-weekly mortgage payment plan. No refinance required. Nothing needs to be changed on your loan. All they change is the way you pay your mortgage; which is you pay half every two weeks. That takes a 30-year mortgage down to 23 years; cuts seven years interest payments off a person.

JA Wow.

DB Now, for someone who’s got, ya know, a quarter of a million dollar mortgage, that will save them over $100,000.00 in interest payments; $100,000.00 in interest payments with that one simple trick.

JA So wherever you are in the world right now, I hope you heard that – taking a 30-year mortgage and just paying twice a month instead of once a month, you’re going to save seven years of interest and reduce that mortgage loan to 23 years. You’ve just made up your entire membership, just for that.

DB That paid for the program 100 times over.

JA A hundred times over.

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DB Now, ya know, another question I get a lot right now, is David, would you recommend going from a 30-year mortgage to a 15-year mortgage? Now this is why it’s important to constantly be in programs like this because what we teach can change based on the economy.

JA Right.

DB Now if you’d ask me ten years ago, David, would you recommend a 15-year mortgage? I would have said, no John, you know what? Do a 30-year mortgage, make extra payments. Right now the rates are so low that I would say to almost anybody watching, if you can make those payments, pay the home off in 15 years. You can always later refinance. But the beauty of a 15-year mortgage is it forces you to have forced savings and it pays that home off earlier.

JA And what I love about that is if you’re paying down your mortgage, and you’re house is appreciating at the same time.

DB Right.

JA You’re getting probably the biggest bang for the buck of where you should be investing. That’s an investment. I look at that as an investment in paying down your mortgage.

DB Well it is an investment.

JA Right.

DB Ya know, let me give you another example. People come up to me all the time and they’re like, oh my God, thank you for the advice to refinance. And they tell me how much money they’ve saved on the refinance, so I was, I had a make-up woman the other day at one of the shows I was doing thank me because she had refinanced her home and she was saving $500.00 a month on a refinance. And I said, well what are you doing with the money? And she said, well I don’t know, I’ve got more money to spend now. I said, wrong answer. Now, the good news with this woman is because of that we’ve been doing shows for years and she’s had me around her and she’s read my books, three years ago she was renting, now she owns a home, now she’s refinanced to a lower rate. I said, but now what I want you to do is I don’t want you to take the $500.00 that you’ve got and go spend it, I want you to take the $500.00 and apply it to your principal, because if you apply it to your principal, you’re going to take this 30-year mortgage and pay it off in about ten years faster. Well she came back to me and she ran the numbers, and she goes, you’re wrong. I’m going to pay it off 18 years faster because in her case she didn’t have that big of a mortgage and so, she’s going to be debt-free in 12 years. Own a home, free and clear in 12 years.

JA So I hope you all got that. You can make extra payments, is what David is saying, on the principal amount that you owe on your mortgage, which thereby decreases the amount of interest you’re going to pay overall over the course of ten or 15 or 20 years.

DB Okay, now let me get...

JA Is that right?

DB ...yeah that’s right. Now let me give you a little secret to this because I make extra payments on my mortgage every month. When I do this. First of all, my mortgage pay-, I believe everybody should have their payments automated because you never want to be late on a mortgage.

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JA Right.

DB If you’re late on a mortgage it will destroy your credit score in a matter of months. So I automatically pay my mortgage payment. So the money’s pulled right out of my bank account, automatically goes towards my mortgage on the first of every month. Then I make a second payment towards principal, also automatically moved. The key here is my principal payment is separate. I don’t lump it together. The reason is, I hate to say this, but it’s true. Sometimes banks make mistakes, and believe it or not.

JA Oh never.

DB And believe it or not, they’re, when you make principal payments, in some cases they don’t apply it towards the mortgage. So you need to look at your mortgage statement every single month, and I look at my mortgage statement every single month to confirm that the payment has reduced my principal. And there have been times when it hasn’t, and because I’ve got that separated check or separated transfer, I’ve got proof. Now here’s when I...

