Welcome to Finance and Fury. In doing last week’s episode – on paying yourself first and allocating your financial resources – I wanted to go through other important rules in the book that inspired that episode – The Richest Man in Babylon – as there are some classic rules that helped me build a solid financial foundation early in my financial journey

  1. This book is the Richest man in Babylon – I would suggest that everyone read – It is not a long book and has some classic lessons that act as basic building blocks towards financial independence – but if you want a summary of these rules – you have come to the right place
  2. The book is essentially an allegory that is set in ancient Babylon, and follows the story of the protagonist – Arkad – who is the richest man in all of Babylon – throughout the book he imparts his wisdom to a younger man – Bansir who also wishes to become wealthy – it is a little like rich dad poor dad but 1.0 – as it was published in 1926 book by George S. Clason
  3. It lays out the basics of personal finance – in a parable format – it has basic lessons to help you build future wealth and become financially independent
    1. These rules are: Pay Yourself First, Live Within Your Means, Put Your Money to Work, Keep Your Money Safe, Own property/Be a Homeowner, Insure Your Future Income, Improve Your Skills to Earn More Income

Rules of Money – Step by step

  1. Pay yourself first – “Start your purse to fatten”
    1. If you want your personal wealth to thrive – the base rule in the book is to start by setting aside 10% of your income into either savings or investments –
      1. 10% income is a way of paying yourself first that is outside of your standard expenses – The idea is that when you set aside 10% of your income, you will automatically adjust your remaining budget so that your maximum expenditure on additional items is 90% – based around the hedonic effect of spending
    2. In the book – it states that, “For every ten coins you place within your purse take out for use but nine. Your purse will start to fatten at once and its increasing weight will feel good in your hand and bring satisfaction to your soul.” – Arkad states that “I found the road to wealth when I decided that a part of all I earned was mine to keep.” This is a great rule to follow – but ideally you will pay yourself first what you need and not just assume that a system such as superannuation will accomplish you FI goals for you – based around current SG rates, 10% of your gross income will be paid into your superannuation account– so for most people this rule is being automatically achieved – But as we went through in last weeks episode – this concept of paying yourself first really is about knowing what you need to accumulate personally first, then having the remaining funds left for additional expenditure
    3. The purpose of paying yourself first is all about a subtle but significant mindset shift – where you are making a conscious decision to “pay yourself first” – to allocate a certain percentage of your income before you budget for your monthly expenses – this is in a vast contrast to simply saving what is leftover – but now you are spending what is leftover – it can be difficult at first, but once you get used to it, it won’t even feel like it impacts your lifestyle as your hedonic treadmill will shift.
  2. Control your expenses – i.e. your spending – “This is the second cure for a lean purse. Budget thy expenses that thou mayest have coins to pay for thy necessities, to pay for thy enjoyments and to gratify thy worthwhile desires without spending more than nine-tenths of thy earnings.” This rule can be boiled down into: “Confuse not the necessary expenses with thy desires.”
    1. Beyond your SG payments – there is no way you can pay yourself first if your income doesn’t even cover your expenses – the major reason why people find it difficult to set aside additional cashflow towards a long-term goal is for two reasons –
      1. The first is the state of mind – what level of lifestyle you have become accustomed to – the more you earn the more you start to justify additional expenses – your lifestyle expenses reflect your earnings unless these are kept in check
      2. The second is easier – simply due to the expenses – i.e. the outgoings – which if these are greater than your incoming cashflow – means that it is a result of unstainable desires.
    2. By adjusting your mindset to pay yourself first a portion of your income – you can start to focus on your ability to achieve your long-term financial goals and bring your spending habits in line with your end desires
      1. The aim of this is to avoid the hedonic treadmill – where no matter what you earn, your lifestyle expenses can easily match this – The Richest Man in Babylon shows that someone’s desires can grow freely whenever there’s a possibility that they are fulfilled – i.e. if you have the money to spend you will – but this is only if you don’t have another purpose or desire for these funds. 
    3. In last weeks episode – we looked at using the pay yourself first rule to create a budget. The main purpose of drafting a budget is to identify leaks from your account, and also helps to control your spending – but instead, the purpose is paying yourself first what you need to achieve financially independence and then spending the rest
    4. Therefore, the lesson is that you should always account for the payments going to your goals and make sure that the rest can cover your lifestyle costs – by reducing your lifestyle costs where necessary – i.e. controlling your expenses
  3. Invest wisely and put your money to work – Make your savings multiply
    1. Investing wisely over time is the third cure for a lean purse: to put each coin to labouring for you – rather than you labouring for your coin
      1. The point of this is that your coin may reproduce its kind and produce a stream of wealth that shall flow constantly into thy purse.
    2. Once you have mastered your allocation of resources – the next step is to put your investments to work
    3. The total measure of a person’s wealth doesn’t lie in the money they have in their account now, but the amount of their wealth in the future
