This is the statement that changed the game for my finances. It really isn’t that hard to understand, yet somehow I was 24 before it ever crossed my mind. When I read it, I didn’t know it would become my #1 favorite finance book of all time, The Richest Man in Babylon.
Welcome to January’s book of the month review! This is one of the oldest and most trusted financial books that has withstood the test of time over the 91 years since it was first written. It is a relatively short book (can be read in a day) and yet holds such profound wisdom. If one chooses to learn and implement the most simple of tactics (you’ll really think it can’t possibly be that simple), it is sure to change your life.
Top 3 takeaways to be found in the book:
- No less than 1/10th of all you earn is yours to keep. With this stash, don’t just let it sit there under your mattress (do people still do that??). Put it to work and have its “children” work for you and their children. What does that mean? Put no less than 10% of your money aside and make it multiply!
a. Now mind you, this will look different for everybody. Some people have skills in the stock market, some have skills in real estate, some have a good eye for new companies to invest in. Whatever you have skill or knowledge in (or trust someone who does) invest your savings to begin earning a return on it. That way, interest and earnings will begin to compound. THIS is the secret to becoming rich, since it makes your money grow FOR you, without your time and energy. Passive income = true wealth.
b. For those who may be struggling financially, this may seem like it’s jumping the gun, right? For example, Dave Ramsey (if you don’t know by now, he’s a pretty big deal in personal finance) suggests saving a quick emergency fund of around $1,000 and then pushing everything else towards debt payoff. Unfortunately, I agree with the book over him (sorry Dave, still love you!)
By saving up money WHILE you pay off debts, you’re putting yourself in a better position to jump on opportunities when they present themselves! Plus, it makes you feel better =) seeing money stack in the bank is much more satisfying than sending additional checks to Wells Fargo (I’m just sayin). Lastly, it helps you be more prepared for unexpected life. For example, I’ve had to find a new rental property in 30 days and thanks to savings I had money to move, pay deposits, and show a new landlord I’m a good renter.
Step 2 makes this okay though because…
2. No less than 2/10ths shall be used to pay down your debts. This is how I took it, tell me what you think the book meant. I take 20% of my income and use that to pay the minimum balances of any debts. With any amounts leftover, I add to whichever debt is next in line for my snowball (courtesy of Dave, see? I still listen to him too). Let me give you an example:
Take Home Pay: $1,000
20% for debts: $200
Debt 1: $20
Debt 2: $50
Debt 3: 100
Leftover: $30 – add it to the debt with the lowest balance and keep on rollin =)
3. Use a budget to tell your money where to go! My favorite part in the book is when the teacher says this and someone stands up and says “I’m a free man, not a slave. Why would I restrict myself with a budget?” The teacher goes on to ask who would make this guy’s budget for him? The man answers that he would make it for himself. And the teacher says “Then who’s restricting you from your money? Why wouldn’t you just make sure the things that matter to you are included?” *paraphrased because people in Babylon didn’t talk like that, obvi*
It cracks me up because I’ve had that specific conversation before, even though we’re how many years into the future?! However, by telling your money what you desire in your life – whether it’s no debt, money saved up, vacations, investments, fancy clothes, ANYTHING! – you’re giving yourself permission to say NO to all the things that you don’t actually value! Why spend money eating McDonalds 5x per week, when you’d prefer a fancy restaurant 1x per week? Tell your money it’s meant for La Dans Noir, not a happy meal!
*Disclaimer, there are no mentions of McDonalds in this book*
There are many other nuggets of wisdom in this book, which is why it’s stood the tests of time. These, however, are my favorites and have helped me the most.
So for all of you, if you’ve read the book, what is a big takeaway you’ve had? For those of you just reading this post, what portions would make sense to add to your life? What can I do to make it easier for you to read this book? Also, any suggestions for next month?
Now go, be badass!
There is a reason that this book is still one of the top books ever written about personal finances. I loved it but think that it’s probably about time to listen to it again. Thanks for reminding me about some of the great principles that it teaches. Sometimes it amazes me how simple it can all be. People try to make the money game so complex and confusing, but the basic principles for success haven’t really changed in thousands of years.