I first heard of The Richest Man in Babylon from Fighting Mediocrity who made a fantastic animated video review of it. (Check it out here.)
I bought it on Kindle for next to nothing: £1.99!
It’s a short book and reads like an allegory similar in style to The Alchemist.
Synopsis
In ancient Babylon, an ordinary family man is struck one day that he is not rich and in all likelihood never will be rich.
He and his friends decide to ask the richest man in Babylon for his secrets to becoming rich.
Takeaways and analysis
The overall objective recommended is the image of ‘fattening up your purse’. It’s a great image to have in your mind when you’re reading this book. Imagine your wallet slowly getting fuller and fuller.
Rule 1
Pay yourself first. Save 10% of your income and spend the rest.
Clason makes the point that most people don’t pay themselves first. They spend what they earn or worse, spend more than they earn.
Keep one out of every 10 pounds.
Pay yourself first.
Interestingly, MJ DeMarco in The Millionaire Fastlane makes the point that most people do not pay themselves first even when they think they do. If you are employed, then the Government takes most of your gross pay first anyway.
DeMarco says truly paying yourself first would be by getting paid into a company structure, attributing expenses to the company, then finally paying tax on the profits. So the Government eats last.
Rule 2
Control your expenditure
This sounds obvious but it’s not. Or at least, most people don’t act like it’s obvious. Clason alludes to Parkinson’s Law whereby your expenditure fills to meet your income. So as your income rises, so does your expenditure.
Most of what we think are necessary expenditures are nothing of the sort.
We don’t need to go on holiday. We don’t need Netflix. We don’t need to go out to dinner twice a week.
Those are wants and desires.
Clason has a great line regarding this: Confuse not the necessary expenditures with thy desires.
Rule 3
Make your 10% you saved work for you. Create income streams.
Whether that’s investing in loans generating interest or ventures to generate earnings and capital appreciation.
Rule 4
Guard your treasures from loss
Don’t put your hard-saved money into high-risk ventures.
Rule 5
Make of thy dwelling a profitable investment.
Rule 6
Ensure a future income.
Make sure to look after yourself when you can’t work.
Rule 7
Increase thy ability to earn.
Good luck tends to go to honest, hard work and industry and not to speculators and gamblers.
Clason makes the point that fortunes were never truly made at the gambling tables. The only people to get rich in gambling is the house.
What can we learn from The Richest Man in Babylon?
If you earn £48,000 a year, your monthly gross salary is £4,000.
Of this, taxes in the UK will leave you around £2,500 in your pocket (take home pay).
Clason says that we should save £250 of this. The rest is for us to spend as we wish.
We might say that it’s difficult to live without that £250. Wouldn’t life be boring without little treats and expenses here and there?
Pay yourself first.
Think about fattening up that purse.
Next, make that 10% saved every month work for you.
I put mine into an equity fund called Aurora.
You might simply put the 10% into a savings account and earn interest on it.
Don’t touch this treasure. Let it grow and grow.
In 10 years, instead of nothing, you’d have £25,000 minimum in your wallet.
In all likelihood, you’d have much more because of the extra earnings of your 10% treasure and the power of compounding.
The Richest Man in Babylon is an absolute classic of personal finance. It’s as applicable today as it was in the 1920s.
I highly recommend it.
