The Richest Man in Babylon by George S. Clason is a fascinating lesson in personal finance written in short, easy-to-digest stories. It was first published in 1926, but the classic parable style and timeless concepts about how to build wealth continue to provide value as if it was written today.
Originally written as a series of pamphlets, the parables were eventually collected into a book. The book provides many timeless lessons about spending, saving, and investing to build wealth that are as applicable today as when it was first written.
The Richest Man in Babylon – Summary in 3 Sentences
The book is set in ancient Babylon, and follows the story of Arkad, the richest man in all of Babylon, imparting his wisdom to a younger man, Bansir, who wishes to become wealthy.
It lays out the basics of personal finance – spend less than you earn, save 10% of your income, and invest wisely – in an engaging parable format (stories told to teach a lesson). The book teaches that if you follows these basic lessons, work hard, and continue improving your skills, you can build future wealth through passive streams of income.
7 Lessons from The Richest Man in Babylon
The book is divided into three sections. The first 7 lessons are the “cures for a lean purse” that Arkad (the richest man in Babylon) shares with Bansir, and then there are two other related parables that impart the last two bits of wisdom. This article will cover the overarching lessons in the book.
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
This, my students, was the first cure I did discover for my lean purse: For
each ten coins I put in, to spend but nine.
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 American – 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
This, then, is the second cure for a lean purse. Budget thy expenses that
thou mayest have coins to pay for thy necessities, to pay for thy enjoyments
and to gratify thy worthwhile desires without spending more than nine-tenths of thy earnings.
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
This, then, is the third cure for a lean purse: to put each coin to laboring
that it may reproduce its kind even as the flocks of the field and help bring to
thee income, a stream of wealth that shall flow constantly into thy purse.
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
Consult with wise men. Secure the advice of those experienced in the
profitable handling of gold. Let their wisdom protect thy treasure from
unsafe investments.
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 real estate. I made sure to learn from people with more experience and me (and not the get-rich-quick gurus), and was dedicated to becoming an expert in it. That’s not to say I didn’t make mistakes along the way, but by focusing on one area of expertise and working hard, I was able to increase our 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 – Be a Homeowner
Thus come many blessings to the man who owneth his own house. And
greatly will it reduce his cost of living, making available more of his earnings
for pleasures and the gratification of his desires.
I must say I don’t 100% agree with the advice that owning your home is a definite path to wealth. The first four lessons are universal, and essential for building wealth. But while owning a home can be a good decision, it’s not an indisputable fact of personal finance like “live within your means” is.
That said, when you look at the financial statistics, on average homeowners accumulate more wealth over their lifetime than renters. In my opinion, the greatest value in homeownership is that it is a basically a forced savings account.
Similar to the rule of paying yourself first, if you have a house with a mortgage, each month when you send your payment in you are contributing a little bit to the principal of your loan and building equity in an asset that will hold its value – your home. So in 30 years when the mortgage is paid off, you own an asset worth at least a few hundred thousand dollars that you wouldn’t have if you had been renting that whole time.
However, I have written before that the true cost of homeownership is higher than you think, and renting is not just “throwing away money” like many people believe.
But if you are a renter, to build the same level of wealth as a homeowner, you have to be disciplined in saving and investing the money you would otherwise have put into a house downpayment, maintenance, and repairs. If you don’t have that kind of discipline, then owning a home can be a great (albeit inefficient) way to ensure you are saving money and building equity every month.
Lesson 6 – Insure Your Future Income
This, then, is the sixth cure for a lean purse. Provide in advance for the
needs of thy growing age and the protection of thy family.
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 7 – Improve Your Skills to Earn More Income
Thus the seventh…remedy for a lean purse is to cultivate thy own
powers, to study and become wiser, to become more skillful, to so act as to
respect thyself.
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. As I mentioned earlier, in my own life I decided to invest my time and money in learning real estate investing, and built a steady stream of passive income over the last several years.
But 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!
RELATED: 7 Ways To Make an Extra $500 Per Month (That Actually Work)
Wrapping Up (and Bonus Lessons)
There are two more parables at the end of the book that are somewhat disconnected from the main story. If all you took away from The Richest Man in Babylon were the basics – pay yourself first, live within your means, invest your money wisely, and prepare for the future – you would way ahead of the average person in learning to build wealth.
But I think the last 2 stories help to give a little extra context and answer some of the “why” behind how some people seem to easily grow their wealth and others continue to struggle, barely getting by.
Good Luck Favors Those Who Take Action
The first story answers the common complaint that it seems that those that acquire great wealth are just lucky. Without seeing the details of the entire story, it can be easy to condense someone’s wealth into just a string of good fortune.
For example, Bill Gates, a college dropout, became fabulously wealthy by founding Microsoft. He was at the right place, at the right time. He had an interest in software at the beginning of one of the greatest shifts in the global economy through computerization. His ideas were picked up by other hobbyist computers which eventually cascaded into one of the largest software companies in the world.
While those are all true, there were thousands of people in similar situations. What Bill Gates did was seize the opportunity presented to him. Instead of dreaming of becoming rich one day, he took action and through great effort (and yes, some luck) built an empire.
It’s easy to spot opportunity through hindsight, but there was no way to know that the computer/software industry would become the juggernaut it did when Gates was tinkering in his garage in the 70s and 80s.
In the same way, there is opportunity all around you – if you are looking for it. But without taking action, you’ll never see the fruits of your “good luck”.
Learning How to Build Wealth Is More Important Than Being Wealthy
This is the perfect conclusion and summary of The Richest Man in Babylon. It ties all the lessons together.
Imagine two people, both with an equal amount of wealth – let’s say $100 million. One built his wealth over 20 years by starting and building a successful businesses, and wisely investing his profits. The other won the lottery a few weeks ago.
If both of these people suddenly lost all of their money, who do you think would have a better chance of rebuilding their wealth?
I would place my bet on the one who built his wealth through hard work and discipline. This person learned and practiced all the wisdom given in The Richest Man in Babylon – he lived within his means, used his skills to increase his earning ability, and took advantage of the opportunities presented to him to build his wealth.
The other person just had $100 million dropped in his lap. He hasn’t had to learn the skills of delayed gratification, wealth building, or the ups and downs of what it takes to run a successful business. If left to his own devices, he doesn’t have the knowledge and skills to build wealth. Is it any wonder that nearly a third of lottery winners declare bankruptcy (far higher than the average bankruptcy rate)?
Learning the habits that lead to wealth is a skill that will continue to pay dividends regardless of how much money you have. But without the money-management lessons that come along with the path to wealth, it is almost impossible to hold on to your money, even if you are the “luckiest” lottery winner in the world.
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