← The Mello Millionaire with Tommy Mello
The Mello Millionaire with Tommy Mello
Save Smarter, Live Richer: Practical Investment Tips with Financial Expert David Bach
00:37:41
Loading summary
Transcript104 lines
- [00:00]
David Bach
An interesting phenomenon happens where people were making good money in a job. If they don't actually start to build financial freedom, they actually start to resent their job. So what happens is you've got somebody who's making 200,000 or 250 or 300, and they got themselves a Harley and they bought themselves a new truck. Now two years have gone by, a recession hits. They're having to work harder. They're making maybe 310, 320, but they're actually further behind. And all of a sudden they're like, you know, I think this job sucks. It's not the job that sucks. It's that you didn't use your money to build some freedom.
- [00:36]
Tommy
David bach is a 10x New York Times best selling author, entrepreneur and financial educator.
- [00:41]
David Bach
I'm gonna drop a truth on you right now. You want to go and try and get rich overnight? You will stay poor forever.
- [00:46]
Tommy
Known for the Automatic Millionaire and the Finish Rich series.
- [00:50]
David Bach
Don't buy options. Most people have no business buying options. Look Super Sexy on CNBC. Super risky.
- [00:55]
Tommy
With over 7 million books sold, he's taught millions how to build lasting wealth through simple automatic habits.
- [01:01]
David Bach
Recessions make millionaires. Booming economies like this, this is where people can get lazy.
- [01:07]
Tommy
Get ready. This conversation will change the way you think about your personal finances and investment strategies.
- [01:16]
All right, guys, welcome back to the Mellow Millionaire. Today I got an awesome guest. You're going to learn about wealth saving, retiring like a millionaire. David box in the house. David has taught millions of people how to build lasting wealth through simple automatic habits and inspired a global movement around financial freedom. And today he's going to share with us an amazing new tax strategy. David, thank you so much for being here.
- [01:40]
David Bach
Good to be here. I'm so thrilled this could work out. Thank you.
- [01:43]
Tommy
So let's just get started. You know what's the number one piece of advice that you give people about money?
- [01:49]
David Bach
Before I even say what it is, let me just say that I've worked with thousands of real life millionaires. Not people who built business and sold businesses. People who had jobs making 50, $75,100,000 a year. Average Americans. How they built real financial freedom is super simple. Comes down to three words. Pay yourself first. It's all about paying yourself first. It's the flow of money. The way ordinary people in America have become millionaires. And by the way, there's now 24 million millionaires in America. And that's a number that's going to double in the next 10 years. And the bulk of these Americans become wealthy by paying themselves first. But it's the second part that's the key. They made it automatic. It was all done automatically behind the scenes. Right. Like you've got 10, 15 employees. You told me today.
- [02:42]
Tommy
Yeah.
- [02:43]
David Bach
Okay, so when an employee has a 401k plan, the single most important decision they make is when they sign up for their 401k plan. It's that automatic decision where they're paying themselves first before they pay the government. Which, by the way, it's the only legal way to get out of paying those taxes. Right. So they've got to pay themselves first. The formula, and I'll give you the exact formula right now, we know what the number is to become a millionaire in your 50s, it's one hour day of your income. So the first hour day of your income. So everybody who's working for you, if they're filling out the little form and they go, what is an hour day of your income? It's 12 and a half percent of your gross revenue. Now, I actually want you to save more than that. I want you to save 15 now because you're going to need more money. The reality is with inflation, the cost of everything you need to be saving minimum 10% of your gross income, but ideally 15%. Fidelity has the largest 401k numbers of anybody. There's Fidelity, there's Vanguard, there's Schwab. Fidelity has right now 565,000 people who are millionaires in their 401k plans. It took them an average of 26 years and they saved 14% of their gross income. Now, in most cases, those people also had some kind of a match. Their employer put a match on top of it. So very important for your average employee that they invest in a Target dated mutual fund and what that means, and I'll use Fidelity as an example here. If it's a Fidelity plan, inside that 401 plan will be a mutual fund with a date. If you have a Vanguard 401 plan, in most cases they're going to have Target dated mutual funds. You may have offered your employees also the option of having an index fund. If someone wants to have 100% index fund, which is great, like the Vanguard Total Return Stock Market Fund, the Symbols V fund has 3,600 stocks in it. That fund has got $1.7 trillion in it right now. That's the biggest no brainer mutual fund you could ever invest in. Meaning you don't need to think it's got 3,600 stocks in it, it's going to average wherever the stock market does, or in many cases, better. That fund has averaged over 12% for the last five years. If you go back and you pull these funds, the s and P500 fund, great option. I listen to you on a podcast. You've got $100 million now in the S&P 500. Pretty much you've got diversification then. So for somebody who's listening, one of the biggest myths is that to tell people when you're young, you should be super aggressive with your investments. 100% they say, you know, you're young, you can afford to lose money, you should take more risk. The problem is someone who's 30 and invests super aggressively and loses all their money, they're equally unhappy. And so someone who's 30, that takes too much risk, they often get scared out of the market and they never go back in again. So I would, if I go back to that allocation I said earlier, 75% stock, 25% bonds. For a young person, it's a great allocation.
