Book Review 004: The Richest Man in Babylon

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The Richest Man in Babylon is a story about a wealthy man and his common sense approach to creating wealth. Written by author George S. Clason, a businessman and writer who drafted pamphlets about generating wealth in the 1920s. His book has sold over 2 million copies, and his work has been the foundation of countless other personal finance advice that coined the term “pay yourself first”.

Summary:

1. Pay yourself first

“Every gold piece you save is a slave to work for you. Every copper it earns is its child that also can earn for you.”

Algamish advises the young Arkad to always keep part of his earnings. At first, Arkad thought that he kept everything he earned, but in fact, he earned money, spent it on expenses such as food and clothing, but did not have any savings. Algamish told him that by keeping a part of his earnings off the top and using those funds to invest, those monies will bear “children” and those “children monies” will create even more children, Arkad would eventually be rich.

2. Never invest in something you don't understand

(“A small return and a safe one is far more desirable than risk.”)

Arkad took the Algamish’s advice and began to save, but he used his savings to invest in jewels with Azmur, a brick maker, who promised him big returns. However, it turned out to be a scam and Arkad was given worthless glass trinkets instead of jewels. Algamish then warned Arkad to invest only with experts. If he wanted to buy jewels, he should go to a jewel merchant, not a man who made bricks. When it comes to money, he said, always seek knowledgeable advice.


3. Save early and often , seek out opportunities

“A man’s wealth is not in the purse he carries. A fat purse quickly empties if there is no golden stream to refill it.”

Arkad had become a wealthy man following the principles of Algamish, and he began to teach others how to create wealth. Arkad explained that the most important investment rule is to protect your principal. He warned the men against get-rich and fly-by-night schemes, and told them to be as careful choosing their investments as they were when choosing their wives. To invest, he said, they should seek wise counselors who knew about both gold and life. Arkad told them never to invest their gold in ventures they did not understand or with men who were not skilled in the enterprises they promoted. He told them to buy homes instead of renting them, thus taking advantage of one of life’s best investments. He cautioned them to plan carefully for their later years when low energy, illness, decrepitude and age would make it more difficult to work. Finally, Arkad advised every man present to increase his knowledge, expertise and skills, to become wiser so he could earn more.


4. If you have a strong desire, you will find a way, if not, you will find an excuse

“Good luck waits to come to that man who accepts opportunity.”

A trader who had once been a slave, and still would be one if not for the kindness of his mistress, who took pity on him and helped him gain his freedom, shared his story. His mistress gave him two camels, some bread and a jug of water, and told him to ride across the desert to flee for his freedom. He was greatly afraid because the desert is vast and cruel. Then his mistress asked him if he had the heart of a free man. If so, she said, you will take your chance. If not, you will stay here and remain a slave. Dabasir took her dare and rode into the desert. He journeyed for weeks, his food and water long gone. He thought often of death, but the words of his mistress spurred him forward. He vowed to trek on until he was safe and free.

Thus, one day he finally came out of the desert and made his way to Babylon. From that day on, he always used determination to forge ahead, no matter what difficulties lay in his way. Dabasir looked hard at the young man by his side and told him that he, too, had either the heart of a free man or that of a slave, and that a free man would find a way to repay his debts. Tarkad rose and thanked him for the story, assuring him that as a free man he would repay the money. The next day he did. Where there is a will, there’s a way.


Key Take-Aways

  • Always save at least one-tenth of your income. Invest your savings. Put your money to work for you.

  • Be thrifty. Budget carefully. Do not spend on needless things.

  • Seek the counsel of knowledgeable experts before you invest.

  • Never put the principal that you invested at unseemly risk.

  • Increase your knowledge, expertise and skills, so you can earn more money.

  • Good luck comes to those who know how to seize opportunities and act on them quickly.

  • Be cautious with your money. Lend it only to those who are sure to repay it.

  • Take comfort in hard work. It is your best friend.

  • If you are determined to get ahead, you will.

Good Luck!

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Book Review 003: Automatic Millionaire - David Bach

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Be an Automatic Millionaire - if only it was that easy...right? When I first came across this book, I had just finished my Bachelors degree in Business Administration and was starting my first full time job at a Financial Services Company. I was gifted the book a couple months back from a friend, but pushed it aside until after graduation. This turned out to be perfect timing as this book covers some great basics for beginners.

Key Ideas:

1) Millionaire next door - The average American Millionaire couple earned a combined income of $55,000 (written 2005) during the course of their entire career! This was a big surprise for me as I assumed you needed at least a combined income of $150,000 or more to be able to save significantly. These Millionaires were able to save with a modest income by budgeting, paying themselves first (more details below), and automating their finances. This leads to the next key idea.

