Have you always wondered what the key ingredient to financial freedom is?
Look no further.
George S. Clason’s book, “The richest man in Babylon”, will answer this question for you. More specifically, he explains the importance of money management and passive income.
Today I will summarize the 10 most important points that Clason makes in his book. Let me start out by quoting this pioneer within passive income:
“Pay yourself first.”
We’ll get back to this advice a couple of times in the post. A few nice things about the book that I want to mention are that it has a good story, is full of great analogies and really gets you excited about money management, a subject that otherwise seems tiresome and boring.
The takeaways are summarized here, for those in a hurry, but explained and developed upon later in this post:
- No one ever gets paid for hard work alone.
- Without a passive income, all wealth will come to an end.
- Pay yourself first.
- Time is your best friend.
- Be careful with whom you trust your money.
- Practice makes perfect.
- Set up goals.
- Act when the time is right.
- No matter how much money you make, if you spend it all, you are never going to become wealthy.
- Men of action are favored by the goddess of luck.
Here are the 10 takeaways, in expanded form. The authors thoughts will be in plain text and my occasional comments will be in italic.
1. No one ever gets paid for hard work alone.
The beginning of the book is about a craftsman, a builder of chariots. He makes the finest chariots in the whole city, yet he has no money left at the end of the month. This is definitely not to be confused with smart hard work though. Smart hard work is work that will get you closer to the goals you wish to achieve – be it financial freedom or cooking mastery (meatball mastery). It all comes down to doing things in a smart way, to learn the best practices in the field you wish to become a master within, and then establish a plan. Only then should hard work be applied.
“From early dawn until darkness stopped me, I have labored to build the finest chariots any man could make, soft-heartedly hoping that someday, the Gods would recognize my worthy deeds and bestow upon me great prosperity”
2. Without a passive income, all wealth will come to an end.
Clason argues that every penny saved should be put to work, so that your income can bring additional income, and that income can bring income, and so on. This is the power of re-investing capital you earn.
“’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. If you would become wealthy, then what you save must earn, and its children must earn, that all may help to give to you the abundance you crave.”
3. Pay yourself first.
In the book, it is suggested that once you get your salary, before any other expenditures, pay yourself one-tenth of that amount.
“’I found the road to wealth when I decided that a part of all I earned was mine to keep. And so will you.’
” ‘But all I earn is mine to keep, is it not?’ I demanded. ”
‘Far from it,’ he replied. ‘Do you not pay the garment- maker? Do you not pay the sandalmaker? Do you not pay for the things you eat? Can you live in Babylon without spending? What have you to show for your earnings of the past mouth? What for the past year? Fool! You pay to everyone but yourself. Dullard, you labor for others. As well be a slave and work for what your master gives you to eat and wear.“
It is a powerful analogy to see every expense you have as you slaving for someone else. If your net-income is $2,000 per month, and you pay $1,000 in rent, you are effectively working 20 hours a week for you landlord (in Sweden a normal working week is 40 hours). Think of it this way, and it will be easier to handle your cravings for spending.
4. Time is your best friend.
To get compounded earnings, time is the most important factor. And most of us plan to have a lot of it, 80 years at minimum. It is never too late to get on the right track, but the sooner you do your first saving, and the sooner you put that money to work, the better.
” ‘Wealth, like a tree, grows from a tiny seed. The first copper you save is the seed from which your tree of wealth shall grow. The sooner you plant that seed the sooner shall the tree grow. And the more faithfully you nourish and water that tree with consistent savings, the sooner may you bask in contentment beneath its shade.’”
5. Be careful with whom you trust your money.
In the book, a main character gives away his money to a brickmaker that insures him a hefty profit will be made on a boat trip, where he will use the money to buy jewels. As a result, the main character loses all his money when the brickmaker is fooled to buy glass instead of jewels. Why trust the brickmaker when it comes to jewels? Lesson to be learned: Don’t take financial advises from anyone who isn’t well educated in the field.
6. Practice makes perfect.
If you decide to handle the investments of your savings by yourself, start out small. Use only a small amount in the beginning, while you are learning. Luckily, almost none of us has the luxury problem of starting out with a wealth so big that we can’t afford to lose it. Start learning today! Read a few of the books listed in this blog, get an education in economics and start reading about specific investments.
7. Set up goals.
For your motivation, it is essential to set up goals for your savings and investments. Intangible goals are of little use. Do it step by step, and don’t be unrealistic. This deserves some further explaining. Examples of intangible goals are:
- I’m going to become rich.
- I’m going to be the best football player there is.
- I’m going to get a good job.
For these goals to serve any purpose, they should be measurable. Examples of measurable goals are:
- I’m going to have $50,000 in my savings account.
- I’m going to join Karlstads BK (Swedish football team).
- I’m going to be a sales manager at IKEA.
As you probably can see, something is missing. We need to add a time limit as well, so we know when this should be achieved:
- I’m going to have $50,000 in my savings account by the end of this year.
- I’m going to join Karlstads BK in 6 months.
- I’m going to be a sales manager at IKEA once I’ve finished my bachelor.
These are quite big goals. Each one of them should be divided into smaller ones, with an action plan on how to achieve them, but we don’t have space for that here.
8. Act when the time is right.
If you have done a thorough research and asked your friends and family about possible shortcomings in your analysis, don’t be afraid to act. Great opportunities are rare and should never be missed out on.
“In spite of the advice of my father, I did hesitate. There were beautiful new robes just brought by the tradesmen from the East, robes of such richness and beauty my good wife and I felt we must each possess one. Should I agree to pay one-tenth of my earnings into the enterprise, we must deprive ourselves of these and other pleasures we dearly desired. I delayed making a decision until it was too late, much to my subsequent regret. The enterprise did prove to be more profitable than any man had prophesied. This is my tale, showing how I did permit good luck to escape.”
9. No matter how much money you make, if you spend it all, you are never going to become wealthy.
You will forever be dependent on your monthly salary. Also, it is a huge risk-taking, in case you lose your job. This applies for everyone, including doctors, engineers and McDonald’s crew members.
“Yesterday how many of thee carried lean purses?” “All of us,” answered the class. “Yet, thou do not all earn the same. Some earn much more than others. Some have much larger families to support. Yet, all purses were equally lean. Now I will tell thee an unusual truth about men and sons of men. It is this; That what each of us calls our ‘necessary expenses’ will always grow to equal our incomes unless we protest to the contrary.”
10. Men of action are favored by the goddess of luck.
Surely, to become the greatest within any field requires a bit of luck. But here is the thing: With every opportunity, there is a certain chance of hitting the jackpot. Usually, you can only manipulate this chance by a small degree. What you can do though, is to manipulate the number of opportunities that you are faced with. By doing this, you will increase your chances of being “lucky” at some point.
So take action! Investigate as many opportunities as possible. Be it within investing, in your search for the ultimate job, or in finding a partner. Sooner or later you’ll hit a jackpot.
Is there anything missing? What do you think are the top 10 takeaways from “The richest man in Babylon”? Do you want me to develop on any of the subjects? Let us know in a comment!
If you would like to read the full book, and, besides gaining knowledge in money management, getting me one step closer of becoming a Babylonian (wealth-wise), buy it here today.
As a conclusion, I will repeat Clason’s major takeaway:
“Pay yourself first.”
For more investment tips delivered from the land of meatballs, stay tuned!