JA The little tricks help. Little tricks help.

DB Now, this kind of gives me chills.JA Ha ha...it does.

DB On my arm because when I first heard about this mistake that banks would make, this was in 1994, and I had bought my first investment property with my best friend who lives here in Del Mar. We had bought our first home in the Bay Area, fixed it up, and he was a mortgage broker. And I had watched a show about how banks sometimes make mistakes on the principal payments. And I said to him because he was handling the mortgage at the time because he was a mortgage broker, did you check? He’s like, I didn’t know, ya know that’s a good question, I didn’t check. We go back and look at it. We had a year’s worth of principal payments. This was my first year owning a property, that the bank had taken those interest payments, not applied it to the principal and just held it in a side account. And banks do this, believe it or not, all the time. So, when we back to them and said, wait a minute, none of that was credited towards the principal, they said, oh well we didn’t know you wanted us to. So it’s just being held in a non-interest bearing account. So, these are the kind of things that you, ya know, ya learn and then you teach and then people go, oh my God, that happened to me too.

JA Ya know specialized knowledge, I’ve told you if you’ve been with me for a while, specialized knowledge is worth its weight in gold. Little tidbits like that, that you’d never even think to ask or do, is worth its weight in gold.

DB Oh before we go off the debt topic.

JA Yes.

DB So um, I’ve got a system. The book I wrote is called “Debt Free for Life.” In “Debt Free for Life,” I have a tool called DOLP; stands for done on last payment. You can go to my website, finishrich.com, we actually have this worksheet on our website. It’s a .pdf, you can download it.

JA Say it’s finishrich.com.DB Finishrich.com and we can even put the worksheet on your website if you want. JA Awesome, let’s do that.

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DB Super simple worksheet. All you, all it does is you downl-, you write out what your debt is and I teach you how to determine the order in which to pay your debt off and that’s really the key is that you need to know which debt to pay off first, second, third, fourth and fifth. Now I’ve been teaching this tool for, I don’t know, ten, 15 years and people have loved it. This year we made it automated, so this year we created with Equifax.

JA Yeah.

DB One of the leading credit bureaus in America. This is only good in the U.S. because it’s not abroad. But in the U.S. with Equifax if you go to debtwise.com, we’ve created this DOLP system on-line. So what it does is, you put in your information, Equifax has your credit file. They pull all your debt in seconds, put it on a dashboard on the computer, show you, here’s all your debt, here’s when you’re going to be debt-free, we call it your debt freedom day, here’s how much faster you can be debt-free if you make extra payments and shows you what order to pay it off in. And then every time you make a payment to your credit card or your mortgage payments and that’s reported to the credit bureau, it automatically updates. So it’s a – I look at it like a debt scale.

JA Love it.DB It’s all automatic. It’s $14.95 a month. And people go into this tool. JA What $15.00? That’s it?

DB $15.00 a month. That’s it. It completely automated. It’s multi-subscription. We’ve had about 20,000 people go into this program since January. Unbelievable results. And the reason is it’s...

JA It organizes the stuff that you that you don’t want to do yourself.DB It organizes all of your debt in seconds and it’s automated. You might want to

check that out too.JA Yeah we’ll definitely check that. We’ll put a link in this interview for that. DB Good.

JA Here’s something that I wanted to ask every one of you. Do you have a debt-free or a debt-freedom day that you’ve set and I’ve never actually heard that before and I think we should, number one, put something on our forums about what’s your debt-free day? And then every one of you needs to be working backwards from that day with a plan to reduce the worst debt first and then obviously take the money that you’re saying and start some investments if you’re not already investing.

DB Yeah, ya know, again we were just talking before we turned the camera on that you and I have been doing this so long we sometimes forget that everybody doesn’t do this. So like to me a debt-freedom day is so obvious, especially for entrepreneurs.

JA Love it, yeah.

DB And ya know, we’ll talk about I think the most important investment an entrepreneur can make, other than in their business, is in real estate, and I’ll talk to you about why, but.

