We spend our lives gaining an education, refining our skills, and building a network all in an effort to increase our earning potential. I still remember the exhilarating rush I got when I earned my first paycheck from my first job after college. Or better yet, my first paycheck after a promotion or job change that netted me a big increase in my salary. All the work to get to those critical points in my career was worth it when I realized I could now afford rent, that meal out or that fun trip with some friends. But, while I spent so much focus on increasing my earning potential so I could cover my immediate fixed and discretionary expenses, little focus was paid on how to build WEALTH without hitting the lottery. It always seemed like no matter how much income I produced, I never had any savings to show for it and nothing to build wealth from. However, after rereading George Clason’s “The Richest Man in Babylon” (and some strong prodding from my partner, Kaity), it became evident that the answer to building wealth actually is not some grand mystery and instead is achievable for any person.
The answer to building wealth is best broken down into two key parts: 1) Understanding the basics of budgeting and 2) applying successful historical lessons to build wealth. Since we covered the basics of budgeting in our previous article, let’s focus our attention on building wealth.
In “The Richest Man in Babylon” the main character reflects on the lessons he had to learn to become a man so rich that he makes more money than he can possibly spend. He breaks these lessons down into seven parts, which when approached with a long-term outlook and commitment, are easily achievable.
Cheat Sheet: How to Build Wealth
4) Guard Thy Treasures From Loss
5) Make of Thy Dwelling a Profitable Investment
7) Improve Thy Ability to Earn
Start Thy Purse Fattening
Step one to building wealth is quite possibly the most important lesson. While potentially the easiest step to enact, it might feel overwhelming at first. The first lesson is to fatten your purse by saving 10% of everything you earn. While the concept is straight forward, in order to overcome the psychological barrier, think of it as paying yourself first. You may think all of your income is “your money,” but the truth is that most of it becomes other people’s money when you have to pay rent, utilities, bills, etc. Shift your thinking from needing to save money to needing to pay yourself first. In today’s age of direct deposits, it is easy to automatically put 10% of your paycheck into an account you DON’T touch.
Control Thy Expenditures
Does that dress look so good you have to have it? That TV’s picture is so clear that you absolutely have to upgrade your existing one? Friends are getting together for the second night-in-a-row of hitting the bars and you don’t want to have FOMO? These all might be all too real scenarios of what some of us would call essential expenses. Essential to maintaining our lifestyles and essential to conform to some preconceived perception.
Deep down, we all know that these are luxury expenditures and not necessities. The second lesson is to spend less on luxury or frivolous expenses. Managing the basics of budgeting can help you identify the expenses that are not essential, but building a strong conviction to psychologically overcome the urge to make impulsive purchases or agree to an expensive dinner is critical. This is a lesson I wish I had mastered in my early 20s. I was making a pretty good salary out of college and instead of getting a decade head start on building my wealth, I spent my weekends drubbing up huge bar tabs and purchasing possessions that were overall worthless. In the “Richest Man in Babylon,” the main character makes the same mistake, choosing to buy more things as his income increases. I don’t know about you, but it always seems that I can find a way to make my expenses match my income, regardless of how big the increase.
Be smart, be committed, and cut down on your unnecessary expenses!
Make Thy Gold Multiply
If I had a dollar for every time my parents told me money doesn’t grow on trees, this article would look very different. So, while money doesn’t grow on trees, what if there was a way to make it grow and multiply, similar to how trees do? Fortunately, there is. It is called investing or using your money with the expectation of achieving a profit or return. The third lesson is to invest your money wisely so that it will multiply.
Whether you’re buying stocks or starting a new business venture, investing can take many different forms and you should always enter into an investment expecting a return. When it comes to investing, time is your best friend thanks to the power of compounding. With compounding, you are able to make the returns from your investment continue to bring in more returns. The idea is that you want to learn to make your treasure work for you and make its children and its children’s children work for you.
In our parable, the main character makes a nice return on his investment and buys himself a gift with those earnings. He is soon chastised by his mentor for squandering the opportunity to put his investment’s children to work, missing out on the opportunity to further increase his return.
The moral of this lesson is to invest wisely by continuously reinvesting your profits to build wealth through the power of compounding returns. We’ve created a Beginner’s Guide on How to Start Investing to help you get going.
