Note: I decided to break this entry into multiple pieces since there is a lot to talk about in each one of the lessons. Here is Part 1 of I don’t know how many.
I had heard much about a book that sounded quite boring to me and hence I paid little attention to, “The Richest Man in Babylon.” I assimilated Babylon with a beautiful ancient city, and as such I had little interest in spending my valuable time reading some sort of story with little relevance to the modern world and my own personal success. That was my initial reaction simply from reading the title. But after seeing the book come up over and over (particularly thanks to Amazon’s recommendations, which can be quite insistent) I decided to read it and see what this book was all about. The reviews talked about advice that was just as relevant today.
I was pleasantly surprised to find, as many others had, that this book written in the 1920’s was in fact just as relevant today. Written as a fable, the story is intriguing and the prose is beautiful and succinct. I am not one to generally care much for the prose since I enjoy business books which, in general, don’t have an appealing prose. Through this book I encountered a very rich city from some forthy centuries ago (that’s 4,000 years people) in which men and women woke up each day with the same thoughts and worries as most of us do today. The details and particularities were different than today’s reality, but the essence was there and the parallels could be easily drawn. We may not carry pieces of bronze, silver and gold in our pockets these days, but we have a currency we use to buy items. We may not go to a “gold lender” to get our loans, but we do have banks for this very purpose which behave very much the same as the gold lender used to in Babylon, charging an interest rate for the money that was lent to you. Women used to leave their men when they ran out of money due to irresponsible behavior, just as today many marriages fail due to financial distress and disagreements. Pretty much every lesson in the book is valuable today, and as such I encourage everyone to take a few hours to read through it.
I want to share with you a few gems from the book.
Gem #1: A tenth of all you earn shall be yours to keep
This is probably the most powerful and simple lesson the book teaches, yet it can be the most difficult to apply in our lives if we buy into consumerism. Although you may currently think that everything you earn is yours to keep, the reality is that you must use this income to pay for your debt, buy food, clothing and pay for shelter. If you are not careful, before you know it the money you receive is gone and you have to wait until your next paycheck in order to continue paying for your living expenses. The The Richest Man in Babylon teaches us that no matter what we do, the only way to build wealth is to live BENEATH your means, notice that it is not WITHIN your means, but beneath. You must not use more than 90% of your income to pay for your loans or other debts and pay for all of your living expenses including vacation, giving to charity, and emergencies. 10% of all of your income should be used to fatten your purse and create passive income streams or investments opportunities. You may not find this appealing at first, since it would make you live as if you had a 10% “pay cut,” but consider your two options with respect to this and judge for yourself what would be best for you. With smart decisions you will be treating money much more wisely and will be able to upgrade your living situation without relying on your employer’s will.
Here are your two options of things you can do with your income:
- Bad option. Spend all of your income each month. In this option you live paycheck by paycheck and at the end of each cycle you have no money left over from the previous payment you received. You may have more clothes, have eaten more food, and given yourself a few luxuries, but your bank account or purse are just as lean as they started. You may have even given to charity a little amount and felt good for doing that, it was a worthy cause, you say. The problem with this option is that we always rely on a corporation to pay us, which they won’t do unless the price seems right to them, and this means we need to be working continuously doing what others want us to do in order to be paid. If we choose this option, we would also rely mostly on the government in retirement, which we should all have learned by now it is not a wise option given our levels of debt and rising health care costs. This is not only risky but also dangerous and a sure way to NOT achieve financial freedom. In case of disability or an emergency we quickly go in debt, and coming out of debt can be painful and stressful. The good news is that this is not the best option we have, and we should instead follow the teaching of the The Richest Man in Babylon, Option 2.
- Good Option. 10% of our income is ours to keep, forever. The concept in Babylon was simple, for each 10 pieces of copper (or silver, or gold) you received, take one and declare it yours. This piece of copper would be yours to keep forever and would become what I refer to as a my personal Wealth Soldier, which you would invest and have it work hard for you to make your more and more little Wealth Soldiers. This money would be there to make you richer and, eventually, you will have a strong army of soldiers working for you. Different from Option 1, if you save 10% of your income no matter what, that means that after each cycle your wallet and bank account will be fatter and ready to provide more for you (assuming you are not going further into debt each month). The simple feeling of knowing that you HAVE and OWN more money should give you the motivation to continue saving. At the end of 1 year you could have thousands of Wealth Soldiers (money) working for you in investments to provide for you a better living in the future. You are becoming richer, wealthier month by month.
Given that we do not live in Babylon, we may not be able to (or want to) follow exactly the same system they did. We do have many options to make use of this great rule when making financial decisions.
How to Apply this Lesson
- Crucial Step – adjust your spending. If you are spending all of your income each month, or borrowing through loans and credit cards each month, it’s time to either bring in more income (be creative here) and/or re-examine where your money is going and cut some expenses. You will never build wealth if you spend all of your income or more. For every hundred dollars (or euros, pesos, yen, won, etc.) you receive, put ten away and declare them your personal Wealth Soldiers. These must not be spent unless you do not desire to build your wealth. Use the other ninety to pay for debt (and make sure your total debt is going down), buy food, clothes, donate to charity, etc. You’d be impressed on how little your life changes when you cut your expenses by 10% and how much your savings increase when you do so.
- Start simple. If your employer provides you a retirement account (possibly with matching benefits!) have them take this 10% you want to save and put it in your retirement account. If you do not have an account through an employer, make use of a IRA or Roth IRA account which you can easily open with any major bank. Just pay attention to investment options and fees they may have. At the end of one year, you will have invested 10% of your income, which is more than your average income for an ENTIRE MONTH! In general, put the money where you feel safe putting it, in investments you understand or investment recommended to you by SOMEONE YOU TRUST. If you do not know about investments, learn about them and seek the advice of someone who knows what they are talking about. A lesson we will review later is that advice is freely and willingly given, but it is your responsibility to only accept good advice.
- Although the previous step is simple and neat, some of you may want to use this money (your Wealth Soldiers) for investments other than just bonds/mutual funds. You may want to invest this money in businesses or other money generating ideas. If this is the case, open an account ONLY for this purpose. Do not use your regular savings account if you are going to do this, as you do not want to mix the money you declare as YOURS with the money you may be going to use to spend in case of emergency or for travel, etc. The money you have declared as YOURS, your personal Wealth Soldiers, deserve special treatment and as such you should put them in a separate account designated as your Wealth Building account. This way you will never spend them for anything other than buying assets or investments that increase your wealth, rather than buying items that decrease your net worth.
HINT: Money contributed after tax to a Roth account can be withdrawn and used. The earnings can’t be withdrawn early without penalty, except for in a few cases. I do not recommend you withdraw your contributions to a Roth account simply to spend them, but it would be wise to consider doing so for some types of investments.
I will elaborate on many other lessons later on, but for now, I believe this is lengthy enough. I sincerely hope you find it useful enough to apply some of this in your life and recommend it to your friends. Opportunities to build our wealth are around us, we just have to be smarter with money. Financial education is just as important as any other type of education, if not more. Use your money wisely!