JA I agree.DB To me when you own real estate as an entrepreneur. Like, I know what date I want to have my mortgage paid off.

JA Right.

DB So, I can tell you, like my, I know exactly what my goal is, I know exactly how many more payments I’ve got and when more money comes in I’m trying to accelerate that. That to me is obvious. But again, most people, they get a mortgage

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and then one thing that happens is as rates go lower, they constantly refinance that mortgage, which in turn extends the length of the mortgage. So I see so many people that they’ve got a 30-year mortgage and they pay it down, ya know, down to the 25th year or the 24th year, the 23rd year. Then they refinance into a 30-year. They just stretched the mortgage out again. And I see people...

JA So they’re starting from day one again.

DB Well they’re just, they’re lengthening the length of that mortgage again, so that they’re never really getting out of debt. And people do this with commercial mortgages. Most commercial mortgages are ten years. People get down to the sixth, seventh year and they refinance again to another ten year. Well, then you’re constantly extending your loan payments, which doesn’t get you free. To me the purpose of working and bringing in income, other than to, ya know hopefully if you’re in business you love what you’re doing.

JA Right.

DB And you’re getting a lot of passion out of it. It’s changing people’s lives. By the end of the day we’re doing it for cash too. I mean money’s coming in. That money should be going to set you free. It should not just be going to Lisa Lifestyle. I always say you want to own your life, not lease your lifestyle.

JA That’s good. So, are you leasing your life or are you owning your life? That’s very, very good. So somebody gets into a debt reduction plan, all right. They start paying off their debt first.

DB Yeah.JA The right debt first, as you suggest. Then they got a surplus and they start paying off some of their mortgage next.

DB Um-hmm.

JA: Okay, then we’ve got, ya know, the stock market is options, investing in business is an option, investing in real estate is an option.

DB Yeah.JA I love real estate. I’ve made a fortune in real estate. I’ve loved real estate. DB Yeah.JA I’m actually going to get back into the real estate market right now.DB Perfect. It’s the best time.

JA I’ve stayed away from it just because I didn’t want the hassle, but I’m like looking at it, going oh my God, what an opportunity, and so depending on where you are in the world, you’ve got to take a lot at what the best investments are for where you’re at as well.

DB Well I mean clearly we haven’t seen opportunities like this in real estate in 20 years.

JA Right.DB So the last time we saw this cycle, was the late 80’s, early 90’s, at least here in the

United States. JA Right.

DB By the way, a lot of global money is coming into the U.S.

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JA Yeah.

DB In fact there’s an article today in the New York Times about how Chinese money is coming into New York City where I live and they’re coming in and buying things for cash. One out of three properties purchased right now in the U.S. are being bought for cash.

JA Wow.

DB So, investors who got money are saying, you know what? I don’t know if I want to deal with the stock market, but if I can go buy a piece of real estate right now that’s 50% off the top, below replacement cost, and what, by the way, I know we’re all over the place here but, like people ask me, how do you know real estate’s a good deal? Well first of all, if you can, buy real estate today, which you can in many markets, for below replacement cost. What that means is that if somebody wanted to build the building next door, right next to it, or build a home right next to it, the cost to build that home today or new building would cost more than what this property is selling for. We see that very rarely.

JA Right.

DB Being able to buy real estate below replacement cost is something that happens about once every 20 years because there’s real estate booms and busts. We’re clearly in a bust right now which is leading to foreclosures, which is leading to an enormous amount of inventory, which leads to the ultimate buyer’s market. I wouldn’t want to have to be a seller necessarily in this market.

JA Awful.

DB But, ya know, it also depends, like in, I got to tell you in New York. We were talking about New York where I live. Real estate has come right back up, ya know. In three years it went down 30%, 35%, 40%. It’s right back up to the high. People who bought two years ago have already flipped and made money in many cases in New York, so we’ll see that in other markets. You’ll see that, look, San Diego.