Guard Thy Treasures From Loss
Have you received an email from a very convincing Nigerian prince lately? How about the IRS calling you asking for your social security number? Better yet, a business opportunity too good to pass up, but the financier happens to be out of the country? It’s sad, but these are all common examples of scams I come across every day. When laid out in this article, it seems obvious these are scams, but they can be very convincing and easy to fall for. In today’s age where cybersecurity threats and overall fraud are more sophisticated than ever, the old adage “if it’s too good to be true, it must not be true” is more influential and important to remember than ever. The fourth lesson is to guard your investment against losses by making smart investments and avoiding get-rich-quick schemes.
I’ve been there. You’re living paycheck to paycheck and an opportunity comes along that can really turn your financial livelihood around quickly. It’s hard not to get excited by these prospects. However, I have learned from personal experience, if you think you’ve hit the jackpot, your scam alarm better be ringing on full alert. Take the time to research your investments. Understanding the ins and outs of the process will help you make informed decisions, and ensure your money is not at risk of substantial loss.
This can also be extended to totally legitimate investments that have a big upside. For instance, if you are an early investor in a business venture or are placing an option call on the stock market, there is a huge risk involved. Usually, the bigger the risk, the bigger the potential reward. Each person will have their own comfort level with risk, but at the end of the day doing your homework and making sure you know what your investing in is key.
Do your research to be an educated investor that mitigates the risk of loss.
Make of Thy Dwelling a Profitable Investment
While these are lessons from ancient Babylon, this lesson speaks true to the American Dream. Homeownership (property in particular) is one of the world’s oldest forms of investment. If you own property and a home, you have an appreciating asset that you can gain equity in and sell at a later time for a profit. The fifth lesson is to own your home instead of renting.
Shelter is a necessity for all people and in today’s world, it is proving more challenging to be a homeowner due to rising costs and lagging wage increases. Because of this, we have seen people renting longer before they are able to purchase their first home. This has created a scenario where younger people are older than previous generations were when they are able to start accumulating wealth through homeownership. Renting comes with many benefits, but ultimately you are helping the homeowner gain wealth while your money provides you no investment benefit. Remember, pay yourself first!
However, don’t despair. Homeownership is still attainable and should be a pivotal part of your plan to build wealth. We’ve developed a Beginner’s Guide to Homebuying to help guide you to your first home purchase when the time is right.
Use homeownership as a diversification of your investments on your path to wealth.
Ensure a Future Income
We’ve set a good foundation to build our wealth, but let’s not lose sight of the end game. We need to build wealth that will support us into our old age, possibly beyond the time when we want or are able to work any longer. This is why we need to focus on building our retirement investments. The sixth lesson is to make preparations for retirement and beyond.
There a lot of long term investment vehicles available that will help you prepare to be financially independent in retirement. If you follow lessons 1-5, you’re in good shape already. Now add on a 401K, IRA, pension and you will be set. Not only are there tax benefits to a lot of retirement accounts, but often companies will match some of your contributions. This not only gives you free money (which doesn’t ever happen in any other scenario) but helps you activate the third lesson more effectively by increasing the money available to compound.
Not only is it important to set up your financial independence in retirement, but also ensure your family is taken care of when you’re gone. This can be accomplished by having life insurance and setting up an estate plan.
Set yourself up for the later years early by contributing to retirement savings as early as possible. For us, we want to #Retire50, so have made this a priority!
Improve Thy Ability to Earn
This is my favorite lesson and you are following it just by reading this article. We are living in the greatest informational age in human history. Every bit of knowledge you could ever desire is right at your fingertips. Lesson seven is to continue to educate yourself and develop skills that will help increase your earning potential.
Watch a MasterClass. Take an online course. Scour YouTube. Join a networking group. There are limitless opportunities to better yourself on a daily basis. It’s up to you to take advantage of these opportunities and put your newly acquired skills and knowledge to work in your favor.
Never stop learning and challenging yourself to be better. There is no excuse for not trying to better yourself every day
The Richest Person in Your World
You might not have ambitions to be the richest person in Babylon, the U.S., or even on your street, but I’d bet good money that you want to build wealth and be financially independent (I wouldn’t even need to go against lesson four to make this bet). The knowledge and ability to build wealth is in your power regardless of your situation, now show commitment to these seven lessons and take control of your future wealth!
Check out additional topics to make personal finance SLIGHTLY EDUCATIONAL on our Personal Finance page.