- [05:38]
Tommy
So I'm just curious. I did a Roth IRA when I was 16. At this point next year it comes out of a self directed. It's got over a million dollars in it. I got very lucky. Now I couldn't put money in there after I was 27.
- [05:49]
David Bach
It's in a Roth IR.
- [05:50]
Tommy
Roth IRA, which you could max out 7,500. I was putting 300amonth when I was 16. I worked two jobs to do that.
- [05:56]
David Bach
And you're 42.
- [05:57]
Tommy
42.
- [05:58]
David Bach
Okay.
- [06:01]
You know, now here, now we'll talk later about my ideas for changing the tax law and retirement accounts. You know, with a Roth IRA you'll just leave it there because why would you take the money? I would just like keep growing tax free. But what I would tell you, cause my kids have Roth IRAs. When I wrote this book, the Automatic Millionaire and then the Latte Factor, my young, I've got a 15 year old now and I have a 22 year old. So when they read the Latte Factor six years ago, they were like, well, dad, how do I get one of these Roth IRA accounts? I'm like, well, we go set it up for you. And my 15 year old now has. We funded it for three years. So this year it's $7,500. Previous two years it was $7,000. So this kid's 15 with $24,000 in his Roth IRA. If you go to investor.gov, they've got probably the easiest compound interest calculator there is to use in the world. It's free. And you can run these numbers. So I go, james, let me show you something. If you save $20 a day, so we just use you, all you do is fund a Roth IRA until you reach your 60s.
- [06:58]
Tommy
It's so cool.
- [06:59]
David Bach
And you only earn, you know, you don't get the returns that you quoted with like private equity, you know, if you get 10% right. The stock market for the last hundred years has averaged 10% annually with reinvested dividends. James, how much money you think you'll have? The answer for him is over $11 million in tax free money.
- [07:17]
Tommy
At 10%.
- [07:18]
David Bach
At 10% now you can run these numbers lower, you could run them at 8% or 7% and then you just realize you need to save more money. But the key is $20 a day for most people can be a life changing amount of money put away for retirement. One of the things I did, I didn't bring my stack of cash for this show cause I wasn't knowing we were gonna do this show. But I just did a bunch of podcasts and I carried around. I'm not one of these people who does this, but I carry it around a stack of $10,000. So a stack of $10,000 and 20s is about that thick.
- [07:46]
Tommy
Okay?
- [07:46]
David Bach
So imagine I'm holding $10,000. The reason I did that is because I wanted to ask people, what do you think it takes to below $10,000 a year? And the answer is $27.40 a day. And you know, the question I ask people is like, look, I don't know what your financial situation is, but I know a whole lot of people who blow $27.40 a day on nothing.
- [08:10]
Tommy
They're going to get a candy bar, the chips.
- [08:12]
David Bach
You know, you go to Starbucks and you're not going out, you're not going into Starbucks and out of Starbucks and spending less than $10, right. Chipotle today just had came out with earnings and they basically said, you know, young people are starting to come here less because, because you go there and you get a burrito on a Coke and it's $27, right? So, you know, people are starting to actually wake up to the fact that with inflation they're going to need to save more money. And the only way to save more money is to make decision automatic. I carry these phone, this phone right now is like as a prop also. These are money making machines. And what I tell people is your phone right now is a money magnet. Where you can make everything automatic, all your savings, all your investing, automated with a click of, you know, a few clicks or people. The greatest technology in the world is separating you from your money automatically. It's much harder to hold onto your cash right now because everyone is coming for it. And they're not just coming for it once, they're coming for it for the lifetime value of the customer.
- [09:08]
Tommy
Right?