DB There are so many deals, I’m sure I will be back here in five years and we’ll be like remember all those deals that there were? Las Vegas, ya know, Florida.

JA I’ve got a friend of mine spending $5 million a month right now in San Diego real estate.

DB Yeah.JA He put a group of people together and... DB He’s doing syndication.JA Yeah.

DB Yeah, I’m seeing that too. So I think there’s so much opportunity and people say well, it’s very hard to get financing. Reality is people are getting financing. Look, cash is king in this market, but if you can put down 20%, 25%, 30% on property, you’re getting financed. So and many properties today, across this country, you can guy them for so cheap that the moment you put a renter in that property, the return on your investment is a 10% or above return.

JA Yeah.DB Which as we look at the stock market or the bond market, we can’t guarantee

these kind of returns.

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JA Well the bank market. So, so what I want. There’s many of you that are watching right now that are saying, I don’t have the money to invest in real estate or the stock market for that matter. So your option right now is to invest in you, your best option invest in reducing your debt so you’re never, ever, ever in this position again so when the opportunity comes on the next cycle, which it always does.

DB Yeah.

JA You’ll be ready. So your strategy, remember I’ve always said, you have the right mindset. You’ve got to have the strategies and tactics. Then you’ve got to implement them. So depending on where you’re at, your first strategy if you don’t have the money right now is the debt reduction strategy. Second strategy is your mortgage reduction strategy. Third is now take a look at opportunities, whether it’s in the stock market or real estate and you do this based on what are your interests, what do you have fun doing, what are you prepared to really understand, learn and know versus relying on all the experts, who in a lot of cases are right and a lot of cases are wrong. So you’ve got to do your own due diligence and go with your intuition and with your intelligence.

DB So let me just say this because we’ve talking about paying down debt, but there are certain principles that will put you in a position so that you will always have money. And so let me go back to principle number one, which is, I don’t care how much money you make, whether you make $30,000.00 a year, $50,000.00, $75,000.00, $100,000.00 or more, the number one principle to building wealth is that the moment money comes in, you have to pay yourself first.

DB I wrote a book called the “Automatic Millionaire.” It’s probably the book I’m most well-known for and the principles of that book is that you can become a millionaire on an ordinary income. It starts with paying yourself first. And the magic formula is that when you earn money the first hour or day of your income should go right off the top into a retirement account. Because what happens when people get paid, the first people who normally gets paid is the government.

JA Right.

DB In every country. The only way to escape paying the government first is to use deductible retirement accounts. So, ya know, we have a lot of Canadians that buy our programs and watch us. They have RSP accounts.

JA In Australia, there’s 10% that’s taken off right off the top.

DB Yeah. So, here in the U.S. and in most marketplaces, one hour a day of your income is 12-1/2% of your gross income – 12-1/2% of your gross income should come right off the top automatically into a retirement account. Now once you’re got it in a retirement account, then you need to decide, well what am I putting it in – stocks, bonds, real estate, gold, silver. But the first key is that idea that you will always pay yourself that amount.

JA So habit number one.DB It’s habit number one. Now the beauty of what I just said though is that it’s not a

habit. So the reason I teach, make it automatic. JA Right.

DB Is that you only have to make a decision once. That way you don’t need to have discipline. That way you don’t need a budget. Once you check off the box and the money’s moved from your checking, ya know, it’s not even your checking account. It’s moved from wherever you’re being paid right into a retirement account, you don’t have to think about it.

JA What if you’re a business owner though and you’re co-mingling your business life...

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DB Yes.

JA ...and I tell them never to do that, but I know there’s a lot of people who are doing it that their business and their life is the same.