2) The "Latte Factor" - The term coined by David which is the idea that you can become a millionaire by changing financial habits that snowball and have an overall big impact to your savings. Being a millennial, I've seen countless articles on "Don't eat Avocado toast if you want to purchase a home", "Don't go to Starbucks and save those dollars". I think its loosely based on the same concept. While I disagree that Avocado toasts and Starbucks are the main reasons why people do not purchase their first homes (i.e. Market prices, Fear of the 2008 crash, prefer to be renters, etc.), I do agree that small habits can give you the option to make the big purchase such as a house, impact your finances greatly, but it is often missed because these expenses are not considered in the aggregate.

If you think about it, $3-5 dollars at Starbucks may not kill your budget, but if you have read other financial books such as Rich Dad Poor Dad (I love this book!), you will know that the rich focus on creating/purchasing assets as quickly as possible, that will continue to build them wealth in the long run. What I mean is, that $3-5 dollars a day, or $1450 a year (rough estimate) can go towards buying mutual funds at a modest 8-12% return, rental properties with $100-200 cash flow per door, or even towards getting that degree that may double your salary, etc. And that is just ONE habit. 

I personally view expenses now in terms of opportunity cost. For example, you might want to take a trip to Vegas with your friends after graduating, but with food, travel costs, and other expenses, you might be out of pocket $500 bucks over a weekend. Now some may argue that they do not want to deprive themselves of fun, and I totally understand, I am merely trying to prove a point and that change in "mindset" is most important.

3) Paying yourself first - This concept I was already familiar with from reading "the Richest Man in Babylon". A simple idea in which you always want to pay yourself first (legally of course), before anyone else - the government, landlord, utility company, and any other bills that may come your way.

Now, how can we do this? There are many different strategies and methods, but one is simply through 401Ks and IRAs. By automatically setting up money to go to your 401Ks and IRAs you are deferring your taxes and growth until retirement.

Simple example: Lets say John makes 50K a year and pays 25% in taxes. Without paying himself first, he will lose 12.5K to Uncle Sam and have $37,500/year or $3,125/month left over to pay the bills. Now lets say he decided to put 15% of his pre-tax income into a 401K (This is very achievable). Now, out of the 50K/year income, 7.5K is going into his 401K Tax free, and he is being taxed on $42.5K which amounts to $10.6K in taxes or overall savings of $1,875. Now this is a very simple illustration and everyone's tax deductions and credits will vary, however, there will be tax savings as  you are reducing your "taxable income" off the top. Note: 401K I used in this example is deferring of taxes, not eliminating it, however, it is taking into consideration that with compound interest (Warren Buffet), we will have a built a sizable portfolio from starting early and often.

4) Automate it, take action NOW - The most important part of this book is automation. Like the title says, these ideas are only good on paper unless you act on it. So David challenges the readers to take baby steps in making changes - 1) increase 401K contributions (Check) 2) automate paychecks to go to different accounts - 401K, checking, bill pay account, etc. (Check) 3) Create a rainy day savings account worth 6 months of expense (Check).

Once I decided to take action, I have to admit it took me less than 15 minutes to automate my expenses and also create a savings account to save up for a 6 month rainy day fund (This step is critical as I personally ran into Car issues couple months later and it wiped out my savings. Luckily, I was able to rebuild it and I didn't have to rely on loans, credit cards, or anything else due to my rainy day fund).

Overall, I think book provided a great basic foundation for my finances and helped me pay for my wedding all cash, save up for a downpayment on my house, payoff any loans all in the span of 4 years. Write down your thoughts below!

Good Luck!

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Book Review 002: Rich Dad Poor Dad - Robert Kiyosaki

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One of my all time favorite books on personal finance is Rich Dad Poor Dad. I can honestly say that it was the catalyst for changing my perception on finance, wealth, and even accounting basics such as an asset and liability. This book written by Robert tells of a story of his two Dads: his biological father (Poor Dad) and his best friend’s father (Rich Dad). These two dads had a stark contrast when it came to dealing with finances which is evident all throughout the book.

Robert Kiyosaki talks about key principles that will change your life forever:

1) Why the Rich get Richer

One of the early lessons taught by Robert’s Rich Dad is that the Rich have money work for them, while the poor and middle works for money. The key difference is their understanding of assets and liabilities. Poor Dad would encourage Robert to take the traditional path of go to college, get a good education, get a job and if you save throughout, one day you can retire and live on the beach. Rich Dad, however, had a different perspective and encouraged his son and Robert to both educate themselves financially, create assets/businesses that create cash flow as early as possible.

Rich Dad explains to Robert that the poor and middle class struggle financially because as they work harder to increase their income, their expenses also increase. They work to make their business owners wealthy, pay the government taxes, and pay off student loans and mortgage debts. The Rich on the other hand, use their income to pay themselves first, buy assets/investments that create cash flow and repeat the cycle to generate even more income each month. They are taking full advantage of what Einstein dubbed the “eighth wonder of the world”, compound interest.

A story in the book tells of young Robert and his best friend working hard to make their “income” and buys comic books to read. After working weeks for limited pay, Robert and his friend end up buying used comic books and create a reading library business for other kids to pay and enjoy. This allows Robert and his friend to realize that they have created a cash flowing business, where they are not working harder, but smarter for more income.

