Unfortunately, we live in a country where many people do not have a lean purpose, and in all actuality that have an absolutely ton of debt that is prohibiting them from potentially ever reaching financial autonomy. But don’t worry, I’m here with a chapter recap of ‘The Richest Man in Babylon’ to teach you the 7 cures for a lean purse!
Now that I have finished Rich Dad, Poor Dad, I am on to my next book! The thing that’s always attracted me to ‘The Richest Man in Babylon’ is the same thing that made me read ‘Rich Dad, Poor Dad’ – it’s a lot about the mindset of creating wealth for your family and some of the baby steps, per se, to make sure that you’re on the right path!
As I mentioned, the first chapter that I am recapping in ‘The Richest Man in Babylon’ is the 7 cures for a lean purse. Unfortunately, debt is way more common in America than what it should be, and most Americans are living under a boulder of bone crushing debt.
Just as with investing we talk about the Debt/Equity ratio for a company, the Debt/Income ratio is very important for an individual investor so you know if you can cover your liabilities at any point in time. The average household debt in the US is $137,063 and the median household income is only $61,372, so that means that the debt is more than DOUBLE the income – that is no Bueno my friends!
So how can you change that? Well, George Samuel Clason, author of ‘The Richest Man in Babylon’, recommends that we start with these 7 cures for a lean purse! So, what are we waiting for? Let’s check them out!
1 – Start Thy Purse to Fattening
Pay yourself first! It’s really just that simple. Clason recommends that if you’re paid 10 coins then you should try to only live off of 9 of those coins and save the last coin. Of course, we don’t get paid in coins, but the logic is the same. Always try to save at least 10% of your income. And I mean AT LEAST that as a very minimum.
The more that you can save, the faster that you’re going to reach financial autonomy. Let’s do a quick example. I just said that the average household income is $61,372, so 10% of that is $6,137/year of savings.
If you were able to save 10% of your income and invest it at an 8% return (the average since 1950 is over 11%), as Clason suggests, you’d have nearly $700K in 30 years! But if you could just increase that up to 15%, your total now is well over $1 million after 30 years!
You can see how the total amount really just continues to climb at an exponential rate solely based off how much you can invest!
If you want to play around with some of the numbers yourself, you can by utilizing the Sinking Fund Formula Calculator that I created where you can input your own contributions, return and time horizon.
Do you want to get motivated to save and invest? Trust me – looking at compound interest calculators is a great way.
2 – Control Thy Expenditures
Control Thy Expenditures – sounds like living within your means, right? This should be an easy one for us all to accomplish. The easiest way to make sure that you’re controlling thy expenditures is to budget. You can track your spending and income each month to make sure that you’re earning more than what you’re spending because if you’re not, you’re destined for failure.
Personally, I think that Doctor Budget is the simplest budget tool out there that also will cause you to physically track your expenses. The tracking aspect is so important to budgeting because tracking is the #1 way to understand exactly where your money is going, but don’t worry, you can track your budget in less than 15 minutes.
All that you do is plan your budget with a budget calendar, download your transactions at the end of the month from your bank or credit card (don’t stress – I show you how to do this!) and then code them as groceries, gas, mortgage, etc.!
It’s very simple, but that physical act of coding each expense is what will cause you to review everything you bought for the month and will make you instinctively recognize “money leaks” where you’re excessively spending money on things that you might not actually care about.
If you can control thy expenditures, you will be destined for greatness in your financial journey!
3 – Make Thy Gold Multiply
As an investor, this might be my favorite one to read! Now that you’re spending less than you earn and you’re paying yourself first, you need to make your money work for you!
Clason used an example where a father wanted to save and invest for his son, so when his son was born, he took 10 pieces of silver and loaned it out to earn 25% every four years. After 20 years, those 10 pieces of silver turned into 31.5 pieces.
His son didn’t need the silver when he was 20, so instead he let them stay loaned out until he was 50. Those 10 silver coins, that were 31.5 coins after 20 years, were now 167 coins!
That, my friends, is the beauty of compound interest!
I frequently talk about investing for our family as I think that’s the best way to create generational wealth and now that I have a son, I am putting my money where my mouth is.
How am I doing that?
It’s nothing crazy at all.
I am investing $50, every month, that’s setup to automatically transfer into the account on the date that he was born. So, in total, I am only investing $600/year. My plan is to do this until he is 50 years old and then give it to him as a present for him to use, either for his retirement or maybe for his kids, or just anything else that he might deem fit.
Over the course of those 50 years, I will spend $30K investing for him, but if I receive 8% on average every year then he will have nearly $372K. $30K of my money will give him $372K – that is an amazing investment that will hopefully then allow him the ability to continue to pay it forward for our family.
That is how you make thy gold multiply!