- [09:08]
David Bach
Everything's a subscription fee now.
- [09:10]
Tommy
Yeah. That's the one thing. You know, I'm sure you're familiar with Michael Michalowicz. I got to know him pretty well. But this idea, when it hits, that's when I was 16, it hit my account. I didn't miss the $300 a month, right? Because I just would look at it once a year and I just never used that money. I said, that's my future self money. And it's hard to do that. This takes some discipline.
- [09:31]
David Bach
What you just said is like, gives me chills. Because it's the key, right? You made a decision at a young age to take care of your future self, right? Now you're doing that with your health, right? And at the end of the day, a lot of people will, they know they should do something better with their finances, right? Like this book, the Automatic Millionair sold 2 million copies. The updates got success stories galore in the back of the book. And the thing I'm always the most fascinated with is like, well, what made you make the decision? Right? Like there's a story in the front of this book now with a woman named Tiffany. She was a teacher making $39,000 a year. But she lost her job, which is unusual as a teacher. They had layoffs. She was hugely in credit card debt. She had to move home with her mom. And she saw me on Oprah talking about the Automatic Millionaire. She's like, I think I can do this. She went down to the bookstore, bought the book and said, not only do I think I can do this, I think I can do this for myself. I can get out of debt, I can pay myself first. I can change the course of my life, and I think I can teach others. She's now gone out and taught millions of people how to do this. And she's a self made millionaire now. And that's an extreme example. But I get these stories all the time from people and the question is always, what made you make the decision? So let me ask you, what made you make the decision at 16?
- [10:56]
Tommy
So I got in my cousin's red Corvette. We're sitting in the Car. And he goes, how much money you got in your retirement account? Like, tell me about your Roth ira. I said, what are you talking about? And he goes, dude, I'm 10 years older than you. I'm 26. He goes, you don't understand that extra 10 years, what it'll do. He goes, listen man, why don't we go set something up right now? So we drove out to the bank, we sit down, he goes, how much can you afford a month? I go, about a hundred bucks. He goes, can you do 300? And I'm like, I'd have to get a second job. He's like, well, how do you feel about that? I'm like, I could do it. And it was more of like, you know, when I looked at a compound interest that back in the old school, finite math days on the back, that extra 10 years is crazy.
- [11:43]
David Bach
When you look at Buffett, one of the wealthiest people in the world today, and you see his compounding, his compounding started after 60. Because once you get to the fourth decade, money starts to compound at a rate of over 20x compound over 40 years.
- [11:56]
Tommy
I don't know what it is about a husband and wife getting together, but if there's both of them there, they'll say, you know what, let's just do the fifth wheel, let's just do that second house. Let's just do the Harley. And like, we deserve it. We work so hard and they don't realize they're stealing from their future. And they almost feel like they're self entitled. Business owners do it all the time. They, they take out a draw and like we work our butts off. But I'm like that. Money is like the fuel of growth.
- [12:24]
David Bach
I'll tell you, for couples it's a real issue because I always say people are usually born one of two ways. They're born to spend or they're born to budget. Which by the way, I don't like budgeting because budgeting's too hard. You should make it automatic. But you tend to marry your financial opposite. And it's very rare that two people who like to save get married. Sometimes two people who like to spend get married, but that's why they end up bankrupt.
- [12:45]
Tommy
Right?
- [12:46]
David Bach
So I think the way you get people to get clarity around their money decisions is I teach people to look at their values first. So what are your most important values? Purpose focused financial planning, which is that, what's the purpose of money in your life? The purpose in your money in your life is whatever you've decided the Purpose is. But if it's just to buy stuff, I promise you that stuff, long term doesn't make people happy. Just doesn't. No. And it creates more stress. So the thing that happens is our incomes go up is our lifestyles increase. And as our lifestyles increase, our stress goes up. And, you know, they say 70% of people have jobs right now, would like to quit their job. They're basically checked out, right? They're unhappy. And the number one reason is typically because they think their boss sucks. Right? Like, I know, I know you're direct report, you're doing leadership books or whatever. Like, I, I joked with somebody the other day, I said, you know, somebody should do a book called Just Don't Suck, right? Because.