      1. Through the power of compounding returns, your assets will provide a steady stream of income and capital growth that grows over time
      2. The aim is that these passive income streams will eventually bring in enough money for you to live off of without having to work for a wage
    4. Select the investments – then reinvest the profits so that every dollar you earn makes additional money of the money you make – and continue investing in these assets with your surplus income
    5. The richest man in Babylon advises to put each coin to labouring that it may reproduce a stream of wealth that shall flow constantly into your purse – i.e. invest in an asset that can be reinvested to minimise the amount of work required by you
  4. Guard your money from extreme losses – Keep your money safe
    1. The book states: “Secure the advice of those experienced in the profitable handling of gold. Let their wisdom protect thy treasure from unsafe investments.” – in other words: Guard your treasure against getting lost
    2. It is natural to want to invest to gain huge profits in the short term, but in doing so you risk your money – higher reward potential – higher risk – so you risk losing wealth. The point of this rule is to not be allured by the desires to build wealth rapidly by making a risky investment – when investing, do not make investment decisions out of hope, but make safe investment decisions that can grow your wealth gradually
      1. Getting caught up in the vision of becoming an overnight millionaire, rarely ends well. Building true wealth is usually a slow, steady process.
    3. Wealth protection insurances also tie into this lesson, summarized as this: be prepared for the unexpected. You may be making a good income now, and even saving for the future. But if you were to get sick and could no longer work, how would you survive? Or if you are the sole breadwinner for your family and through some tragic circumstances died, your family would be left without a way to pay the bills.
    4. Whilst these are some very unpleasant possibilities to think about – they still need to be considered – and as such, a plan needs to be made for the future
      1. Wealth protection insurance is a complicated topic that would need to be covered in another episode, it is important to do your homework and be prepared in case of an emergency.
    5. All of these cost money every month in anticipation of a future tragedy that may never happen, but these monthly costs can provide a blanket against future risks that you may face if the worst-case scenario come to fruition
  5. Be a home owner – “Thus come many blessings to the man who owneth his own house. And greatly will it reduce his cost of living, making available more of his earnings for pleasures and the gratification of his desires.”
    1. Owning your own home increases the amount of money to be set aside since you save on rent – and as your pay off your debt – increases the amount of cashflow at your disposable.
    2. But while owning a home can be a good decision, it’s not an indisputable fact of personal finance like “live within your means” is – as purchasing a home that is outside of your means may cause you to go backwards –
      1. That said, when you look at the financial statistics, on average homeowners accumulate more wealth over their lifetime than renters.
      2. Beyond the capital growth that property can gain over time – the greatest value in homeownership is that it is a basically a forced savings account by repaying principal on the loan
  • Similar to the rule of paying yourself first, if you have a house with a mortgage, each month when you send your payment in you are contributing a little bit to the principal of your loan and building equity in an asset that will hold its value – your home.
    1. The sunk cost of a property to rent is the rental expenses – but the sunk cost of owning a property is the interest expenses, plus BC and rates that you have to pay
    2. As example – say your interest costs are $15,000 and your rates are $3,000 – but your rental expenses were $26,000 – you are $8k p.a. better off – but not in cashflow – as you will be paying principal back – so your total outgoings may be $2k more than renting
  1. But once the mortgage is paid off, you own an asset – being a property – and don’t have to rent indefinitely – it is important to work out what is affordable though – as depending on BC and other costs – owning a property, even with growth increases may be more expensive than renting
  2. In addition – this can be a source of equity to access for further investment purposes
  3. Other option is rentvetsting
  1. have a retirement plan – Know where you are and where you’re headed financially
    1. “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.”
    2. The whole purpose of your wealth accumulation is to provide in advance for the needs of your growing age and the protection of your family
    3. The Richest Man in Babylon says, provide in advance for the needs of your growing age and the protection of your family.
      1. So know what your end target looks like – how much you need and how you are going to fund your lifestyle in retirement
    4. insure your future income through building wealth – Every person must think of the days to come when you will no longer be working – following the first 5 rules helps you achieve rule 6
  2. Increase your ability to earn – “The more of wisdom we know, the more we may earn. That man who seeks to learn more of his craft shall be richly rewarded.”
    1. The last lesson in wealth creation by Arkad – is to continue to increase your own ability to earn – through becoming wiser and more skilful – this can be either in your own knowledge with investments – but also in your career – continuing to build your knowledge in your own field to expand your career and make yourself indispensable to your employer – allowing you to demand higher salaries – this means your financial assets also grow over time.

Summary: Pay Yourself First, Live Within Your Means, Put Your Money to Work, Keep Your Money Safe, Own property/Be a Homeowner, Insure Your Future Income, Improve Your Skills to Earn More Income

Thank you for listening to today’s episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact/

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