DB Okay, ya know, all my, almost all my friends are entrepreneurs. I get this question all the time. David, you tell everybody to pay themselves first automatically, but I don’t take, I don’t take a paycheck. A lot of entrepreneurs pay themselves at the end of the year. And I always ask a simple question, do you set aside money for taxes? Now, if you’re an entrepreneur and you don’t set aside money for taxes, the IRS comes and takes you and puts you in jail. So, the answer most entrepreneurs will always give me is, well of course I set aside money for taxes. And then I say to them, well do you, how do you do that? They go, well I, ya know, I automatically or I know I need to move this amount of percentage away for taxes so that I can pay my taxes quarterly. By the way, the reason the IRS requires people who have businesses to pay quarterly is they know that if they didn’t, they would never get the money.

JA Right.

DB Because otherwise people would not budget all year long and be able to pay their taxes. So what I tell entrepreneurs is this. You have to think about paying yourself first, just like taxes. Why would you commit to pay the government before yourself?

JA Right.DB And what I tell them is, look, if you’re not taking 10% of your income off the top at

least to pay yourself first, your business isn’t working. JA Right.

DB Or your life’s expenses are out of whack. It has to be a decision day one that money’s coming off the top. Now maybe it doesn’t start at 10% John, maybe it starts at 1% or 2% and works up. Ya know I always tell people...

JA But the idea is you’ve got to have this mindset and this knowledge, this is a cardinal sin if you don’t.

DB This is the deal. Now the second thing business owners need is they need emergency money. Ya know, I’m in a group called YEO, Young Entrepreneurs Organization, it’s global.

JA Yeah.

DB I’ve had so many really well-to-do entrepreneur friends of mine that when this recession hit, they had a very short amount of money of emergency cash set aside. They were not, they might have a business doing, ya know, tens of millions of dollars, but they didn’t have a year’s worth of payroll set aside. And when the recession hit, I watched some of my friends, in some cases, go bankrupt because they did not set aside an emergency cushion of cash. As an entrepreneur, you’ve got to put money aside for taxes, put money aside to pay yourself first and you need emergency money. Now for entrepreneurs, I think it’s more than for employees.

JA Yeah.

DB But today your goal should be to get at least a year – your goal to work towards is a year’s worth of operating expenses set aside. Now, people who have no operating expenses set aside, go oh my God, David, there’s no way. You just, you just start and you work your way up. It’s like exercise, ya know.

JA Right.

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DB If you haven’t worked out for a month and I said, you go run ten miles it would be brutal, but if I say, look, let’s go run a quarter mile today and we’ll run a half a mile next week and then we’ll run a three-quarter, ya know, you work your way up.

JA I hope you’re all, ya know, we’re talking about a lot of different topics, ya know, debt reduction, entrepreneur, no entrepreneur. The, the antithesis of all of this is that David’s got a way of thinking and strategies and tactics for any level of the financial gain. And if you don’t, maybe that’s one of the reasons that you’re not as financially successful and you don’t have your debt freedom day yet. So my goal is to bring you the best people and the best knowledge for you to be able to say, okay, wakeup call time, I’ve got to have some of these things in place. And what he just talked about is so critical. You’ve got to start with a little bit to get the habit and then to make it automatic. I love the idea of just making it automatic, all right. So if you make the decision now and take 1% or 2%, just click that off into your retirement savings account, or click that off into paying more of your mortgage, that’s an automatic decision and I love it.

DB And a lot of people know me for what’s called the, I created this phrase called the latte factor, which, because people would say to me, ay know, well David, I don’t have the money to pay myself first, I don’t have the money to pay my debt down, and I’d say, ya know, and I’d say, look, do you spend $5.00 a day on coffee at places like Starbucks, ya know, do you eat out lunch? Do you drink bottled water? Do you smoke cigarettes? ‘Cause everybody does.

JA Right.DB Everybody’s got some latte factor. And it’s a metaphor. JA Sure.DB It’s not about the coffee, or the bottled water or cigarettes. JA Something we could give up.

DB It’s something, and if you can look at the way you spend money, and I, I call it the seven day challenge. Just for seven days, take a pad and paper out, track everywhere you spend money – cash, people go is that cash? Cash, checks, anywhere you spend money.

