The Richest Man in Babylon*, a book written in the 1920s, has more practical wisdom in it about personal finances than most people practice in their entire lives. I read the book for the first time almost a decade ago, and putting into practice its lessons has helped me get to a point where I’m reasonably worry-free about my finances.
A fable, the story is intriguing, and the prose is beautiful and concise. Based in a vibrant city roughly 4,000 years ago, the characters in the book woke up each day with the same financial worries most of us have today. Their bronze, silver, and gold coins functioned like our modern money. Their gold lenders are our modern-day banks, charging an interest rate for money lent to you. Marriages failed due to financial distress and disagreements, just like today.
With that in mind, here are crucial lessons that I’ve been applying for about a decade. These have helped me enormously, and I hope they help you too.
Gem #1: A tenth of all you earn shall be yours to keep
This first gem is the most important – you will never have financial freedom if you spend more than what you keep. Period. If you spend as much money as you make, or more, you’ll live paycheck to paycheck and remain broke.
You can be driving a cheap, 20-year-old car or the latest luxury car, and that makes little difference for your wealth or financial freedom. But having readily available money stash that you can use in case of an emergency, and not worry about paying your bills, that’s crucial to freedom in this world.
With this in mind, keep at least 10% of everything that you earn. No matter what you do, no matter what you’re going through, only spend 90% of the money that you earn and receive.
If you earn $100 today after paying your taxes, save the first $10. No exceptions. Use the remaining $90 to pay your bills, buy groceries, clear up credit card debt, donate to charity, save for vacations, and anything else you may want to spend on.
The order is important, you first save the $10, then spend what’s remaining.
To save 10%, you must live beneath your means. You sacrifice comfort and spending today so that you can indeed have freedom and flexibility tomorrow. That way, you can hope not to be a slave to employers or banks that take advantage of those who can’t survive without their help.
Use this 10% of your income to fatten your purse. You should use it to create passive income streams, invest. Think of each dollar in that 10% as your freedom fighters; they are there to work for your freedom if you use it wisely.
The concept in Babylon was simple, and it remains simple today, for every ten pieces of any currency that you earn, take one and declare it yours. This money will be there to make you richer. Eventually, you will have a strong army of soldiers working for you. It is simple, ordinary, but powerful.
Ordinary things, done consistently, produce extraordinary results.Keith Cunningham
How to Apply this Lesson
Adjust your spending
Pretend that you got a 10% income cut. Take that money out and save it before you spend anything else. You’d be impressed with how little your life changes when you cut your expenses by 10%, but the impact on your long-term savings can be massive.
Build up an emergency fund
The first thing you need to do is to stash away enough money so that if something terrible happens, and you can’t earn any income for six months, you will still be able to live. If you need $1000 a month for necessary bills, rent, food, and other essentials, then you want to save $6000. Make sure that’s the first thing you do with the 10%, it will give you peace of mind.
Max out retirement benefits
If your employer gives you access to a retirement account with matching benefits, start by putting money there. If your employer doesn’t offer a retirement account option then open an IRA or Roth IRA. If you don’t haven’t educated yourself about investment options, I recommend you start with a service that automates the process for you. Services like Betterment and Wealthfront are great options.
Gem #2: controlling your expenses
Gem #1 is very simple, but hard to do if we don’t rethink our ability to save. Each day we delay saving and investing our income hurts us significantly in the long term. You can read up more about compounding effect to understand why, but for now, just trust me on this — it is important to start saving right away.
To save, you need to rethink what is a necessary expense.
That what each of us calls our necessary expenses will always grow to equal our incomes unless we protest to the contrary.George S. Clason in The Richest Man in Babylon
When we first start to make some money, we rent a small room in a shared apartment. When we get a little higher income, we convince ourselves that we need a bigger room. Then we can’t live in a shared house anymore. Each time, we find ways to justify spending money because it is necessary.
Just because all of your friends have the latest iPhone doesn’t mean you must go broke to pay for an unlimited data plan and get the latest gadget. Broke with an iPhone is still broke. It is much better to have a cheap phone and $1000 in the bank.
By reducing the essential expenses to a minimum, you can identify opportunities to save a significant amount of your income. You can get inspired by minimalists, or by thinking about the better life you can build by saving. But, whatever you do, just cut your expenses so you can save. As gem #1 taught us, you first save 10% then spend the remaining 90%. Do not touch that first 10%.
How to apply gem #2
Be ruthless budgeting
Look at all of your expenses by category. How much are you spending on rent, transportation, groceries, clothing, restaurants and bars, cellphone, and subscriptions like Netflix? Add to your budget 10% of your income as “freedom fighters”. Now add it all up. If the total is greater than your income after taxes, find ways to cut.
Budgeting is about reviewing all of the expenses, cutting back on the non-essential, and that way ensuring that you can save. It is hard work, and to keep the motivation you can reward yourself.
One trick you can try is to add to your budget a reward, something to treat yourself. It could be a spa day, or a restaurant date with your partner, or a night out with friends. When reducing your budget, keep it as a goal to cut back on the other non-essential expenses but keep this “treat yourself” amount. Of course, you can’t cut back on your 10% savings since Gem #1 takes precedence, 10% of all you earn is for you to keep.
Two simple gems make all the difference
These two lessons from The Richest Man in Babylon are the simplest and most fundamental truths about financial freedom. Keep at least 10% of your income, forever, and save or invest it. To do this, reduce your costs by examining what is truly necessary and cutting back on what is not.
I’ve provided some ways to apply these lessons, reliable yet straightforward guidance that has helped me. Just find a method that works for you and start being disciplined about your expenses. When you do, you will be rewarded by a fatter wallet each month, healthier bank accounts. This will give you the peace of mind of knowing that you can take better care of yourself and those you love.
Post first written in June 2011, updated August 2020.
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Last Updated on August 15, 2020 by Omar Eduardo