Best Financial Advice from David Bach

A few months ago I wrote a piece for a national magazine and was able to "interview" (via email and via their representatives), some of the top names in personal finance today and ask them what their best piece of financial advice was. Here's the response I received from David Bach, the #1 New York Times bestselling author of Start Late, Finish Rich and The Automatic Millionaire:

I’m often asked what’s the secret to being rich. If I could only give a person one piece of advice when it comes to money it would be this—buy a home. You simply cannot get rich renting. According to the Federal Reserve, the average renter in America today is basically broke (worth less then $5,000). On the other hand, the average homeowner is worth more than $171,000. That’s 34 times more than a renter. The simple truth about building wealth in America is this: “Nothing you will ever do in your lifetime will realistically build you as much wealth as buying a home.” Don’t believe me? Go ask your parents and grandparents right now if their home was their best investment. The answer is almost always a resounding “yes.” My grandmother bought her home for $10,000 and, when she went to sell it a few years ago, she sold it for more than $400,000. I remember as she was packing up the house she turned to me and said, “If only we’d bought a few more houses and rented them,” we would have really been rich. If you’re renting right now, start saving to buy a home. It’s the smartest investment you’ll ever make.

For those of you interested, here's my best piece of financial advice.

Comments

[db]

I'll take your advice over David Bach's advice any day. Since Bach has started beating his home ownership so loudly I've just about completely turned away from him as a source of financial information.

I am just tired of people like Bach constantly telling us that we need to own a home NOW. This is not because I don't want people to own homes. It's because I think you have to be careful to afford the home you end up with, and Bach naively assumes that everybody out there will be able to do that!

Let's get everybody into a home! That sort of thinking has been behind the recent spate of no-down-payment, interest-only sort of mortgages. Mortgages they probably really can't afford. It also encourages people to get disproportionate ideas about real estate as a vehicle to wealth (such as in your next article on barely making it on $150K a year -- where we find the problem is they have bought into needing to buy rental properties to build wealth.)

I look around at the local housing market, where there are now condos on sale for $500K on up to $1 million and more. Who in their right minds pays $1 million for a glorified apartment? It's incredible to me. Moreover, who can afford all these $1 million plus properties?

I am sorry Mr. Bach, but I will not be a homeowner until I can afford to be one. (And I don't want much -- a modest 3-bedroom ranch house in a quiet neighborhood with a yard so I can grow part of my own food and good public transportation access is all I really want.)

That means I will not be a homeowner until I have an acceptable downpayment and something left over in savings to handle maintenance and upkeep on the house without causing me to incur debt. If that means I'm a loser in the money game, you'll just have to change your way of thinking about me.

DB

[Rick]

I'll agree that this advice ("buy a home"), taken on its own, is not that great of advice. Mr. Bach's logic is quite poor. He claims that renters are worth less than $5K, while owners are worth an average of $171K. What do they say: correlation is not causality. In other words, I'll bet that rather than the home making these people rich, it's the rich people that can afford to buy a home.

Second, Mr. Bach compares us to our parents and grandparents, citing one example of a person who bought their home for $10K. I'm sorry, but homes were just much cheaper back then. $10,000 in 1960 is worth about $67,000 today, and you'll be hard pressed to find a home for that amount in most places today. On the flip side, there is absolutely no evidence that homes will continue appreciating in the future like they have in the past. That sort of appreciation is simply unsustainable in the long-term. In short, just because a home may have turned out to be an excellent investment in 1960, this by no means indicates that a home is just as good of an investment in 2007.

I have nothing against buying a house. I just bought one myself, and it was actually a zero-down loan. But that's okay, because I'm in this for the long term, and in my location, houses continue to appreciate at a slow but steady pace, unlike the rapid appreciation and now depreciation in some locales.

Basically, the key is simply to spend less than you make, budget, use self-control, educate yourself, know what you're getting into. Debt is not bad. It's a tool. Know how to properly use your tools. And if you don't know how to do any of this, fall back to the first key: spend less than you make.

[Skott]

I agree with Rick. Putting yourself in a position to own your home requires some saving and discipline. By cutting corners to get there, the way David Bach advocates in his book, the benefits of homeownership may be negated by the higher interest rates or unfavorable terms that often come with sub-prime mortgages. I prefer not to think of owning my home as an investment. It's simply a better deal than renting.

[Ty]

DB is in the same boat as Dave Ramsey and Robert Kiyosaki in that they have nothing of substance to offer. I would recommend to everyone to go read The Richest Man in Babylon...it is all three of their advices wrapped up into 150 pages that was written in 1926 by George Clason. They just got popular off of the fact that they have pretty books and shows and are friends with the Trump...

[Jesse]

I don't know if it's logical to say, "Well, people that rent are poor (worth less than 5k)." You should probably say, "Well, people that are poor, have to rent."