Book Review 004: The Richest Man in Babylon

The Richest Man in Babylon

The Richest Man in Babylon is a story about a wealthy man and his common sense approach to creating wealth. Written by author George S. Clason, a businessman and writer who drafted pamphlets about generating wealth in the 1920s. His book has sold over 2 million copies, and his work has been the foundation of countless other personal finance advice that coined the term “pay yourself first”.

Summary:

1. Pay yourself first

“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.”

Algamish advises the young Arkad to always keep part of his earnings. At first, Arkad thought that he kept everything he earned, but in fact, he earned money, spent it on expenses such as food and clothing, but did not have any savings. Algamish told him that by keeping a part of his earnings off the top and using those funds to invest, those monies will bear “children” and those “children monies” will create even more children, Arkad would eventually be rich.

2. Never invest in something you don't understand

(“A small return and a safe one is far more desirable than risk.”)

Arkad took the Algamish’s advice and began to save, but he used his savings to invest in jewels with Azmur, a brick maker, who promised him big returns. However, it turned out to be a scam and Arkad was given worthless glass trinkets instead of jewels. Algamish then warned Arkad to invest only with experts. If he wanted to buy jewels, he should go to a jewel merchant, not a man who made bricks. When it comes to money, he said, always seek knowledgeable advice.

3. Save early and often , seek out opportunities

“A man’s wealth is not in the purse he carries. A fat purse quickly empties if there is no golden stream to refill it.”

Arkad had become a wealthy man following the principles of Algamish, and he began to teach others how to create wealth. Arkad explained that the most important investment rule is to protect your principal. He warned the men against get-rich and fly-by-night schemes, and told them to be as careful choosing their investments as they were when choosing their wives. To invest, he said, they should seek wise counselors who knew about both gold and life. Arkad told them never to invest their gold in ventures they did not understand or with men who were not skilled in the enterprises they promoted. He told them to buy homes instead of renting them, thus taking advantage of one of life’s best investments. He cautioned them to plan carefully for their later years when low energy, illness, decrepitude and age would make it more difficult to work. Finally, Arkad advised every man present to increase his knowledge, expertise and skills, to become wiser so he could earn more.

4. If you have a strong desire, you will find a way, if not, you will find an excuse

“Good luck waits to come to that man who accepts opportunity.”

A trader who had once been a slave, and still would be one if not for the kindness of his mistress, who took pity on him and helped him gain his freedom, shared his story. His mistress gave him two camels, some bread and a jug of water, and told him to ride across the desert to flee for his freedom. He was greatly afraid because the desert is vast and cruel. Then his mistress asked him if he had the heart of a free man. If so, she said, you will take your chance. If not, you will stay here and remain a slave. Dabasir took her dare and rode into the desert. He journeyed for weeks, his food and water long gone. He thought often of death, but the words of his mistress spurred him forward. He vowed to trek on until he was safe and free.

Thus, one day he finally came out of the desert and made his way to Babylon. From that day on, he always used determination to forge ahead, no matter what difficulties lay in his way. Dabasir looked hard at the young man by his side and told him that he, too, had either the heart of a free man or that of a slave, and that a free man would find a way to repay his debts. Tarkad rose and thanked him for the story, assuring him that as a free man he would repay the money. The next day he did. Where there is a will, there’s a way.

Key Take-Aways

• Always save at least one-tenth of your income. Invest your savings. Put your money to work for you.

• Be thrifty. Budget carefully. Do not spend on needless things.

• Seek the counsel of knowledgeable experts before you invest.

• Never put the principal that you invested at unseemly risk.

• Increase your knowledge, expertise and skills, so you can earn more money.

• Good luck comes to those who know how to seize opportunities and act on them quickly.

• Be cautious with your money. Lend it only to those who are sure to repay it.

• Take comfort in hard work. It is your best friend.

• If you are determined to get ahead, you will.

Good Luck!