2) Importance of Financial Literacy

There is so much information out there that sometimes the danger is what we may think we know, that just isn't true. This may be the case of people assuming that their primary house is an asset. As Rich Dad explains, “An asset puts money in your pocket, a liability takes money out of your pocket.” As your mortgage has principal, interest, property tax, insurance payments going out each month and not creating cash flow, by definition, it is a liability. Further, it comes at an opportunity cost where you are not able to invest the money into a new business or rental property that creates cash flow and enhances the velocity of your portfolio’s growth.

Robert mentions that the amount of money you make is not as important as how you spend (and keep). Imagine this, who makes more money, a Nurse with a modest but comfortable living arrangement who makes $100K a year with no debt, and is able to invest 20% of her income, and keeps over $40K after taxes. Compared to a Doctor at the same hospital who makes $300K a year, but has student loans of $250K, a mortgage payment of $10K a month, drives an expensive car to “keep up with the joneses”, you get the idea. Most people mistakenly view wealth in terms of net worth or assets minus liabilities, true wealth is measured in the number of days you could continue to live your lifestyle should you have to stop working today.

3) Getting Started

The most important idea shared in the book for me was getting started. A lot of people are provided with the same information, and one person may be enlightened to take action, and the other will sit on the information for years. A favorite quote of mine is “action without knowledge is dangerous, but knowledge without action is useless.” Robert points out a couple reasons why someone may be hesitant to take action:

  • Fear: The fear of losing money and making a fool of yourself may be a reason for you not taking action. However, to those people I ask, what happens if you don’t take action and it's too late? It's not surprising to hear according to Northwestern Mutual's 2018 study that surveyed 2,003 adults, that 21% of Americans have nothing saved up for retirement, a third has less than $5,000, and that 33% of baby boomers have $25,000 or less in retirement savings. Additionally, 78% of Americans say they are extremely concerned they will not have enough money for retirement and another 66% believe they will outlive their retirement savings.

In this day and age, the promises of work hard and save to retirement or “accumulation mindset” that was conveyed to our parent’s generation just does not seem to apply anymore. More often I see retirees re-entering the workforce and taking minimum wage jobs to support their lifestyle.

  • Cynics: There will always be skeptics and people who like to criticize rather than be a doer. Cynicism typically comes from lack of knowledge and excuses. People might tell you investing is real estate is dangerous, “look at the crash of 2008, I heard my friend gets 3am calls to fix toilets, etc.” If you educate yourself, you can take cautionary steps to mitigate the risk of your portfolio crashing as it did in 2008 (i.e. not over-leveraging, maintaining reserves, buying 20% below market, etc.) you can’t prevent a recession, but people who held on during the tough times, made 3x greater returns coming out of the recession. Further, if you don’t want to be a plumber and fix toilets, hire a competent property manager that will take care of your property. It will be well worth the expense and allow you to truly scale your business.
     

  • Laziness: There may be people who don’t take action simply because they prefer to status quo and would rather avoid their future problems than face it head on. As I have discussed in the previous book review “Automatic Millionaire” the key is to take small steps, actions that automate your progress towards wealth building and financial freedom. It’s not about money, but freedom, and buying back your time instead of working 3-40 years hoping that your retirement nest egg will be large enough to support you, you are taking action now to take your future into your own hands, taking back the control from wall street.

Robert offers a couple tips to getting started

  • Find your why: This will be your reason behind why you do the things you do, and it will be a key factor in keeping you motivated and the fuel to your fire. When you set out to create a future that is greater than your past, and pair it with hard work and consistency, you will achieve great success.

  • Master a formula (then move onto the next step): You may have heard the term “jack of all trades, master of none”. Similarly Robert explains that you want to master a formula (i.e. Malcolm Gladwell’s 10,000 hour rule or Dean Graziosi's working on your strengths) and stay focused before you start additional ventures

  • Pay yourself first: This idea is repeated in many different personal finance books: Richest Man in Babylon, Automatic Millionaire, and I will teach you to be rich. The idea is that you are paying yourself (and hopefully investing it) before any taxman (IRS), landlord, credit card company, or other expense vendors get their hands on your money.

  • Circle of 5: You may have heard the phrase, “you are the average of the 5 people you spend the most time with.” This rule of thumb seems to apply whether it's a good or bad group of 5. If you want to learn to be financially free, hang around other people who have done it, or are on track to do so. If there are people in your life who are always complaining, not taking action, or in a state of helplessness, you might soon find yourself on the same boat.

In conclusion, Rich Dad Poor Dad has been a hit among millions of readers who seek to achieve financial independence, grow their wealth, and break free from the status quo. Although there has been controversy amongst critics who question the existence of Robert’s Rich Dad, the way that he has made his fortune, etc. There is no denying that it is a thought provoking and mind-set shifting book. I highly encourage people to take a day or two to read this book so that you can find out for yourself.

Good Luck!

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