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.
Excellent post Kevin. Keep up the quality content.
I totally agree. Great post. People need to start understanding in order to progress financially they MUST spend less than they make. They also much start investing/saving and depriving themselves of some of their wants in order to see wealth in the future.
Thanks for the feedback, Mich!
However, the true credit goes to George Samuel Clason and others like him for sharing such a treasure trove of information. We have the benefit of standing on the shoulders of giants!
Your rule number 4 makes me smile Kevin. My latest post deals with the “Bernie Madoff” type of investment I made. What’s worse was that I convinced other friends (both knowingly and unknowingly) to follow me.
I wonder if the number 4 kind of mistake can be taught: “Don’t touch that kid, it’s hot!” Or, are we destined to touch it anyway, and then learn.
Cheers,
Andrew
Hi Andrew,
I’ve read that one way to get the child to not touch the stove is to put something hot on it, hot enough to be uncomfortable but not enough to burn, and have the child touch that. They learn their lesson, and without any scars. I guess the financial corollary is to play only with money you can afford to lose. Sometimes we can learn from observation, but other times… we learn from the lessons of experience!
The future income is important as hell for relaxing now….. If you don’t build the castle on strong foundations you are in trouble!
I don’t earn a lot or spend a lot so life is quite relaxed but savings and retirement needs some serious tackling!!!
@Forest
Since your cash requirements are already low, you are already one big step on the way there! The next step would just be to increase your earnings via something you enjoy in order to build up that castle some more, without sacrificing your quality of life.
Thanks for stopping by!
Woah.. you just read my mind buddy. Get out of my head!!!. I was about to just say this. Focus on what you love to build your other income sources. Once you’re ok with your currently quality of life just build from there.
Very wise thoughts! I am still about to put my money in savings account but I am not sure about the currency to put it in.
I have about 60 % of my money in Swiss Franc, and 40 % in my country’s currency, which is bound to the Euro.
Saving in Swiss Franc brings only 0.03% interest, while saving in my native currency is 8.5% (10 % if I deposit it for 2 years) Swiss Franc is very stable and does not depend on the Euro.
Basically I don’t want my Swiss Franc to lose it’s value over time by inflation.
How would you advise me to deposit my money?
Hi Get Happy Life,
All things being equal, I would invest in the currency that offers the greatest real return (return after inflation). Of course, since all things are not equal, you need to evaluate how risky it is to invest in your native currency, and add that risk premium to the real return you demand in order to make it worth it.
I would also not put all of my eggs in one basket, so even if you do get a great return, you might want to evaluate the chances of your eggs cracking, and therefore keep some assets in what you see as the safer alternative. If one bet goes bad and you lose your money, at least you have a backup and you are not left with nothing.
I would also take a look at other options such as guaranteed certificates of deposit or high-interest savings account to see if you can’t bump up those returns somewhat. 0.03% does seem very low, and there may be very-low risk ways of increasing those returns.
Thank you for your time and effort. I appreciate your advice. My final decision would be to keep the Swiss Franc as Emergency Fund and deposit the rest of the money for 2 years on 10% interest rate. This way I will have great return and not care if devaluation occurs, although it is not very likely to happen.
Thank you once again for your opinion.
Glad I helped! Just remember to keep the “sleep-at-night” factor in consideration. If you are aware of the downsides and upsides of your strategy and you are not exposing yourself to unnecessary risk, then why not?
Number 5 – Owning your own home struck a cord with me. I know several people who have managed to own their homes outright and am told that out right home ownership the worlds biggest stress buster. I guess I’ll know in 6 more years.
Nice post!
6 more years isn’t too far away! Many of the benefits of owning come from the psychological and intangible benefits of being in your own “castle”, so to speak. You still have to answer to the taxman and, in our case, the condo board, but after living in apartments for 8 years, I don’t really miss it too much. 😉
This post brings back great memories of when I first read the Richest Man in Babylon. These timeless principles are often overlooked or discounted, but if followed they do result in increased wealth.
Sounds like this book really struck a nerve with you….
Well worth pulling out of the archives! The Richest Man in Babylon is one of my favourite wealth creation books of all time. The storyline makes is easy enough for anyone to read and the lessons are invaluable.
This is a great post Kevin.
Why does the thought of a bunch of 20 dollar bills pouring out of my purse make me so happy? Wouldn’t that just be a great thing? Pain free saving!
I’m glad that you guys liked the post and enjoyed the book. I think this book is sort of what piqued my interest in this stuff. I’ve read other books before but I guess it all started with this one. 🙂
These are all great tips!! I’m working right now on #6 and #7 — ensuring a future income and increasing my earning potential. Let’s see how 2012 pans out!
Looking forward to the news. 🙂
All good tips, Kevin. I think #6 slips by many people, but it’s important. We’re working for our income today as well as for that of the future.
Agreed, #6 is very important. This post chronicles the beginning of my journey, and hope that it can be a good beginning for others as well.
This is a very good, simple, crisp article. However,r if you try to calculate yourself in most of the cases, it is cheaper to rent, rather than own the place.
More over it frees up a lot of your time – as you have to do very little maintenance, associated with owning the place. While there is certain security, against uncertainty, but it is purely psychological.
Economic sense is against owning the house : -) Especially nice own. It is a luxury, rather than necessity. Every little counts towards your way on financial independence.
That is true, but it also depends on where you live! I’m paying less for our purchased home than I was on rent, but that’s because I was living on my own and now we’re 2. Also, the rent in the area is quite high.
However, as a student I paid low rent in a cheaper area. I had pot-smoking and welfare-abusing neighbours, but it was SAFE — no violence (aside from some domestic violence on the part of the neighbours), no drugs (aside from the pot, but I much prefer potheads to crack addicts), and definitely no knives or gun violence. The street was full of trees and it was near the waterfront. It was only cheap because the building was so old and ghetto, but I stayed in that apartment for 5 to 6 straight years, and I still have a lot of memories from those days.
Oh I live in a condo now so I still have many of the benefits of apartment living, while much less of the drawbacks. The only real downside is the expensive housing market, but rent in this area can be even worse! It’s a little ridiculous, but I do love the fact that we are so close to downtown and right next to a subway, yet also in a quieter area and not quite in the middle of the city.
Thanks for being part of this week’s Book Review Blog Carnival at http://manoflabook.com/wp/?p=3672
The seven points you mentioned are good and definitely make your financial planning on the right path, still I would like to add some points like you must have experienced and certified financial advisor with you, who will guide you through your financial planning and wealth management. The benefits of having advisor is like you can be relax and don’t need to look after your financial planning every time, your advisor will look after it and he/she will guide you throughout your planning as well as he will regularly updates you about latest of financial world and investment option also.
Awesome list of wealth building strategies. George S. Clayson really hit the nail on the head with his financial principles in The Richest Man in Bablyon. I like how your strategies break his principles down into easily digestible solutions. I think all 7 strategies are important, but the 1st is to me the greatest…..pay yourself first. Great post and thanks for sharing!