4 – Guard Thy Treasures from Loss
“Guard thy treasure from loss by investing only where thy principal is safe, where it may be reclaimed if desirable, and where thou will not fail to collect a fair rental.” This is the exact flip side of making thy gold multiply. Sure, we obviously want our money to grow, but it’s just as important to make sure that we’re not losing any money while we’re trying to make it multiply!
So how do you do this? Well, we always hear Andrew and Dave talk about “Investing with a margin of safety…emphasis on the safety” on the Investing for Beginners Podcast and that means finding companies with a strong moat and a great balance sheet.
One great way to do this is to utilize the Value Trap Indicator to make sure that you’re not dumping your money into a company that is a value trap but instead is a company that is a strong buy. You need to find companies that have a strong balance sheet, both for the short-term liquidity and the long-term so if troubles arise, they will still be poised to be able to make it through those tough times.
It’s more important than ever to focus on the management of the company and make sure that you trust that they’re running the company well. One way to do this is to measure the ROIC of the company as that is a ratio that can help show you how efficiently the company is using the money that they invest into the business.
Long story, short – you need to do your due diligence on the company, both as a quantitative sense and qualitative sense, to make sure that you trust that the company isn’t going to make you lose money!
5 – Make of Thy Dwelling a Profitable Investment
“Own thy home.”
That was easy – next? Clason simply is saying that if you own your home, you have more control over your life. Sure, owning a home isn’t always better than renting, but I think that it largely is for the most part.
While renting gives you flexibility to move as often as you want, if you don’t intend to move frequently, then you’re likely going to be better off paying for a home. I guarantee that your mortgage would be less than if you were paying rent on that same home and you’re also creating wealth! Of course, coming up with a downpayment can be hard, but it’s much, much easier if you’re aware of all the options out there!
Now, while I never count the value of my home as an asset in my Net Worth, it is an asset if I ever wanted to sell our house and downsize or if we were forced to do that at some point. If we were just renting the house, there wouldn’t be anything at all to fall back on if the going got tough.
Buying a home isn’t creating generational wealth – it’s just adding a layer of protection and strengthening your shield!
6 – Insure a Future Income
Oh man…does this sound like DIVIDENDS?! It does to me! Clason, my main man!
As you know, we all absolutely love dividends because while they aren’t guaranteed, once you earn them, they are realized returns as soon as you get them rather than unrealized returns that can shrink and disappear at any minute. Dividends are a great source of future income, especially if you can get ahead of things and try to identify some Dividend Aristocrats of the Future!
Another way to do this is by owning real estate. If you own some rental properties, then you’re setting yourself up to receive rental income in the future as well as continuing to pay down those mortgages and own more and more of the home as the mortgage is paid off further.
While a first home isn’t an asset, any rental property is according to Rich Dad, Poor Dad as you can sell that property at any point in time and have no impact to you or your family’s quality of life since you weren’t living there! That’s the beauty of a rental property.
Another way to ensure a future income is to plan for life insurance. It all depends on the person and the situation, but if you have a family, you need to have life insurance. It’s just that simple. It’s pretty cheap and if something tragic ever were to happen, it would be devastating to leave your family with one less income but all of the same fixed expenses, wouldn’t it? Do everyone a favor, but mainly your family members, and get life insurance. It’s that simple.
Plan for the future and make sure that you have ways to keep making money going forward. It might sound overwhelming, but it’s not. You have a ton of ways to do this, you just need to decide what makes sense for you and your family.
7 – Increase Thy Ability to Earn
This is a really fun one – earning more money, now! Find ways to make more money, either with your current job, a side hustle, random one-off jobs, anything!
Rich Dad, Poor Dad asks us to find ways to not work for money but instead try to find ways that can help us find a scalable income and I think that it’s an extremely valuable lesson for all of us to learn.
Not everyone has time for a side hustle, but I urge you to think about inefficiencies in your life regarding how you’re earning money and continuously try to optimize your time. Doing so will allow you to maximize your earnings potential.
Each one of these 7 cures for a lean purse made me say out loud, “oh, this might be my favorite one!” That’s how you know that this list is legit. Hopefully you were able to see a tangible takeaway for each one of the 7 cures and have some sort of plan for you to implement some of these in your life today. Hopefully you are likely doing some of these today but I’m sure there are some areas where you can absolutely improve and get better.
Please, please, please – take some sort of takeaway for you to implement from not only this post, but every post that you read. Maybe your takeaway is to start budgeting with Doctor Budget or maybe it’s taking a look at the Value Trap Indicator, but regardless of what it is, you need to have a plan of action!
Reading without learning or a plan of action is a waste of time! Reading and acting on what you learned is what will set you up for personal finance success.
The choice is yours – seems like an easy one to me!