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The Richest Man in Babylon

Book Review 003: Automatic Millionaire - David Bach

The Automatic Millionaire, Expanded and Updated: A Powerful One-Step Plan to Live and Finish Rich

Be an Automatic Millionaire - if only it was that easy...right? When I first came across this book, I had just finished my Bachelors degree in Business Administration and was starting my first full time job at a Financial Services Company. I was gifted the book a couple months back from a friend, but pushed it aside until after graduation. This turned out to be perfect timing as this book covers some great basics for beginners.

Key Ideas:

1) Millionaire next door - The average American Millionaire couple earned a combined income of $55,000 (written 2005) during the course of their entire career! This was a big surprise for me as I assumed you needed at least a combined income of $150,000 or more to be able to save significantly. These Millionaires were able to save with a modest income by budgeting, paying themselves first (more details below), and automating their finances. This leads to the next key idea.

2) The "Latte Factor" - The term coined by David which is the idea that you can become a millionaire by changing financial habits that snowball and have an overall big impact to your savings. Being a millennial, I've seen countless articles on "Don't eat Avocado toast if you want to purchase a home", "Don't go to Starbucks and save those dollars". I think its loosely based on the same concept. While I disagree that Avocado toasts and Starbucks are the main reasons why people do not purchase their first homes (i.e. Market prices, Fear of the 2008 crash, prefer to be renters, etc.), I do agree that small habits can give you the option to make the big purchase such as a house, impact your finances greatly, but it is often missed because these expenses are not considered in the aggregate.

If you think about it, $3-5 dollars at Starbucks may not kill your budget, but if you have read other financial books such as Rich Dad Poor Dad (I love this book!), you will know that the rich focus on creating/purchasing assets as quickly as possible, that will continue to build them wealth in the long run. What I mean is, that $3-5 dollars a day, or $1450 a year (rough estimate) can go towards buying mutual funds at a modest 8-12% return, rental properties with $100-200 cash flow per door, or even towards getting that degree that may double your salary, etc. And that is just ONE habit. 

I personally view expenses now in terms of opportunity cost. For example, you might want to take a trip to Vegas with your friends after graduating, but with food, travel costs, and other expenses, you might be out of pocket $500 bucks over a weekend. Now some may argue that they do not want to deprive themselves of fun, and I totally understand, I am merely trying to prove a point and that change in "mindset" is most important.

3) Paying yourself first - This concept I was already familiar with from reading "the Richest Man in Babylon". A simple idea in which you always want to pay yourself first (legally of course), before anyone else - the government, landlord, utility company, and any other bills that may come your way.

Now, how can we do this? There are many different strategies and methods, but one is simply through 401Ks and IRAs. By automatically setting up money to go to your 401Ks and IRAs you are deferring your taxes and growth until retirement.

Simple example: Lets say John makes 50K a year and pays 25% in taxes. Without paying himself first, he will lose 12.5K to Uncle Sam and have $37,500/year or $3,125/month left over to pay the bills. Now lets say he decided to put 15% of his pre-tax income into a 401K (This is very achievable). Now, out of the 50K/year income, 7.5K is going into his 401K Tax free, and he is being taxed on $42.5K which amounts to $10.6K in taxes or overall savings of $1,875. Now this is a very simple illustration and everyone's tax deductions and credits will vary, however, there will be tax savings as  you are reducing your "taxable income" off the top. Note: 401K I used in this example is deferring of taxes, not eliminating it, however, it is taking into consideration that with compound interest (Warren Buffet), we will have a built a sizable portfolio from starting early and often.

4) Automate it, take action NOW - The most important part of this book is automation. Like the title says, these ideas are only good on paper unless you act on it. So David challenges the readers to take baby steps in making changes - 1) increase 401K contributions (Check) 2) automate paychecks to go to different accounts - 401K, checking, bill pay account, etc. (Check) 3) Create a rainy day savings account worth 6 months of expense (Check).

Once I decided to take action, I have to admit it took me less than 15 minutes to automate my expenses and also create a savings account to save up for a 6 month rainy day fund (This step is critical as I personally ran into Car issues couple months later and it wiped out my savings. Luckily, I was able to rebuild it and I didn't have to rely on loans, credit cards, or anything else due to my rainy day fund).

Overall, I think book provided a great basic foundation for my finances and helped me pay for my wedding all cash, save up for a downpayment on my house, payoff any loans all in the span of 4 years. Write down your thoughts below!

