6 Lessons from The Richest Man in Babylon

George S. Clason's The Richest Man in Babylon is a fascinating lesson in personal finance written in brief, easy-to-digest stories. It was first published in 1926, but as if it were written today, the classic parable design and timeless ideas of how to create wealth continue to provide value.

Originally written as a collection of pamphlets, gradually the parables were compiled into a novel. The book offers several timeless lessons that are as applicable today as when it was first published about spending, saving, and investing to create wealth.

Here is a summary of the main lessons from The Richest Man in Babylon:

Pay Yourself First

Live Within Your Means

Put Your Money to Work

Keep Your Money Safe

Be a Homeowner

Insure Your Future Income

Improve Your Skills to Earn More Income

Lesson 1 – Pay Yourself First

The first lesson given by the wealthy Arkad to his students was to pay yourself first. This may be the most basic maxim in all of personal finance, but if you don’t follow it, you will never escape the paycheck to paycheck cycle.

So what does it mean to pay yourself first? There are two ways to look at savings, and mathematically they are identical.

Savings = Income – Expenses

Expenses = Income – Savings

I will spare you the mathematical proof, but those two statements are equal. However, the psychology behind them are vastly different. If you follow the first equation, you are saving whatever is left over after you pay your expenses. You are following the path of the average person – almost 80% live paycheck to paycheck. Unless you have an unusual amount of willpower, it is difficult to spend less than you earn if you don’t specifically prioritize savings as a line item in your budget.

The second equation is a subtle but significant mindset shift. You are making a conscious decision to “pay yourself first” – to save a certain percentage of your income before you budget for your monthly expenses. Instead of saving what is leftover, you are spending what is leftover. While it may be a difficult shift at first, once you get used to it, it won’t even feel like it impacts your lifestyle.

Think about the last time you got a raise. Where did the money go? You probably have no idea. Your spending increased to absorb the difference. But what if the next time you got a raise, you decided to divert the entire difference into a savings account? Your lifestyle wouldn’t be impacted, and you wouldn’t notice the difference, but your savings would begin to grow.

You are now paying yourself first and living off the rest, rather than hoping you have money left at the end of the month to save for the future.

Lesson 2 – Live Within Your Means

If you are like Arkad’s students in the parable, you are probably thinking that there is no way you can pay yourself first and save a portion of your income because your income doesn’t even cover your expenses now!

The book rightly points out that most people confuse necessary expenses with discretionary ones. Much like keeping up with the Joneses, your desires will always increase to consume whatever money you have and then some.

This desire to live beyond your means is true regardless of your income level. Even if you make $200,000 a year or $1,000,000 a year, there will always be things you desire that are slightly out of reach, whether it be a nice vacation or a luxury yacht.

By adjusting your mindset and making your greatest desire be saving a portion of your income (The Richest Man in Babylon uses 10%), you will be satisfying your desire and still living within your means.

Lesson 3 – Put Your Money to Work

Once you have mastered your spending and are consistently saving money every month, the next step is to put your savings to work earning their keep.

I like to think of each dollar as an employee. I want my employees to work hard for me, and earn as much money as they can. This is the concept of investing.

Instead of spending your money on things that lose value and will eventually end up in a landfill like cars, electronics, or designer clothing, invest your money in things that will earn more money like stocks, real estate, or even a side hustle business.

Through the power of compound interest, your assets will provide a steady stream of income, and by investing that income will produce even more income. These passive income streams will eventually be bringing in enough money for you to live off of without having to work for an hourly wage!

Lesson 4 – Keep Your Money Safe

Warren Buffett is famous for his 2 rules of investing:

Never lose money.

Never forget rule #1.

Buffett’s discipline has made him one of the wealthiest men in the world. Despite the popular opinion of the day, he invests only in what he knows and understands. While everyone is running to invest in Apple, Google, Facebook and the latest big tech IPO, Buffett is slowly and methodically building wealth investing in more traditional companies he understands.

that’s not to say there’s anything wrong with buying tech stocks, but it’s not Buffett’s area of expertise, so he invests in what he knows.

Getting caught up in the latest fad (*cough*…Bitcoin…*cough*), with visions of becoming an overnight millionaire, rarely ends well. Building true wealth is usually a slow, steady process.

Personally, I decided to invest my time, energy, and research into learning to invest in stocks. I made sure to learn from people with more experience and me (and not the get-rich-quick gurus) and is dedicated to becoming an expert in it. That’s not to say I don't make mistakes along the way, but by focusing on one area of expertise and working hard, I am able to increase my net worth much more safely than if I had tried my hand at a dozen different things I didn’t know much about.

Lesson 5 – Insure Your Future Income

This lesson can be 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.

Thinking through some of these unpleasant possibilities and making a plan for the future is a part of responsible adulthood. While insurance is a complicated topic, and there are a lot of less-than-honest sales tactics out there to promote various products, that doesn’t mean you shouldn’t do your homework and be prepared in case of an emergency.

Some of the different types of insurance you should at least consider would be:

health insurance

life insurance

disability insurance

homeowner’s insurance (if you own a home)

long term care insurance

All of these cost money every month in anticipation of a future tragedy that may never happen, but you owe it to yourself and your family to think through these possibilities and have a plan should the worst-case scenario come to fruition.

Lesson 6 – Improve Your Skills to Earn More Income

In the personal finance equation, there are two ways to come out ahead – spend less, or earn more. There is a reason this lesson is toward the end of the book. If you don’t learn the basics of how to control your spending, live within your means, and invest wisely, then earning more income will do you no good. You will just adjust your desires to match your new, higher income and still be stuck in the paycheck-to-paycheck cycle.

But once you have learned the basics of personal finance and have a handle on your budget, then earning income can be a powerful tool to build wealth. There is no denying that it is much easier to become wealthy making $500,000 per year than $50,000. But if you haven’t learned the discipline of saving and investing, earning 10 times as much will do you no good in the long run, and is no guarantee of building real wealth.

There are many ways to earn more income, but it all comes down to increasing your skills – whether that be in your current career, or a side hustle to make some extra cash by using your knowledge and skills. You could choose to grow your career and increase your income that way, or turn your hobby into a business to make money on the side. The possibilities are endless!