- [13:40]
People are looking for love when it comes to work. People's, you know, our real stories are what impact people. Like my case. I started buying my. I bought my first stock at age 7. That's because my grandmother took me to McDonald's and was like, I'm gonna teach you today, there's three types of people in the world, but those who work here, they make minimum wage. That's a tough way to make a living, but people do. There are those who come here and eat just like you right now. You're a consumer, you're spending money. And there are people who own this place. They're the ones who bought the stock. And she took me home that day, you know, much like your cousin did, and opened up the newspaper and circled McD and was like, that's the symbol of the stock. Put me in front of a television set, showed me how to read a ticker symbol on the screen, and then took me down to a brokerage firm and helped me buy my first stock. And what that lesson did for me was that lesson was that made me realize everything we do, every single day, someone makes money from it. And if I can invest in those companies, that means I get to make money on it. Like, how can you own an iPhone and not own Apple stock? Well, you might not know if I should own Apple stock, but, you know, if you buy the S&P 500, you have Apple stock. How can you shop on Amazon every day and not on Amazon stock? You know, every single thing that you do all day long, you're spending money all over the place. And I was just on another podcast and somebody said, well, aren't you worried about everything going wrong? I'm like, everything going wrong? What does that even mean? Like, do you think people are not going to keep watching Netflix and they're not going to be listening to Spotify. All those companies just continue to make profits. And by the way, the next 10 years are going to be the best 10 years, I think, of our life. Even though the market's at an all time high right now. You know, if you've been in S&P 500 fund this year, you're up 19% year to date.
- [15:22]
Tommy
Right.
- [15:22]
David Bach
It's insane. You know, I think, I think what will happen the next 10 years is we'll continue to see this hockey stick. Because the reality is AI is producing profitability.
- [15:32]
Tommy
I was just in Australia last week. I've been to China, South America. I've been all over the place. And I just love this country. I love the idea of the American dream because I came from very low income. But this is the epitome we all have a chance. And I'm into meritocracy.
- [15:49]
David Bach
I live in Europe and I live in, yeah, full time now. I live in Italy. I live in Florence, Italy. So we lived in Manhattan and I'm like, we're going to go for nine months. We're going to go, Jack, when you're a sophomore and we'll go live in Italy and we'll expose you to all of Europe. Well, what ended up happening is everybody fell in love with it and we stayed. So both my kids went to international schools in Florence. My older son now is at Northwestern, he's about to graduate and he's, he's going to go live in New York again. He's got a job. And my younger son's got two more years. But we've been in Florence now for six years. I have all these expat friends. And the thing you learn about wealth is that the United States is the only country that taxes you wherever you go. So if you decide to move abroad, you still get taxed. But other countries you can get out of a lot of those taxes. And people just move based on taxes. And so the wealthy all over Europe, they just go where the next good tax deal is. I fundamentally believe in the American dream. I think, you know, the automatic millionaire book was about the American dream. If you pay yourself first, if you save small amounts of money automatically and you buy a home, you have to buy a home because you can't get wealthy as a renter. It's just statistically been impossible, right? Homeowners are worth 40 times more than the average renter. So if you go into a bar and you meet someone, if you ask them if they rent or they own a renter on average has $10,000 net worth. And a homeowner on average has a $430,000 net worth. People will say real estate hasn't performed as well as stocks. That's ridiculous. 600 grand nobody pays for the most part. For their first home, they don't pay cash.
- [17:20]
Tommy
No. You're getting a 30 year mortgage.
- [17:22]
David Bach
They're getting a 30 year mortgage. They're putting 20% down. So maybe they put 100 grand down. And now if that $600,000 home now turns into a million, they made 400,000. If they're married, they made $400,000 tax free. On $100,000 investment. We call that a forex return. Very hard to get a forex return by simply buying an index fund. Takes decades. Right. Rule of 72, 10% takes seven years. So when you look at the wealth in America today, it's in two buckets. If you sliced open America, they've got a balanced portfolio that's 60% stock and 40% bonds. Those have been the two things that have made millionaires in this country in the last 30 years. When I wrote the Automatic Millionaire, I launched his book on Oprah 20 years ago, stock value has had a 6x return. So it's gone up sixfold in 20 years. Real estate's gone up fourfold. But again, with actual leverage of a mortgage.
- [18:22]
Tommy
Yeah, the leverage is where you get it.