Good Luck!

Click below to get your own copy. See our affiliate disclosure here

The Automatic Millionaire, Expanded and Updated: A Powerful One-Step Plan to Live and Finish Rich

Investing 002: 4 habits for a better financial future

Charles Duhigg, author of The Power of Habit: Why We Do What We Do in Life and Business, says “Change might not be fast and it isn't always easy. But with time and effort, almost any habit can be reshaped.” Think of the last time you decided to get fit and went to the gym, you don’t get the results you want by working out 10 hours a day once a month, but you may see results when you work out 30 minutes a day consistently over 20 days a month. I  believe that with consistency and persistence, an average person will be able to achieve great success. Now that we have covered some of the basics of retirement accounts such as 401Ks and IRAs, you may be wondering, how you can save the money to invest in these accounts, let's think of 4 ways we can start building habits that will create a better financial future for you and your family:

1. Increase your income

Have you ever heard that the average millionaire has 7 or more streams of income? Depending on your current situation, you may not be able to start a business or invest in real estate immediately, as it is important to plan ahead for things such as reserves, as well as maintain liquidity in case there are unforeseen life changes. However, there maybe opportunities at your current W-2 job that may result in a salary increase, or a side hustle that you can start (e.g. E-commerce, blogging, driving for Uber, tutoring, etc.) to build a bigger nest egg. By increasing your income and maintaining the same lifestyle, you will be able to re-allocate the excess income into other assets sooner than you thought possible.

2. Decrease your expenses

This advice may seem obvious, but its important to note that if you increase your income and your expenses grow with it, then the net effect is the same, or in some cases, your worse off as our tax system is a progressive bracket, meaning you pay more taxes the more you earn. Don’t take your promotion as sign to “keep up with the joneses” and buy a bigger house, and purchase that newer model car. Although there is a time and place to celebrate your hard work and reward yourself, you have to take time to think if it is worth delaying your financial freedom X more years. Instead of comparing yourself to your peers, look inward and find out what makes you happy. When you identify what makes you truly happy, you will end up using your money with more purpose and be less inclined to buy what you may think will impress your peers.

Alot of financial advisers may say that cutting expenses is a “scarcity mindset” and you should grow and increase your income. While I wholeheartedly agree that growing your income should be emphasized, you also have to review your expenses to ensure that there aren't any holes that are causing leaks in your ship towards financial freedom. By using apps such as Mint or Personal Finance, you should be able to have a birds eye view of where your expenses are being allocated. Check the latest cable bill, phone bill, and other variable expenses such as eating out and clothing to make sure that whatever your spending your after tax dollars on are truly necessary. As investors, we have to have a different mindset. If you cut your phone bill in half from $150 to $75 a month. Not only are you saving $75, you can factor in $22 (assuming 30% tax bracket) and $8 (assuming you are re-investing the funds into an index fund or rental property generating 10% in annual returns). Remember, these small changes in habits will create big changes over a long period of time.

3. Life-long education

Another important piece of building habits for your financial future is to educate yourself. As you may have taken courses throughout your life that will be useful towards your current job, it is crucial that you take ownership of your financial future and not rely solely on other people. I personally like to know enough to be dangerous, and that is when I rely on the advice of experts such as my CPA, lawyer, and real estate partners to help me solve problems and plan my finances. However, if I didn't spend time educating myself through books, courses, podcasts, and meeting other investors, I would have to take people’s word at face value, and would not have the opportunity to ask good questions that may result in further benefit. Remember that this is a long journey and you are the captain of the ship. No one is going to care more about your financial well being than yourself.

4. Start early and often

Continuing with the theme of building habits and maintaining consistency. It is important to start sooner than later. As Albert Einstein was famously quoted for saying, “compound interest is the eighth wonder of the world”, which simply means, time is on your side. Without being attached to the different market cycles and trying to determine if you’re at the bottom of the market before diving in, it's important to start early and often. Going back to my example of hitting the gym once a month for 10 hours at a time, versus going for 30 minutes a day for 20 days a month, with all things equal, you will see that the person with consistent effort will have better results over time.

Good Luck!