George S. Clason’s “The Richest Man in Babylon” is a renowned book on personal finance initially published in 1926. It has since become a classic providing valuable insights on saving, investing, and wealth management. The book primarily emphasizes the significance of financial literacy and the remarkable impact of compound interest. Within its pages, Arkad, the wealthiest individual in Babylon, shares his seven remedies for a lean purse, establishing the fundamental principles that underpin the book’s financial wisdom.
1. Start thy purse to fattening:
The phrase is “For every ten coins I put in, to spend nine”. This principle emphasizes the importance of saving a portion of your income regularly. It suggests saving at least 10% of your income as a starting point.
Given the current economic uncertainty, the more you save, the better it is. The savings rate is declining at an alarming rate these days. Your ability to save more will play an important role in deciding the financial well-being of the future.
2. Control thy expenditures:
Live within your means and avoid unnecessary spending. Prioritize your needs over your wants, and do not let your desires control your finances. Pay for your necessities and enjoyments, and satisfy your desires by not spending more than 90% of your earnings.
It might come as a surprise but few people know the difference between needs and wants. Needs are the basic expenses for survival. Food, Rent, Clothing, Education, Power and Utility Bills, Insurance, Medical expenses, etc. come under Needs.
Wants are things or services we choose to purchase but are not mandatory for our lives. Entertainment, Dining out, Travel, TV or OTT streaming accounts, Costly Apparel, etc. are some examples of Wants. By prioritizing needs over wants, one can better control their expenditures and save money for the future.
3. Make thy gold multiply:
Once you’ve saved some money by putting 10% of the income aside for a few years, put it to work by investing it wisely. Investing your savings wisely can help grow your wealth. By finding profitable opportunities, such as through stocks, mutual funds, or business ventures, you can generate additional income and maximize your returns.
The idea is to make your money work for you and how the compounding effect will grow your wealth over the period is astounding.
Nifty 50 Index has compounded at a CAGR of 13.19% over the last 20 years. ₹100000 invested in 2003 would have increased by 12X to ₹1200000 now. Such is the power of compounding.
4. Guard thy treasures from loss:
The first rule of investing is to secure your principal. Protect your assets from risks and losses. Seek the advice of professionals and make informed decisions regarding your investments. Diversification is a great idea to protect your wealth from market volatility and uncertainties.
Be careful with your investments, and do not fall into traps searching for easy returns or get-rich-quick schemes. It is easy to get manipulated by deceitful and unqualified people. So, always do your research and invest wisely.
After the 2020 Covid crash, new investors began putting their money in Cryptocurrencies. Many financial influencers trapped novice retail investors into investing in useless cryptocurrencies with no intrinsic value.
At first, everything seemed perfect, investors got profits but things took a U-turn in 2021. Top cryptocurrencies like Bitcoin and Ethereum crashed by over 60%. The crap cryptocurrencies lost more than 90% from the highs. Scammers took home $14 billion in 2021 according to this CNBC report.
5. Make thy dwelling a profitable investment:
Invest in real estate, such as owning your own home or rental properties, to increase your wealth. Instead of paying the rent to the landlord, you can pay the money to the lender in monthly installments. Payments to money lenders will reduce the loan over time. You will own the house after full payment of the loan.
It is common nowadays for people with good or decent salaries to buy a house on a home loan and pay monthly EMIs rather than paying the rent to house owners. However, it is crucial to be mindful of the monthly EMI payments and ensure they do not exceed 40% of your income. Striking a balance between a decent investment and a potential debt spiral is key.
6. Insure a future income:
Create a reliable source of income before planning your retirement. Invest in opportunities that provide long-term financial security. Make investments that generate regular income, such as rental properties, bonds, stocks that pay dividends, etc.
As the legendary investor Warren Buffett said, “If you don’t find a way to make money while you sleep, you will work until you die.” There is no other quote better than this to make anyone understand the importance of creating another source of income other than our job. Having other income sources takes away pressure from unplanned expenditures.
I take inspiration from my father. At the time of retirement, he had an interest income of about 40% of his salary. I am proud of his financial achievements. When he got married, he did not have a single rupee as savings, let alone other properties. He worked in a private company with an average-paying job. In the next 28 years, he managed to retire with a decent provident fund lump sum amount and his own house. He did not have any knowledge of other investments like stocks. All he knew was to save whatever he could after meeting all our needs and wants, and he was well supported by our mother.
7. Increase thy ability to learn:
The best investment you can ever make is on yourself. Invest in self-improvement, and educate yourself to enhance your skills and earning potential. In today’s world, with limitless access to information through smartphones and AI, it’s important to keep learning and stay competitive.
While some may be content with spending time on social media, successful individuals prioritize self-improvement. Instead of seeking instant gratification, focus on improving your skills to secure a better job with good pay and work-life balance. By investing in yourself, you can achieve long-term financial stability and success.
That’s it Buddies! Personally, I found the book intriguing, and the author made it too easy for everyone to understand. He tells us tales of wealthy people in Babylon earning, saving, and compounding their wealth. I recommend you to read this magnificent yet simple book on personal finance.
NOTE: “Thy” is an old-fashioned, poetic, or religious word that means “your”.
Disclaimer:
I provide the information and my views on the website only to educate new investors and stock market enthusiasts on equity and other market investments. Please consult a SEBI registered financial advisor before making any investments in the stock or commodity markets. In case of any queries, you can contact me on Contact Form or email: shivakumar.lachapeta@valueinvestingonline.in.