- [18:24]
David Bach
So an ordinary American with an ordinary job, if they bought a home and they've been paying themselves first for 20 years, they're a millionaire today. Now some people go, well, a million dollars isn't what it used to be. Still, more than 96% of Americans have. So there's 24 million millionaires in America, 96% aren't millionaires. And 7 out of 10Americans are still living paycheck to paycheck. 7 out of 10, 7 out of 10. 6 out of 10Americans don't have $1,000 in a bank account in case of emergency purposes. 4 out of 10 don't have $400. Huh. It's scary, actually.
- [19:00]
Tommy
And you were in commercial real estate.
- [19:02]
David Bach
Yeah. You did some good research. I started my career in commercial real estate.
- [19:06]
Tommy
And you know what, what is your take on that? Because you, you talk about stocks, bonds, and you talk about homeownership. You know, there are a lot of tax advantages to buy real estate. Depreciation, huge. Now you got accelerated depreciation. It's.
- [19:19]
David Bach
Well, I mean, like I'm imagining that we're in a building that you own.
- [19:22]
Tommy
Yeah. These are Both paid off. Yeah.
- [19:23]
David Bach
So, you know, when you have a business, it is literally the biggest no brainer in the world to buy a building, right? And then you have a building, you have an LLC that owns the building and your business leases it back.
- [19:33]
Tommy
This is an opportunity zone, by the way.
- [19:35]
David Bach
And there's an opportunity zone, so you got even bigger depreciation. And now with the new tax laws, as you know, you can do cost segregations now.
- [19:40]
Tommy
So you're getting that on Airbnb too.
- [19:43]
David Bach
You know, you're getting 100% depreciation. Depending on how it gets done, you can depreciate things a lot faster. So it's all about taking your money and getting your money to work for you. The thing. And you're, you're, you're entering this new level of, of wealth and you're, and you're learning all the tricks. They obsess on making sure that their money's working for them while they sleep, right? That's wealth and that's wealth. And really what wealth is, if you're smart about it, is it's freedom. You can be wealthy and not be free. I have quite a few friends who've got a lot of wealth and they've bought so many things that they're actually not free. You know, now they've got five, six, seven, eight homes and now they have to have a whole team to manage the houses. An interesting phenomenon happens where people who are making good money in a job, if they don't actually start to build financial freedom, they actually start to resent their job. So what happens is you've got someone who's making 200,000 or 250 or 300 and they got themselves a Harley and they bought themselves a new truck and maybe they got in a bigger home. Now two years have gone by, a recession hits, they're having to work harder. They're making maybe 310, 320, but they're actually further behind. And all of a sudden they're like, you know, I think this job sucks. It's not the job that sucks. It's that you didn't use your money to build some freedom.
- [21:04]
Tommy
What can you say? What moves the needle for people?
- [21:07]
David Bach
So the thing is, when you're in your 20s and your 30s and even your 40s, you have an unstoppable amount of energy. You can just go through walls and then all of a sudden you get in your 50s and your 60s and you just don't have the same energy. You don't want to go through walls. The same way you don't want to wake up in your 50s and be like, oh my God, okay, I've really got to get going. I mean, and by the way, if you're in your 50s and that's you, you still need to get going. There's a chart in my book, and this was a chart given to me in training at Morgan Stanley. We had a guy come in, you know, one of our top financial buyers. He was like 62, he's getting ready to retire. And the last thing he did was hand us this chart. And the chart was showing us back in the day what would happen if we invested $2,000 in an IRA account. I saw you give this example before, but I've got this example of $3,000. If you start at age 15. This is like my son. And you save $3,000 a year from age 15 to 19. At 65, this person's got $1,615,000. If they earn 10%, the next kid starts at 19 and invests till age 26. Never invests another dollar, they've got less. $1.5 million. Next person starts investing at 27, invests every single year till the age of 65 and they've got less at 1.3 million. Compound interest works when you start it and you start sooner versus later.
- [22:29]
Tommy
So let me just ask you a selfish question. Let's just say God was really good and abundant with your life. Where would you be thinking about putting money to get the highest irr? And I know you'd be diversified, you'd probably have some long term pen, you'd probably do some commercial real estate. I don't know, what would you do?
