Sometimes the most powerful precepts in personal finance are the ones that are the simplest. We all would love to think that the reason why we haven't gotten further ahead in our financial lives is because saving and earning money are such complicated topics that have a myriad of secrets that are beyond our grasp.
The thing is, that while certain niches in finance may be complicated or require specialized knowledge, in order to succeed you really don't need to have a degree in finance. Some of the most powerful financial rules are the ones that are the simplest and easiest to grasp.
The Richest Man In Babylon
I have been reading bits and pieces of the 1926 book by George S. Clason called “The Richest Man In Babylon“. The book, while it was written in the 1920s has a lot of insightful things to say about saving, investing and the simple ideas behind wealth creation. It gives those simple ideas via parables or stories. One of those stories that I read today was the one the book is named for, The Richest Man in Babylon.
The parable tells us about a rich man named Arkad in Babylon who despite not having any special talents or family wealth was now known to be the wealthiest man in all the land. His friends around him couldn't understand how he had become so wealthy, or how he had become so successful, when they had all been afforded the same opportunities that he had. So they asked him.
He responded by telling them how he had enough sense to know that he didn't know everything, and that in order to become wealthy, he would need to ask someone who was wealthy what their secret was. So when he found the opportunity one day, he asked a money lender who came to the hall of records where he worked. The money lender told him:
I found the road to wealth when I decided that a part of all I earned was mine to keep. And so will you.
We all have the idea that everything we earn is ours to keep, but if we really think about it we all have things we need to pay for in everyday life. We have to buy food, pay for clothing, purchase or rent a place to live and so on. Much of what we earn is not ours to keep. If we really want to succeed, however, we must realize that a part of all we earn is ours to keep, and that we must pay ourselves first. If we don't the money will quickly disappear and none of what we earn will be ours to keep. The teacher in the parable continues:
Every gold piece you save is a slave to work for you. Every copper it earns is its child that also can earn for you. If you would become wealthy, then what you save must earn, and its
children must earn…
A part of all you earn is yours to keep. It should be not less than a tenth no matter how little you earn. It can be as much more as you can afford. Pay yourself first. Do not buy from the clothes-maker and the sandal-maker more than you can pay out of the rest and still have enough for food and charity and penance to the gods.
Wealth, like a tree, grows from a tiny seed. The first copper you save is the seed from which your tree of wealth shall grow. The sooner you plant that seed the sooner shall the tree grow. And the more faithfully you nourish and water that tree with consistent savings, the sooner may you bask in contentment beneath its shade.
We must make our money work for us, and make savings and investment a priority. We need to plant that seed as early as we can, and continue nourishing it so that the tree of wealth will grow and give us shade in the long run.
Lessons From The Parable Of The Richest Man?
This parable is rich in lessons and advice, and I probably won't touch on them all. Here are the main lessons I gleaned from the story:
- Seek out the wisdom of those who know and who have experienced success: The richest man in Babylon knew that he needed to seek out the advice of those who knew more than he did. He sought out wise counsel and received good advice that helped him to prosper.
- Pay yourself first: In the parable the teacher tells the student that you must save at least a tenth of what you earn, no matter what you earn. If you can afford to save more, you should. Don't forget to also give (I might put this before the saving part).
- The law of compounding returns: The earlier you start saving and more faithfully you save, the sooner you'll be well off and wealthy. You must also invest your money and make a return if you want to become wealthy.
- You won't miss the money you pay yourself first: In the parable it talks about how if you make your saving a habit or automatic every time you get money, it won't seem like you're living on less money than before. “Each time I was paid I took one from each ten pieces of copper and hid it away. And strange as it may seem, I was noshorter of funds, than before“.
The whole book is full of great lessons that we would all do well to heed. Amazing how relevant the book is even today 85 years later.
Have you read the book “The Richest Man In Babylon“? If so, what other lessons have you learned?