10 key lessons from The Richest Man in Babylon

The Richest Man in Babylon is a timeless classic book for personal finance. Below are the top 10 lessons I took away from the book. 

#1 Start by feeding your pockets 

This point is actually the crux of the book: the classic principle of paying yourself first. Save at least 10% of all income earned. Even in the example of those who are paying off debt, the author advocates setting aside this 10%. If you want to save money for your future, you must begin by consistently setting aside part of your earnings today.

#2 Control your expenses

Essentially, this is learning to live within your means and avoiding lifestyle inflation.  As our income grows, we often increase our so-called “essential costs,” leading to lifestyle inflation. While we are allowed the occasional latte and extravagant dinners, we need to keep our spending in check. We shouldn’t deprive ourselves of everything. However, fulfilling every desire is no longer a special treat.

Don’t fall into the trap of spending your raise soon after you have received it. It is tempting to buy something special upon getting a raise and bonus after a year of working hard. However, remember that your pay hike is pretax and shrinks on an after-tax basis. If you need some things, make a list of what you believe is essential if you had some extra cash.

#3 Make your money grow

This is an essential lesson from the book that has always been floating around in the discourse of financial planning: invest your money. Take the money that is just sitting in your bank account and have it make money for you. Looking into small investments that aren’t risky is beneficial, especially as those that have a compound interest will lead to more money.

#4 Protect your valuables from loss

Here, the book encourages the protection of principle from loss. It is easy to criticize this idea, as most of us feel that investment vehicles that have the potential to lose value, such as stocks, are an essential part of a balanced portfolio. If you take a bigger picture view, however, the lesson becomes more palatable. The penalty of risk is the potential of loss. Know your risk aversion and understand the risks in your portfolio.

#5 Your residence is a form of investment

Owning a house is better than having a landlord, as eventually, you will be making payments towards your house and not just your lender, and that at least you will own your own home.

#6 Secure a future income

This concept revolves around the benefits of a retirement fund for when you are no longer young and able to work. The idea is that one should try to save the most they can while also having a possible investment in order to be able to support themselves and their family.

#7 Increase your capacity to earn

This lesson encourages the idea of learning new methods to perfect your craft/profession so that you can become more profitable. Also learning new skills and learning, in general, are essential to increase one’s ability to earn more money.

#8 Money slips away if invested into something you’re unfamiliar with

This is described as a law of gold, in which it is a law that anyone who invests in a business which they are unfamiliar with, simply for the aims of making money, is guaranteed to lose that money. 

#9 Money slips away if involved with tricks or schemes

This law revolves around the idea that no money can come from someone who is following the advice of those who use tricks or schemes to make money. There is no fast way to increase your wealth, so be wary of any gimmicks that sell that at the forefront. It is best to be smart and not invest money in unfamiliar territories.

#10 If you have debts, allot money for it

• 10% goes for savings for future investments.
• 70%  should go for necessary expenses, notably to provide for home, clothes, and food.
•  20% will be for paying off debt.