- [22:45]
David Bach
You know, I think everybody's situation, it's always different, right? I think the question is, are you. Is the goal to continue to build wealth? Is the goal to preserve wealth? I think age is a lot of a huge factor in this, right? Because you're 42, you're doing so well that you're at a point now where like, I'll just talk to you personally, but you're at a point where you're building generational wealth. And part of it, when you build generational wealth is are you simplifying your life or are you making your life more complicated? So one of the things you need to ask yourself when, like, I think it's smart. Cause again, I listened to a couple of your podcasts before I came here. You're buying businesses in spaces that you know, you understand the game now. Cause you've been Bought out by private equity. You get how, like, look, I can buy these businesses at a 6, I can clean them up, I can sell them at a 12 or 15. Right. That's the whole private equity game. So you're in the what I would call the smart part of the food chain and private equity for most retail investors, and I include high net worth individuals in this category. Anybody over 25 million. Once you get over 25 million, the first thing these advisors will tell you is you should have 25% in private equity. They'll try to have you have 10 to 25% of your allocation private equity. I can tell you how much I have in private equity and I've been involved in private equity because I was vice chairman of a firm that was bought by private equity.
- [24:01]
I have zero in private equity. Now why do I have zero in private equity? So like if you listen to Chamath for instance, on the all in Summit, he rails against the fact that many private equity funds, the old ones paid back capital, right. But the new ones, the money is just continuing to roll from fund to fund. And what happens is the nav value of these funds is arguably made up because these things are not liquid. So they're selling these, they're selling companies from one private equity friend to the next private equity friend. But they're not always paying out the dollars. So I'm not personally a huge fan of it. I think for you, I'd be buying businesses and buildings and land.
- [24:46]
Tommy
We just bought 122 acres in Idaho because, dude, this is the most unfound area in northern Idaho. And I'm like, man, once this thing gets found, it's still a little late for me.
- [24:58]
David Bach
Yeah.
- [24:58]
Tommy
But 10 years ago, people were buying it like pennies on the dollar. And it's like, it's paradise. It's right next to a ski mountain. It's on a massive lake.
- [25:06]
David Bach
Oh, you got to tell me where it is later.
- [25:08]
Tommy
So these are the questions I repeat all the time. So what's one piece of game changing advice you wish you knew in your early 20s?
- [25:15]
David Bach
I think that there's a skill set and a gift to building relationships and continuing those relationships. And I'm somebody who's got friends that goes all the way back to the third grade. And I continually make friends and I keep friends. And if I could go back and I told my son this, I wish I had kept a really solid database starting at 20, because I still am not in a position where I can just click an email and go, I want this to go out to these 500 people. The younger that you appreciate the relationships, the better. So that would be my first bit of advice.
- [25:50]
Tommy
Love the idea of the Rolodex. I mean, that's an old fashioned term, but a database. One of the things I stopped picking up people I had a common history with, and I started hanging out with people I have a common future with.
- [26:03]
David Bach
You've gotten to know probably Dan Sullivan. Right. Dan used to say, I want to be with people who are batteries included. And I started saying, when you meet people.
- [26:15]
You'Re somebody who's got a fully charged phone, your batteries included guy. If you put yourself around other people who are batteries included, the energy level just immediately goes up. People who are batteries included, people who don't have a fully charged battery, they want to hang out with you too, because they want to plug into your battery.
- [26:32]
Tommy
That's interesting, right?
- [26:33]
David Bach
So you have to sort of think, you have to look at things as like, is this person bringing energy to me or is this person draining energy from me?
- [26:39]
Tommy
Here's my test, David. It's an easy test. You pull out your cell phone and when the caller ID pops up, do you get excited? Do you smile? Are you excited? Or are you like, here we go.
- [26:51]
David Bach
Yep. I try to wake up every morning. You know, I have my whole process. Everybody has, but like, I've got my. I wake up and I meditate, I journal, I do my gratitude. And then every morning I send. I usually send three messages a day where I send out basically a love message. And often that message is just what I call a good job message. You know, I know you're talking about kids. Like, I do that with my kids. Like, good job. Here's what you're doing right. Catch people doing things right. We don't do that enough.
- [27:19]
Tommy
Oh, I love this. Yeah, you do have great energy, David.
- [27:23]
David Bach
Thank you.
- [27:23]
Tommy
We could keep going here, but I really want to dive into this tax strategy because I'm super excited about it.
