BACH TO BASICS

Rough Notes, May 2004 by Boone, Elisabeth

Financial guru David Bach talks straight on money, marriage, mortgages, and more

When it comes to money-and doesn't it always?-many of us simply see red: credit card debt, car payments, college tuition, and those unexpected outlays that seem to come up just as we've managed to set something aside for a rainy day. For too many Americans, living paycheck to paycheck isn't a distant threat but a grim reality-and it's not so much about how much we make as how we use it.

Just as there are no miracle diets, there's no way to become an instant millionaire. But anyone can follow a simple path to building wealth. That's at the heart of the commonsense wisdom of David Bach, internationally known personal financial expert, educator, author, and speaker. The best-selling author of The Automatic Millionaire, Smart Women Finish Rich, and Smart Couples Finish Rich, Bach has appeared on top-rated network and cable television programs like Oprah, The O'Reilly Factor, Today, and American Morning.

Before founding his financial education company, FinishRich Inc., Bach was a senior vice president and financial adviser at Morgan Stanley and a partner in The Bach Group, which managed over $500 million for individual investors.

The Latte Factor(TM)

At age 37, Bach is a millionaire several times over, but he still researches the most economical home telephone service. Small change adds up to big money, he asserts; just consider The Latte Factor. Simply put, this means the cash we lay out each day without even thinking about it: a latte and danish on the way to work, a midmorning snack from the vending machine, or a paperback we pick up for the train ride home.

"When I was on Oprah in January, we did The Latte Factor," Bach says. "We spoke with a woman who had spent $1,100 on her Latte Factor that month. That included everything from lattes to getting her nails done and having massages to having a wine and cheese party. This was a woman in her mid 30s who was making a lot of money and living an extraordinarily great life but had nothing to show for it; she had less than $10,000 in savings," he says. "We said, 'If you cut a couple of things out you'll save a little bit of money, and you don't have to change your whole lifestyle. Over time you can have more than $280,000 in savings.' Then Oprah rolled out a cart with over $280,000 in cash. This was an amazing visual," Bach says. "When you see $280,000 in cash on a table, it really opens your eyes. That message of finding your Latte Factor, whatever that may be, is changing a lot of people's lives."

What's more, he notes, "The wealthier you are, the easier it is to have a large Latte Factor. If you're making hundreds of thousands of dollars a year, your Latte Factor can be a second or third home that you don't use, or a second or third country club membership, or thinking you always have to travel first class. I always tell people, 'When you go out to work, you're trading a portion of your life for your income, and that income can be used to buy your freedom or to lease your lifestyle.' Many people who are high income earners are determined to make money because they really want to be free.

"What so often happens to people is that as their income level goes up, their lifestyle goes up dramatically, and they find themselves on a treadmill where no matter how hard they work, they don't actually see themselves getting ahead. The way people get in that position is that they don't take any chips off the table to buy their freedom."

The credit card trap

Millions of Americans literally are "leasing their lifestyle" because they're awash in credit card debt. Every day, people are bombarded with "fantastic" offers promising unbelievably low interest rates and ridiculously low terms. Few people bother to read the fine print; if they did, they'd realize that the bad news is always in small type. Short of cutting up every piece of plastic you own, how can you get credit to work for you instead of against you?

The first rule of managing credit card debt, Bach says, is "You can't pay the minimum, because now it's down close to 1%." Second, "You have to find out what your interest rate is. Check your credit card rate, then go to bankrate.com to see a listing of all the available credit card rates," Bach advises. "Then use one of those offerings to negotiate with your current credit card company.... Your goal should be to get your interest rate below 6%."

What's your score?

Back in school days, there probably were times when you were afraid to look at your report card because you dreaded seeing a big red F. As adults, a lot of us experience the same high anxiety when we think about what we might see on our credit report. If there is something wrong, we'd rather not know about it-and that, Bach asserts, is a big mistake. As with The Latte Factor, he says, awareness is the key to making positive changes.

"The key to fixing your credit report is knowing what your credit report says, and the way to do that is to pull your FICO score. Go to myfico.com and get the all-inclusive report that shows all three of your credit scores," Bach advises. "That's a great start, because your credit score determines about 90% of the time what rate you can get when you apply for a loan. Also, the report tells you why your credit score is what it is, and you can circle a problem and work on it."