JA Credit cards.DB Credit cards.JA Loaning people money.

DB Just for one week and if you’re married, both of you do it separate. Then sit down and go, what’s in our typical day that we could give up? And don’t think about it as giving up, think about it as getting up. So you’re not giving up the latte; look the latte, make coffee at home. Cigarettes, don’t smoke ‘em, ya know, whatever it is.

JA Ya know, it’s funny you say that. I swear, true story. My wife started ordering, she got this machine at home, an espresso machine?

DB Yeah.

JA She was going to Starbucks every single day and spending, I don’t know, $5.00 or $6.00 on some coffee. Now she has this stuff ordered to the house, and she’s probably saving $50.00 a month, and the reason I know this. She says, hey honey, ya know what? I’m not spending $100.00 a month on coffee?

DB Look.

JA I’m only spending $50 bucks. I said, great. Not that I care, but it’s so true.

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DB I did the same thing with protein shakes. John and I first met at the gym. We met, I came here last August and I ran into him at the gym. I’m like, you look familiar and we got to talking. I used to always get protein shakes at the gym. It’s like $6 bucks for a protein shake.

JA Yeah.

DB So, I’m like, ya know, just out of laziness I wouldn’t have my protein powder. Well now I’ve got my thing of protein powder and I make my protein shake before I go to the gym and it cost me like a quarter.

JA That’s right.

DB But again, but let’s use that small example, $10.00 a day. If you found $10.00 a day, the average person who’s in debt could be out of debt in three years in most cases.

JA Really? $10.00 a day?

DB $10.00 a day. Because the average person’s got less than $10,000.00 in debt. So if you took $10.00 a day and you’re in your 20s and you paid yourself first into a retirement account, you’d have a million dollar nest egg at retirement. So $10.00 a day can change your life. Now anybody who’s in your program, the reality is they can save more than $10.00 a day.

JA Absolutely.

DB Their latte factor could be $50.00 to $100.00 a day. But that money redirected could change their life. And I know we’re going to run out of time here. I want to tell you the one most important decision a business owner can make.

JA Great.DB Do we have time to do that?JA Yeah we have, we got time. Just go ahead.

DB So this comes from my almost decade of experience at Morgan Stanley. So at Morgan Stanley, when I left Morgan Stanley, we managed over $500 million for individual investors, and I had a lot of clients. I had over 100 clients that were self-made millionaires. And when I looked at my clients who had a high net worth, usually over $5 million or $10 million, there were common links among them. One of them was most cases they were entrepreneurs, they had their own business. The second though was, as an entrepreneur, they made one decision that changed their whole life.

JA One decision.

DB One decision. One financial decision that changed their whole life as an entrepreneur and that decision was, at some point, usually it was early in their business, they bought the building that their office was in.

JA Oh wow.

DB Or they bought, ya know, they bought the land. They own the real estate that their business was in. And what would happen is, ten, 15, 20 years later, that building was worth, in most cases, more than the business. So I had clients who had buildings that were now worth $10, $15, $20 million when they sold the business or closed the business down, they were either able to sell the building or they were able to rent that building out and many cases the rent from that building created more cash flow than the business.

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JA Than the business.

DB So, when I got into starting my own company, I said to myself, ya know, the number one thing I have to do is I have to buy a building. I have to buy real estate. Now living in New York it was very hard to buy a building. But I bought a commercial condo. So I bought a commercial condo.

JA Right across from the new, what’s the... DB Oh I’m right near the World Trade Center. JA Well the old World Trade Center, right. DB But my commercial condo was in Tribeca. JA Okay.

DB So when I bought my commercial condo, it was about, let me think about it here, 2005. Okay now my condo is almost paid off. I’ve got about five more years left to pay the commercial mortgage off and I’ve been chunking it down. The amazing thing is if I moved out of that condo today, and by the way I’ve had renters also in the space. So I’ve had renters paying my mortgage. I’m basically in my office, I pay rent too, but in many ways I’m in my office now for free.

