“A part of all I earn is mine to keep. Say it in the morning when I first arise. Say it at night. Say it every hour of every day. Say it to yourself until the words stand out like letters of fire across the sky.”
George S. Clasen, The Richest Man in Babylon
One of my favorite quotes from one of my favorite books on finance that I have ever read. It sums up all that is important in saving for retirement and how to look at money in your life.
This week we are going to venture off our path a little to discuss a book that has had a huge impact on my life, as well as countless others.
The Richest Man in Babylon was written and published in 1926 and has gone on to become one of the classics in personal finance. Through stories set in ancient Babylon using parables, they set about teaching seven steps to financial freedom.
It uses seven parables to teach thrift, financial planning, and personal wealth. It is written in a style reminiscent of the Bible in its simple, easy to understand writing. It is not a long, dry book that you would associate with finance but an easy to read and understand. Frankly, I read this is about two days. It is very hard to put down and is very fascinating. It really opens up your eyes to what is possible.
I wish this had been taught when I was in school as a younger man, as it would have opened up many more ideas on how to deal with and handle money. I can’t stress enough how much this book as impacted my life and inspired me to branch out from the standard of just saving money to save it.
Alright, let’s start talking about the parables and how they can improve your life.
Lesson 1. Start thy purse to fattening.
The goal of this parable is pretty obvious. Start saving money and looking for opportunities to invest that money. This parable refers to the main character Arkad, who was a camel trader. He talks about how he was able to begin to live below his means. He began in poverty and was deep in debt, he was able to figure out how to live on 70% of his income, setting aside 20% to pay his debtors, and to “pay himself” 10% through savings and investments.
The two most important points to take away from this parable are that you need to “pay yourself” first. Setting aside 10% is a great starting point but if that is not enough, then start with 2% and work you way up to the 10%. Some refer to this as the “Me Tax”.
Have you ever wondered why the U.S. government taxes us on our money first? Well, they take this parable very seriously. They pay themselves first. This is why we must be diligent with our money.
The second point would be that you need to start looking for ways to have that money work for you. In the book, Arkad saves it for one year and then starts to lend it out to others and recoups interest as a way of making it work for him.
Lesson 2. Control thy expenditures
The main lesson of this parable is to control your spending. If you can learn to live below your means it will enable you to begin to accumulate wealth.
He says in the book “budget your expenses so that you may money to pay for your necessities, to pay for you enjoyments and to gratify your worthwhile desires without spending more than 90% of your earnings.”
To keep your costs down while not denying yourself things is the key here. One of the problems that we all run into is learning to control our spending even as our earning power grows.
In other words, as we earn more we spend more. The key to growing your wealth is harnessing this need vs want urge. If you can control your expenditures and continue to pay yourself first you will grow your wealth immeasurably. If you can learn to tuck that extra money into our savings or investments then the sky is the limit.
Consider this. Warren Buffet, arguably one of richest men on Earth lives in a nice home in Omaha, Nebraska. It is a nice, comfortable home but by no means extravagant. He could certainly afford to live anywhere but he chooses to live simply. He had learned the lesson of living simply and using the money to work for him.
Lesson 3. Make thy gold multiply
This lesson is about making our money work for us. I think he is referring to investing so that your money will do all the hard for you. He says “put each coin to work so that it may reproduce its kind even as the flocks of the field and help to bring you more income, a stream of wealth that will flow constantly into your purse.”
This is one of the best ways to accumulate wealth. Letting our money work for us and create more and more wealth. There are many great investment vehicles that we can put our money into.
Stocks, bonds, mutual funds, real estate, gold, private companies and commodities. The list is endless and it is our job to invest in things that we understand and do our due diligence to make sure it is something we understand so that if it goes south we have an exit strategy.
We should invest our money so that we have a sure and steady stream of income during our lifetime and especially during our retirement years. This is where time can be our ally. Letting our money use the magic of compounding to grow our wealth.
4. Guard thy treasures from loss
Insurance is a necessary evil. It is something we all should have in the event of a tragedy or an accident. Not only for our health but also for our fiscal health. If you have had a car accident or medical incident and didn’t have insurance at that moment you know how much this can affect your life.
There are many kinds of insurance and all kinds of coverages you can and should have. This is a must as you build your wealth as you can’t afford to be miserly with your insurance and put your nest egg at risk because you didn’t properly insure yourself and your belongings.
It is paramount that you have the correct coverages and it is something that you should check on an annual basis. It is a very simple call to your agent to check your policies and maybe another agency for a comparison. In this day of the internet, you can even check all of these online with a few clicks.
5. Make of thy dwelling a profitable investment
Our homes are the highest expense that we will ever have and it is vital that we consider this expense very carefully. Most people view our homes as an investment but I would argue that it is not that at all, but instead, it is a very large expense that has to be managed very carefully or it will rule us.
It can be very easy to be “house poor” in that you live above your means with the purchase or rent of your home. It is not important if you own or rent but rather that it is an expense that you can comfortably afford.
Again you don’t need to so cheap as to punish yourself just make sure that you live below your means so that your money can work for you.
6. Insure a future income
Setting aside money during our working years is a must to ensure our retirement years. Today there are many different vehicles that we can choose to invest in. Our employers 401k, 403b,Roth IRA, Traditional IRA, SEP plans and so on.
The earlier we start the better so that we can utilize the amazing magic of compounding. Albert Einstein referred to this as the eighth wonder of the world. A little-known fact is that Benjamin Franklin left 1000 pounds in a trust which he bequeathed to the cities of Boston and Philadelphia with the provision that the money was to remain untouched for 200 years. The money in the trust grew to $2 million for Boston and $5 million for Philadelphia. This all without a single contribution during those 20o years. Amazing. Franklin was quoted as saying that “money can beget money, and its offspring can beget more.”
The lesson we can learn from this is that time can be our biggest ally in our quest for retirement. Start early and watch this magic of compounding aid you in the growth of your retirement nest egg.
7. Increase thy ability to earn
Learning is the gateway to much in life. To be in constant search of knowledge will enrich your life in more ways than you can count. As you gather the knowledge you will gather wisdom, which will help as you make decisions that affect your investments in finance as well as your personal life.
In this age of technology, there are so many great ways to constantly educate yourself. There are many great online courses that you can take to help learn more and grow your knowledge in just about any subject you want to learn more about. There are complete courses from Ivy League schools from finance to philosophy.
We should constantly strive to improve ourselves in all aspects of our lives. Whether it is learning to be healthier, be better at our jobs or have better relationships at home. All these things make us a more rounded person. As we become smarter and wiser our ability to earn more increases as well.
The Richest Man in Babylon is one of the classics of personal finance and it has influenced countless numbers of people to improve their financial lot in life.
It has had a huge influence on my life and in fact, one of the reasons I am writing this post is a direct result of my reading this amazing book. It is not a long book, nor is it boring or dry. It is full of short parables that explain and illustrate very simple, easy to understand points that you can take and institute into your life. Reading it will be one of the greatest investments you can make in your life and helping you learn to grow your wealth.
One of the main points is to begin to set aside at least 10% of all that you earn so that in time you can use that money to invest to begin to earn more income. Living below your means and using your money to work for you is crucial to building wealth during your lifetime.
Investing that money and using the awesome power of compounding to greatly increase your wealth over your life. The earlier you start the more this can work to your advantage. And this can help you earn income into your retirement years.
I highly encourage you to take a look at this book, it will teach you valuable life lessons that you can use to better your life and grow your wealth.
Thank you for taking the time to read this post and if you found it valuable please share it.