- [27:28]
David Bach
All right, so this is a big idea. At least I think it's a big idea. What happened is when I started updating the automatic millionaire, I'm getting all the new statistics and all the new stats. A number popped out at me that blew my mind away. $46 trillion right now in retirement accounts. All that money got there in the last 40 years because that's how long we've had these 401k plans. So there's $46 trillion in retirement accounts. And I've spent basically 30 years of my life helping people Fill these accounts. My whole career has been about teaching people to pay themselves first and save money automatically so they'll have money when they retire and they can enjoy their retirement. What I realized as I was updating the book and I've had this idea for a few years, people aren't taking money out of their retirement accounts. What I didn't know is what, what percentage weren't taking money out. With ChatGPT, Deep Research and all these AI tools, I was able to find out that 8 out of 10Americans, it's 83%. But I'll keep it simple. 8 out of 10, 8 out of 10 retirees are not taking money out of their IRA account until they hit what's called RMD age. RMD age is required. Mandatory distribution age. It was 70 and a half, now it's 73 and it's going to go to 75 in 2033 depending on when you were born. As a financial advisor, because that's where I basically spent my last 30 years. When you run a financial plan for someone, the plan, all plans default to take IRA money last. So they have you spend all your taxable money and not take your IRA money until the RMD age.
- [29:10]
So no one's taking this money. And the number one reason is taxes, right? Because all this money's been put away tax deductible, it's growing tax free and no one wants to pay ordinary income tax. That's why all the money got put there. It was a tax, you know, avoidance strategy, right? Like you're basically taking money and paying yourself first. You don't pay taxes. That's the beautiful thing. So my idea is this, my, my idea is to change ordinary income tax on IRA accounts to a flat tax. So what we ran was an analysis of what would happen if you had a flat tax. And we ran three different cases. 10%, 12% and 15%. And people can go to IRA flattax.com and they can read the white papers that we've done. And to simplify this, here's what happens.
- [30:03]
If you take ordinary income tax and you go to retirees and you give them an eight year window. So my suggestion is that you're flowing into the economy. The numbers look like this and these are, again, I'm using AI, I'm using all the engines to do this. So you have to take that with somewhat of a grain of salt. But all this data came back and said you would in 10 years basically bring in a trillion dollars in taxable money forward. So the government would Bring in all this money, over a trillion dollars, you'd bring another trillion dollars into the economy. And that economy money is not all instantly spent. In many cases they'll move money into their taxable account, but then they'll start to spend some of it sooner. That goes into the local economy, that goes into garage doors, it goes into anything that needs to be done in their local economy. So that could create up to $2.5 trillion in local economy revenue. It would raise the GDP. The lowest number it's come back is a quarter of 1%. Could raise GDP, that's quarter 1% annually. Could raise GDP up to 1% annually. So what you have here is a very simple idea that is less tax means more retirement. So there will be some people who are against it. But I think it's kind of such a simple idea that it could get bipartisan approval. And it's similar to the Roth IRA. The Roth IRA was done with bipartisan approval. There's $2.2 trillion now in Roth IRAs. The Financial Service industry learned how to teach people how to do Roth conversions. And this would just be another conversion that could be considered for an eight year window. It would also. The last thing I'll say is this impacts 73 million baby boomers and it impacts 50 million people underneath those baby boomers. So we've got 50 million people in their 50s. If all of a sudden you're in your 50s, you're 53 to 60 and you know that you've got the chance to fund your retirement account and then take it out at a lower tax rate, you're going to see people increase the amount of money they put in their retirement accounts. Yeah, they'll use the catch up provisions in their 50s, which is exactly what we need them to do.
- [32:09]
Tommy
But that's, it's, it's a crazy world. I'm very optimistic. I was sitting down with Robert Ciadini, influence. He came to the house. I met through Joe, got to know him really well, hung out with him like a dozen times, comes to the house with him and Bob at and we're just chatting and he goes, I am so excited. I am so energetic about the future and so many people are so worried. What is your take?
- [32:30]
David Bach
I'm excited about the future. I think the next 10 years are gonna be the greatest 10 years of our life.
- [32:33]
Tommy
Golden.
- [32:34]
David Bach
I mean, I really do. And I think from a, from an investment standpoint, there's gonna be more money made in the next 10 years than the last 20. I just think we're going into a very unique moment in time. And I also think what's exciting, especially for, like, when I meet people like you, is is there's just an entire opportunity of wealth creation in these older, blue collar, traditional businesses. Like this whole idea that everybody's got to go to college and get these AI jobs, right?
- [33:01]
Tommy
I just worry about the entitlement. Not the entitlements. I'm not talking about government, just this idea that we should be provided for. We live in this rich country. We don't need to work, we don't need to try. We need to. We want to play video games. We shouldn't have to. And this idea of the hunter, of going out, getting it, of like, I got my first job at 12 washing dishes. And I'm not bragging about it. I'm just like, mom didn't have a lot of money. I wanted to make my own. Like, what's wrong with that? Some people just.