JA Right.

DB My mortgage will be paid off. My property’s worth millions of dollars and all I did, I would have paid rent anyway, so all I did was instead of paying rent, I own a piece of property that’s appreciated and I’m going to own it free and clear, and if I hold onto it, I’ll be able to have that cash flow for the rest of my life. Now, when I would talk to my entrepreneur friends, I would say the single most important decision is go buy a building for your business. About half of my friends in my peer group did this. And now seven years later, all the ones that did, every single one of them is like, thank you buddy.

JA Great decision.DB Because in some cases they’ve sold the business now, but they own the real estate. Like one of my friends just sold his business for around $100 million. He owns the real estate in a separate company, like I, same thing, I own my real estate in a separate company. He sold the business and that business now has a long-term lease with the building that he owns. So not only did he cash out of his business, but he’s got a tenant, which is his old company, paying for the building.

JA I love it. Specialized knowledge, one more time, ya know, strategies and tactics. It doesn’t matter if you don’t know them, people like David know them. I learn from people like David, just so you know. And I’ve always said that the cheapest way to get rich is to find out what other people are doing that are getting rich and how they’re managing their money, how they’re investing, what they’re not doing and at least learn from them. I’ve got a couple more questions.

DB Yeah.

JA If you’re okay with this. What are some of the major rules of, for people not to do when they’re investing? Like how do you choose a financial planner? How do you choose somebody to help you manage your money or stock? I’ve been burned. I’ve lost millions of dollars by following the wrong advice.

DB Yeah.JA People that I believed were right and people that they only have their best interest at heart.

DB All right, so because we didn’t, you didn’t pre-interview me so I’m going to do this off the top of my head and try to do it most effectively as possible here.

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JA Sure.DB Number one, and this is not, I didn’t, again learning from masters. So one of the first people I studied was a gentleman named Peter Lynch. JA Yeah, I met Peter.

DB Okay he used to run, so have I. He used to run the Fidelity Fund.

JA Yeah.

DB And he was the ultimate guru when I was growing up and he wrote a book called, “One up on Wall Street.” Peter Lynch used to say, if you can’t explain it to me with a crayon on a napkin, it’s too complicated.

JA He, that’s exactly what he said to me as well.

DB Okay, now, one of the things that people do, I think, when, this is how people get taken advantage of. They try to convince you that it’s too complicated for you to understand, but they understand it and you can trust them. If you can’t understand what’s being proposed to you on one piece of paper. If it’s too complicated for you to show me on one piece of paper what it is I’m doing, then don’t do it. I mean that’s just tip number one. Tip number two is don’t put money in investments that aren’t liquid. So when you want to look at, again, I’ll go back to the beauty of having been a Financial Advisor for a decade is I really got to see what works and doesn’t work.

JA Right.

DB So when people would come into my office and I saw how they had lost a lot of money, in every case, how they lost a lot of money, was they put money in limited partnerships. Now the common thing about limited; this doesn’t mean that all limited partnerships are bad, but here’s the things about limited partnerships. Usually there’s a lack of liquidity. You don’t always know where the money’s being invested and people get burned. So what I learned is, if I invest in something, I want to know that basically I can get, that it’s liquid. I can sell it. Like if you buy a mutual fund or a stock or a bond, you can sell that and have the money back within three days. You buy a piece of real estate, you may not be able to sell it within three days, but it is a liquid investment.

JA Right.

DB So it’s very important that you understand what you have, that it’s saleable. The third thing I would say it’s, you, this, I don’t know who created this one, but there’s, I think it might have actually been, it might have been John Templeton, I heard this before too, which was, rule number one about making money is don’t lose money. So, so how do you avoid losing money or losing? Because one of the things that you hear is, ya know, we know people who’ve lost everything, and they’ve made a lot of money but then they’ve lost it all, and usually they’ve lost it all in one or two investments. You really should not have more than 5% of your money in any single investment. Now, the exception of that would be if you bought a piece of property for your business or you bought a home.

