If you want to invest, then make sure you have your personal finances in order first. I know, I know... it's boring. But I have just the cure.
This post is designed to teach you the important principles in a fun and different way, using simple parables that never seem to lose relevance.
- In order to begin investing you need to have your personal finances in check -- this includes budgets, paying down debt, and allocating your money wisely.
- The Richest Man in Babylon is the single best book out there on personal finance.
- 7 common sense and practical steps can be taken to tackle your personal finances and gain financial independence.
Investing and Personal Finance go Hand-in-Hand
It's important to be financially stable before we begin investing. Mathematics will back me up on this. If you have $10,000 of credit card debt and the interest is 18.99%, you're paying at least $1,899 a year on that principal just in interest. Let me repeat, just in interest. That's not including the principal. You would have to generate a 20% return on investment with that same $10,000 to barely break even. And even then, it would take years to pay off the principal.
But it's important for everyone, not just investors, to take their personal finances seriously. My goal, on this website, is to increase your probability AND reduce the amount of time it takes to become financially independent.
“Financial peace isn’t the acquisition of stuff. It’s learning to live on less than you make, so you can give money back and have money to invest. You can’t win until you do this.”
— Dave Ramsey
So what's my point? It's crucial that we cover our debts first and foremost. It's vital to save more than we spend. And it's of utmost importance that we pay ourselves first. This means paying down as much debt as possible while still saving some money to invest with.
The Richest Man in Babylon
This post will be designed almost entirely off the incredibly clear and concise teachings of George S. Clason's The Richest Man in Babylon. There's a reason for this. My parents always tried to teach me the importance of personal finance. From Suze Orman to Dave Ramsey, I tried to take in as much as I could. It was just hard, tiresome, and not very exciting... especially for a young kid. However, I can't thank my parents enough because most of it stuck (at least the basics) and I knew more about finances before college than most adults ever will.
That said, I really wish I would've discovered this book a long time ago. Through ancient parables detailed in an extremely clear manner, Clason explains the tenets of personal finance better than anyone who has ever attempted to do so, and there have been many. You could spend months pouring over dozens of finance books and you still wouldn't have a better understanding than if you read this bite-sized book (144 pages total).
“It’s not how much money you make, but how much money you keep, how hard it works for you, and how many generations you keep it for.”
— Robert Kiyosaki
The story follows ancient Babylon's most successful people. Arkad, one of the main characters, is tasked with explaining how to obtain, keep, and build wealth. He accomplishes this with 7 simple lessons. These lessons are essentially personal finance tutorials that remain relevant to us even today.
7 Cures for a Lean Purse
- Start thy purse to fattening (Pay yourself 1st)
- Arkad's first remedy for a lean purse is a lesson on paying yourself first. He explains by telling them if you have 10 coins in your purse, only spend 9. Overtime the purse will fatten and you'll see your wealth increase. He's essentially saying you should always save some of your earnings, in his example 10%, so you can begin to build your financial independence. This is a great example because it works at every income level if you just save 10%. Arkad also explains that he managed to live just as well only using 90% of his earnings.
- Control thy expenditures (Save more than you spend)
- Arkad's second remedy begins with a cautionary tale of how even the richest among us are often just as broke. He explains that your "necessary expenses" will always grow to equal your income, unless you contest. This means living below your means, never touching the 10% you've set aside, unless used for investment, and apply limits for non-necessary expenses. The first two lessons are the most crucial aspects to personal finance, yet so many people refuse to take them serious.
- Make thy gold multiply (Put your money to work for you)
- The third lesson is summed up with a quote straight from the book, “The gold we may retain from our earnings is but the start. The earnings it will make shall build our fortunes.” Arkad states gold should not just sit around and stare back at you. Rather, put it to work by investing. Not speculating, fruitful investing. By using a value investing philosophy that utilizes compound interest, your money can work for you and multiply. Remember, time and consistent payments to yourself are your greatest allies.
- Guard thy treasures from loss (Protect your wealth)
- The fourth remedy can be viewed as the next step. For instance, once you have started investing and have built up a small amount of wealth, it's important to protect this wealth. Or as Arkad states, “prevent thy purse from being emptied once it has become well filled.” In the investing world, I believe we do this by making smart investments in solid companies while utilizing a healthy margin of safety. As Mohnish Pabrai once said, “Heads I win; Tails I don't lose much.”
- Make of thy dwelling a profitable investment (Make your home a worthwhile investment)
- The fifth lesson covers home ownership. While many people choose to rent (perfectly fine), the main point is to manage this expense/investment in a smart manner. Make sure you can cover the costs, buy/rent at a good price, and take care of your investment in a way it can become profitable for you. If you can do this, your dwelling will not be a burden on you, but rather a fruitful endeavor.
- Insure a future income (Have a retirement plan)
- Once you have saved, invested, and generated a healthy, growing sum of wealth, the next step is to provide a secure future for both you and your family. There may be a time when you can no longer physically, or mentally, provide for yourself and your family. Arkad's point was to be prepared and have already established a sustainable source of income for these times. Compound interest is an amazing tool, and the quicker you start to utilize it, the better.
- Increase thy ability to earn (Invest in yourself)
- Arkad states the seventh remedy is “to cultivate thy own powers, to study and become wiser, to become more skillful, to so act as to respect thyself. In order to be successful, and stay successful, never stop learning. He reminds the men that before accomplishment must come desire. A simple, but important step to overcoming personal financial difficulties.