- [33:27]
David Bach
I'll tell you one last cute story. When I wrote the Automatic Millionaire, I used to get my haircut at a place called Nice Cuts in San Francisco. I went to Nice Cuts because the haircuts were six bucks. So the guy who cut my hair is a guy named Sam. And it was his place. And Sam had two of these places. And he goes, I gave him the book. I go, I'm going to Oprah with this book. And he's like, oh, what are you going to talk about? My goal is to get 10 million Americans to pay themselves first one hour a day of their income. And he goes, what does that mean? I go, it means 12 and a half percent of their gross income. Literally falls over laughing. He could not stop laughing. I go, sam, what's so funny? He goes, david, I came over on a boat from Vietnam. Like, I'm one of those people. I didn't speak English. I had $75. I worked in the back of a restaurant, and they gave me a cot.
- [34:19]
And I slept on that cot and I ate rice and bananas basically for a year. My mom told me when I got to America, she said, you need to save 90% of your income and live off 10%. That's why he's laughing. He goes, but I was in America, David. He goes, I lived off of 25%. So he saved 75% of his income that first year. That's how he got into his own business. And now he owns real estate. All he had, he was buying buildings in San Francisco. And that's the immigrant mentality. They come to this country, they're so hungry, all they see is opportunity. And that's a gift.
- [34:58]
Tommy
Is there a book that when you were younger, just changed your perspective on life or just really changed something other than your own?
- [35:04]
David Bach
Oh, my God. Dale Carnegie, Think and Grow Rich. No. Dale Carney, how to Win Friends and Influence People. That's the book that started it all for me. So that was. I read that book at age.
- [35:12]
Tommy
Napoleon Hill.
- [35:13]
David Bach
Yeah, 19. And then after that book, I read Napoleon Hill's Think and Grow Rich. Those were my first two self help, personal development books that started me on the journey. Those books are still classics. I've made my kids read those books.
- [35:27]
Tommy
And there's this idea, a carpet DM or whatever, live life to its fullest. But here's my problem. How do you say live today like it's your last day, but also say prepare for the future?
- [35:40]
David Bach
I know it's such a great question because my phrase is always live rich now. And people go, well, live rich now. Then that would mean I should just spend all my money and just enjoy my life because what if I die tomorrow?
- [35:50]
Tommy
It's a lot of discipline. How do you exercise that skill of discipline? I find it easy and hard at the same time because discipline is doing something. People are like, man, I get up early and I go into the cold plunge. But you love that stuff if you love doing it. Some people go, I hit the gym for two hours a day. That's not discipline. Not if you enjoy it. Not if it's like something you. Discipline is actually doing something you do not want to do.
- [36:14]
David Bach
See, we got such an interesting conversation about this because I think that discipline isn't a habit, right? So whatever the habit is becomes a discipline. I don't think people who go to the gym two hours a day started off liking it. I think the more you go to the gym, the habit of going to the gym, it's just way more enjoyable, right? Like I work out five days a week at least. And I've just been in Chicago for four days. A hotel that did not have a gym, and I had four days without working out.
- [36:40]
Tommy
I love this, David. Well, you got. Look, I want to do this again in the future. You got a book release. Everybody got to. You got to go pick up. So you got the new copy of the Automatic Millionaire.
- [36:53]
David Bach
Here we go. Automatic Millionaire, 20 year anniversary edition.
- [36:56]
Tommy
All right. Thank you so much, David. Thanks for coming in today. I really enjoyed it.
- [36:59]
David Bach
You're super welcome. I'm enjoying it.
- [37:01]
Tommy
Thank you, brother.
- [37:01]
David Bach
Appreciate you.
- [37:02]
Tommy
Thank you. Thanks so much for listening to this episode. Like always, we're going to close it out with the Tommy Truth, which is a little slice of wisdom from me to you that can help guide you in whatever you're striving towards right now. These simple steps transformed my life from being a broke 20 year old to becoming a cash millionaire in my 30s. Number one, work on yourself. Readers are leaders. Read a lot, get a great mentors, invest in yourself. The law of the lid says you're only going to go as far as your brand allows you ago. So get educated as much as possible. Be genuinely curious and stay curious for the rest of your life. And that's it, guys. We'll talk to you next week.