Almost a century ago, in 1926, George S Clason published his widely acclaimed book, The Richest Man in Babylon. The ‘twist’ is that the book isn’t set in 1926 at all. It’s set in ancient Babylon, and the story is presented as a series of snippets of advice, supposedly given to an poor chariot builder by a rich man he goes to for advice.
What is often surprising to modern day readers, is that a book written in the 1920s, and set thousands of years before that, is still so relevant in the 21st century. Some pieces of financial advice really are timeless, universal, and surprisingly simple. Here are some of the most important insights from the book, that still apply to making basic personal finance decisions today.
Spend less than you make, and invest the difference
This is perhaps the most obvious and intuitive piece of personal finance advice ever given. It’s also the most frequently ignored. A recent report indicates the average American household carries around $5700 of credit card debt, and that’s before you factor in mortgages, auto loans, student loans and other forms of debt. Carrying long-term debt has become a common, and for most people, inevitable part of life. We have become a society in which people regularly spend more than they earn, without even thinking about it. But the advice still holds. In order to grow your savings, and eventually build wealth, you will have to find a way to spend less than you make, and invest the difference.
Use money to make money
I’m sure you’ve heard this one, too. It’s applied since Babylonian times and it still does. That money you saved by spending less than you earned? Invest it. Spend it on assets that will make you money, not on liabilities that will just cost you more money. As you slowly build investments, you’re moving away from the seemingly inevitable grind of working for your money, and transitioning to having your money work for you.
Take advice from the right people
A significant amount of people will offer you advice on personal finance. Some of them will have worked their whole life without accumulating any significant net worth. The point here is to stop taking advice from people who are where you don’t want to be. If you want to do well financially, seek advice from others who are comfortably off. You may be surprised to learn what they actually did to get to where they are. If you can’t easily access wealthy mentors (and most of us can’t) start with books. The Richest Man in Babylon is a short read, though many people find it an odd one, due to the format. Others you might like include The Automatic Millionaire and The Millionaire Next Door.
Research your investments
Or as they say in ancient Babylon:
“Gold slippeth away from the man who invests it in businesses or purposes with which he is not familiar or which are not approved by those who are skilled in its keep.”
This basically means don’t invest in things you know nothing about. Do your research. Know the pros and cons of any investment you make, and employ as much caution as those pros and cons suggest is prudent. Oh, and take professional advice. Whenever you need to.
Just because forex, or cryptocurrencies, or MLM schemes seem to make other people a lot of money, doesn’t necessarily mean they’ll do the same for you. I’ve lost count of the number of forex education courses I’ve seen advertised, usually with someone claiming: “If I can do it, anyone can.” Yet according to Vantage Point Trading, at least 90% of forex traders lose money. If you’re genuinely making money doing it, you’re in the top 10%. Congratulate yourself. But don’t tell other people they can definitely do it, too. Maybe they can. Most likely, they can’t. We should all research any potential investment carefully, and stick to what we know, and/or take advice from people who are familiar with that type of investment.
Pay yourself first, and pay yourself more as your income increases
You’ve no doubt heard this piece of advice too. The advice in the book is to put away 10% of your earnings for yourself before you do anything else. Pay yourself 10% first, then your overall budget is based on what’s left. By thinking of it as ‘paying ourselves first’ we also achieve a neat little psychological trick. Saving money feels like the opposite of spending money. So saving 10% of your income can feel like a sacrifice. But paying yourself 10% (into your savings account) has a different feel. You deserve that money. Give it to yourself. Then use the rest for ‘necessary expenses’, because Clason points out something interesting about ‘necessary expenses’. He says they “always grow to equal our incomes unless we protest to the contrary.” You’ve probably noticed that too. A raise often doesn’t make you any richer at all. It just leads to a more expensive lifestyle, even if you were perfectly satisfied with your previous lifestyle. And that’s a problem, for many Americans, because that lifestyle inflation is keeping them broke.
These are just a few of the insights from the book, but they are all just as timeless, and just as important. If you have a favorite book on personal finance, feel free to tell me about it in the comments.