The Richest Man in Babylon was written in 1926 by George Samuel Clason as collection of parables. The book deals with personal successes especially about accumulating financial wealth. This book answers the main question what separates wealthy people from ordinary working class lacking financial freedom. This is a story of Arkad, the richest man in the city of Babylon some 4000 years ago. This man started working as ordinary worker and later accumulated wealth and became richest person in Babylon. The king asked Arkad to share his wisdom with 100 selected students to increase financial knowledge among residents of Babylon.
These lessons are still valid and will remain valid until centuries to come. People suffering from financial problems 4000 years ago still have same problems in 2017. They are broke with increasing expenditures and no increasing or stable income.
Advice is freely given and in abundance. Watch out from whom you are taking advice. If you take advice about investment from someone who are inexperienced or illiterate then chances are you will lose all of your money. This is what happened to many people who start investing first time in stock market and seek tips from their friends and relatives.
Here are 7 lessons which Arkad share with his students.
- Pay Yourself First (“Start Thy Purse To Flattening)
One of the greatest lessons this book teaches is to save at least 10% of your income each month and manage your expenditures in remaining 90% income. You can save more but atleast 10% is must. Normally, people complain a lot about their expenditures. This was challenge back in 4000 years ago and it is still challenge until today. When our income increases, our expenditures also increase proportionally along with income increase.
Arkad gave this lesson to his students that if you keep one coin in every ten coins then your purse will started to fatten and its increasing weight will feel good and will bring satisfaction to your soul. So first step in achieving financial freedom and to build wealth is set aside atleast 10% of your income and never touch it for your expenditures or buying new stuff.
- Live Below Your Means (“Control Thy Expenditures”)
Next step is to control your expenditures which is tough for many people. When you save 10% of your income, it will be hard to manage expenditures with remaining 90%. How someone can save when his income is not enough to meet all expenditures? Arkad calls this as “necessary expenses”. Necessary expenses always grown with increase in income. Do not confuse your desires of buying new QLED TV with monthly necessary expenses. Your desires are always higher than your income. Therefore, you should only spend money for what is most important or necessary and control your desires.
In order to achieve financial freedom, starting making budget. Budget is the way to control necessary expenses within your 90% income. The purpose of budget is to help you control your expenditures and save atleast 10% of your monthly income.
- Make Savings Work For You (“Make Thy Gold Multiply”)
Next step in building wealth is to invest your savings to make it work for you. You can either invest in Stocks, Real Estate or other investments. Savings without investment will make you feel great but it will depreciate in value and will not earn anything until you invest them into valuable investments which can generate wealth or dividends for you. A person’s ability to increase dividends and monthly stream of income is what makes him wealthy. One must do diligent efforts to find great investments before putting their money. In order to become really wealthy, one must invest all the dividends and interests and take advantage of compounding interests. Compound interest is what made Warren Buffet the second richest person in world.
- Protect Your Wealth From Loss (“Guard Thy Treasures From Loss”)
Wealth gained can easily be lost so it is important to protect it from losses. Every wealthy person will be given opportunities where it may be seems to easily make money or double money. Never invest in such ventures. Arkad says “the first sound principle of investment is security of thy principal” He urged to do diligent analysis and invest only where it can be easier to claim principal amount. If your friend or relative ask you to loan him for his new business, will you give him loan or check his abilities and skills to do business. It is always important to check the risks associated with investments.
Always seek advice of experienced personnel before you invest in some venture. Never rely on your own judgement for making sound investment. If you are going to invest in stocks, it is wise to seek advice from experienced financial person. Never listen to advice of someone who is not experienced in such investments. Arkad says “Guard thy treasure from loss by investing only where thy principal is safe, where it may be reclaimed if desirable, and where thou will not fail to collect a fair rental. Consult with wise men. Secure the advice of those experienced in the profitable handling of gold. Let their wisdom protect thy treasure from unsafe investments”
Last but not least, it is important to buy insurance for such investments.
- Home Is biggest Expense (Make of thy Dwelling a Profitable Investment”)
As home is a biggest expense, Arkad insists of buying home. I believe one should be careful in deciding before buying house. Buying house without strategy and due diligent can cause financial harm. People who bought houses before 2008 housing market crash, lost money as the value of houses went down significantly.
But like other markets, housing market also goes up and down. In order to find profitable real estate unit, one must increase knowledge, seek advice of real state experts and buy property at good price. Many people think house is a investment but in reality it is not. It is an asset for bank not for you as mentioned by Robert Kiyosaki in his book Casflow Quardrant. Owning house will also restrict you in that city and will decrease your mobility. You will miss career opportunities which you can grab if you are more mobile. Owning house will also eat up your large investment in down payment and its not a liquid investment.
- Retirement Plan (“Insure a Future Income”)
Ability to make decisions and to earn more money decline with older age. Everyone should have retirement plan when he will not able to earn for him and his family. This can be an investment in govt. sponsored retirement plans or other long term investments generating cashflow. One can also buy death insurance to protect his family from a sudden death.
- Invest in yourself (“Increase Thy Ability To Earn”)
Final lesson is to increase ability to earn. In order to increase more streams of income, one must increase his knowledge and learning ability. Either you can learn new skill or start a side business.
The best investment you can make is in yourself – Warren Buffet
One of the key skill ultra-successful people has is reading. They invest efforts and time to learn more. They read more books in a month than an average person reads in a year.
Thus last lesson to become wealthy is to study more to become more wiser and more skillful and increase ability to earn more.
Wealth generation is not luck process. One must understand these 7 principles and start immediately. Opportunities do come to all men and waits for no one. The one who is prepared and ready to take action will become successful. Many people want to get successful and accumulate wealth but when opportunity comes, procrastination holds him back and he fails to capture opportunity. You must overcome procrastination and starts taking action on good opportunities and this will build wealth along with confidence. There might be times when you fail to make profits on some opportunities due to bad judgement or time was not correct but if you persist, you will surely become successful.