Here is an article from my early days of blogging. This was originally published on April 21st, 2010.
It’s a warm, sunny afternoon, the wind is blowing softly, and the birds are chirping. You are lying on a lawn chair next to the beach, eyes closed, with the warm sun shining on your face and a cold drink within easy reach. You feel relaxed, thinking about how great it is to be able to live on your own schedule, at your own pace… and then you hear your alarm beeping, rudely awakening you from your slumber and beckoning you to rise and get ready for another day in the corporate world.
For those of us who have not yet managed to escape the rat race, this is often how our typical workday starts out. Getting out of the rat race is an important goal, but first we need to learn how to build our wealth. In my last post in this series, I introduced “The Richest Man in Babylon” by George Samuel Clason and talked about how to get started on the path to wealth. Today, I’m going to continue my book review and discuss seven wealth building strategies to help you pad your wallet and build your wealth. As I always mention in each post, the chapter summaries can even be read for free on Wikipedia.
Chapter Three: Seven Cures for a Lean Purse
Our story continues in Babylon, thousands of years ago… after Bansir and Kobbi had their discussion with Arkad on how to get started on the path to wealth, Babylon entered an economic downturn. It turned out that most of the wealth was concentrated in the hands of a few rich men, for everyone else spent their money as fast as they earned it. The King then summoned Arkad to hold a series of lessons for the people in order to teach them how to build their savings, so that they might also accumulate wealth. Today, we can use savings accounts to make it easier, so we don’t have to worry about keeping all of our savings at home and exposing them to additional risk.
Arkad came up with seven wealth building strategies to teach to the people. Let’s evaluate those seven strategies here and see how they apply in modern times.
1. Take less out than what you put in.
This is the first lesson which Arkad teaches us. What would happen if every week, you put 10 $20 bills in your wallet, and only took back out 9 bills? Eventually, your wallet would be overflowing with $20 bills. This is the easiest way to start saving your money, and hopefully the extra money inspires confidence and encourage you to continue saving more! Arkad teaches us to put away at least 10% of our income into savings at a minimum.
2. Control your expenses.
It’s easy to say “put aside 10% of your earnings”, but what if you are currently spending 100% of your earnings? Arkad makes a good point that there is a difference between expenses that are necessary, and expenses that we have due to our desires. In order to build wealth, it is necessary to budget these additional expenses so that at least 10% remains for savings. For example, if you have a cold, then why not look at treating your cold using natural therapies, while saving money at the same time?
3. Put your money to work.
Although it is nice to have an overflowing wallet, that money isn’t doing any work for you. Once you have diverted your income stream, it is important to start investing that money in assets that will be able to generate capital growth and income for you, such as stocks, bonds, and real estate.
4. Be aware of risk, and protect yourself from loss.
As we often find out the hard way, time and time again, if something is too good to be true, it probably is. Just ask anyone who invested with Bernie Madoff. In order to reduce risk, it is important to:
- Be diversified and don’t put all of your eggs in one basket. Invest in a variety of holdings and asset classes, such as indexed funds.
- Speculate and gamble only with money you can truly afford to lose.
5. Own your own home.
Owning your own home, clean and clear, and not having to pay a bank or landowner interest or rent is certainly something to commend. A ton of cash flow is freed up, helping you on that exit from the rat race, and it is something that I personally want to achieve one day. However, in modern times, the prospect of owning your own home must be mentioned with a few caveats:
- The home must be affordable and should cost less than 33% of your net income in total costs, including the mortgage.
- Owning your own home means owning the home to live in, not owning it to speculate or flip.
With the housing bubble collapse in the U.S., many homeowners who didn’t respect the above rules got severely burned. In Canada, once the interest rates start rising, there will be many more whom will find themselves under water because they did not leave enough room in their budget for an interest rate rise or they overleveraged themselves and bought more home than they could afford.
6. Ensure a future income.
It is important to ensure that you are saving enough to provide a future income, not only for yourself but for your family as well. As you get older and start having dependents, tools such as life insurance become more important.
The best time to start saving is when you are very young, even if you don’t have much to put away, because compound interest works its magic by having a lot of time to play with. Just 10 years more of saving can make a huge difference.
7. Increase your earning potential.
This is a relevant and important lesson even today. What is your greatest tool in order to build your future assets and income streams? It is the income stream you have today, which you secure using your skills.
Work hard at your job and continue to learn new skills in order to make yourself a star employee, keep your eyes open for new opportunities, and never let the world pass you by. Learn a new language, take up a new skill, and challenge yourself in the areas that you are weak in. This will help increase your future earning potential as well as enrich your personal and professional lives in the process.
Even though this book was first written in 1926, the knowledge and wisdom contained therein still apply today. Many basic financial principles and laws are timeless, and are as true today as they were thousands of years ago.
Originally published on April 21st, 2010.