JA Right.DB But when you go...JA Or your business being...

DB Or your business. But when you look at a, let’s say you showed me your brokerage account right now. The most I would want you to have in any single investment, meaning like one stock, or even one mutual fund, is I wouldn’t want you to have more than 10% in anything. And ideally, I want it to be 5%, and the reason is that way you’ll never get blown up okay? Because so much of building wealth, once you, it’s like you climb this mountain, then the key is when you get

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up to the top of the mountain it’s to stay there. What happens is people build wealth and they get to the top of the mountain and they go right over the other side. So, one of the things I created for my clients and I teach in my books, I wrote a book called, “Start Late, Finish Rich” where I outline this principle.

I teach a principle called “the perfect pie approach.” Ridiculously simple, but it works long term. Your money should be divided into three categories. If you had a circle and you had three slices; one slice is real estate, so one-third of your investable assets are in real estate. One-third of your investable assets are in guaranteed investments, that means government bonds, CDs, corporate bonds, I would even put things like, anything that’s guaranteed. Then a third of your asset is in the stock market and that’s in my case, I completely diversify that using exchange shredded mutual funds. So at this point I own personally very few individual stocks. I own all index funds and again because I want, I’m not looking for home runs.

JA Right.

DB What I look for when I invest my money, because I try to invest my money the way I would invest a client’s money, as if I had a fiduciary responsibility. And if I invest your money and I have a fiduciary responsibility, I’m going to be conservative with it because I don’t want to wipe you out. The challenge with entrepreneurs is because they’re smart in their business, they think they’ll be smart with their investments and they take more risk. The reality is, the reality is...

JA Guilty as charged.

DB Running a business is so fricken hard, and we work so hard to make that money that really the whole key when you start building, start to have money to invest, don’t go for home runs, go for singles, day in and day out, ya know, if you can get your money to earn somewhere between 7% to 10% annually, your money’s going to double every...

JA Every seven years, yeah.

DB ...seven to ten years. And, ya know, that works, and if you do. By the way, if you hit singles and you’re constantly scoring, you end up getting returns that are higher than that.

JA Yeah. I don’t know where we go from that because that’s, I mean, you’ve got so many ideas in the last hour or so of what to do, what not to do, ya know, debt reduction, reducing your mortgage, ya know, how to allocate your funds, your money coming in, your money coming out, your investments. All I can say is wow, I am actually going to re-listen to this again because as David was talking, I’m asking myself, am I doing that? Am I doing that? I need to speak to my advisor to make sure we’re doing some of this as well. So listen, John Assaraf here, you guys are involved in an amazing program. David Bach, a dear friend of mine, wonderful that he was here, just during our “Show Me the Money,” I guess we’ve been doing this for two months now. And so, take a look at his website, davidbach.com; finishirich.com.

DB Ya know, let me, before I forget, let me give you while everybody’s watching. If you go to finishrich.com, the book I wrote last year, it’s called, “Start Over, Finish Rich.”

JA Start Over, Finish Rich.

DB Start Over, so it’s how to recover from the disaster that now feels like it’s coming again. Ya know, and you can go to my website, finishrich.com and if you put in your information, you can download the book right now for free.

JA Oh wow.

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DB So they can just go in and when they subscribe to membership site, it’s free, they can download the book for free. And “Start, Finish Rich,” it’s almost like a, it’s a little tiny book, but it’s a “best of” series. It kind of encapsulates everything I’ve taught for a decade and you can enjoy that, I hope it helps you.

JA You can’t get better than free right? So, get free and also tell your friends where to get it so, let’s make it our goal, one of our missions as a community. I know one of David’s goals is to eliminate debt around the world for individuals just like you who are going to eliminate debt and really finish the game rich, so do it for yourself, do it for your friends and get one of these for all of your family. Tell them where to go, finishrich.com. John Assaraf saying thank you, we appreciate your as friends and clients, and we’ll see you next month with some more amazing expert interviews.

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