Free Money Finance

Revisiting the Richest Man in Babylon

The Richest Man in Babylon is one of the personal finance books I think can change people's lives. It's an easy, fun read (because it's a story, not just a "regular" personal finance book), is inexpensive, and contains simple yet life-changing thoughts on personal finance. If you haven't read it yet -- do so NOW!!!! ;-)

Anyway, I haven't talked about the book for quite some time since I covered it in detail several years ago. But I thought it would be fun to share some highlights of the book -- for those of you who will not read it even though I just told you to :-) -- since it contains such great truths. In particular, I want to focus on what the book calls "seven cures for a lean purse." Here they are:

• Cure #1: Start Thy Purse to Fattening 

• Cure #2: Control Thy Expenses 

• Cure #3: Make Thy Gold Multiply 

• Cure #4: Guard Thy Treasures from Loss 

• Cure #5: Make of Thy Dwelling a Profitable Investment 

• Cure #6: Insure a Future Income

• Cure #7: Increase Thy Ability to Earn

Ok, seven may be a bit over-kill (but they're a good seven, huh?) I started with five principles myself (several years ago), then moved to three steps to get rich. But recently I've got the keys to personal finance down to two steps and am working on a single equation. Now if I can only help everyone get rich without doing anything at all, I'll be completely set! ;-)

Seriously, for those of you who haven't checked out the book, do yourself a favor and get it -- I'm sure your library has a copy you can borrow, so it won't cost you a penny. It's a good study and I'm thinking of reading it with my kids so they can start learning the basics of personal finance.

Wealth Creation: The Miracles of Compounding Interest

The following is a guest post written by Paul Damazo, author of 80 Proven Ways to Become a Millionaire, All you need is two or three! For those of you interested, here's a series I wrote a long time ago on The Richest Man in Babylon.

If you struggle to survive financially, you are not alone. Isn't it amazing that in the two most important areas of our lives-finances and relationships-most of us have not had even one hour of training. This is crazy! 

I'm sure you've heard about the Law of Attraction and you know the Law of Gravity. Did you know there are also Laws of Wealth Creation. Perhaps you were never taught them or you do not use them.   

Let me share what I learned from one of my favorite books. 

The Secrets of The Richest Man In Babylon

You can succeed financially! It is quite simple, boiling down to three simple secrets that go back to old Babylon. The book, The Richest Man in Babylon, by George S. Clason, shares Arkad's secrets to becoming wealthy and makes the financial concept of compound interest fun to read and easy to understand. 

What makes his story so interesting is that Arkad did not begin life wealthy. Poor when a young man, he wanted to experience more of life than what his childhood circumstances had to offer.   

Arkad's friends were confused as to why he had so much more money than they did. As children, they had been equal. They had played, studied, and worked together. Nothing had set Arkad apart. So, what was his secret? How come Arkad had all the "luck"? Didn't they "deserve" to be wealthy? 

To Arkad's childhood friends, it seemed very unfair that ordinary little Arkad somehow became the richest man in Babylon, while they struggled daily to survive. 

Arkad shared with his friends that when he was younger he had observed that many things were possible when one had wealth. Being happy and content was a great way to live and having wealth made it even easier. He consciously made the choice to be happy and wealthy! He set out to learn wealth creation and then focused on doing it well.   

Arkad doesn't try to defend his good fortune or to apologize for it. Instead, he sets out to share his secrets. And what he makes very clear is that these "secrets" aren't really secret at all. They are simple formulas anyone can learn. Yes, you can become wealthy.   

Secret 1: Arkad decided  "A part of all I earn is mine to keep."   

He found the road to wealth when he kept and invested for himself one-tenth of all he earned. Start with 1% and work up to 10% or more as quickly as you can. Just start!   

Secret 2: He invested wisely.   

Arkad learned to save and invest and reinvest his money. He told his friends they should put their money and that money's children (i.e., the interest or return on their money) to work for them. 

Make your money work hard for you rather than you working hard for your money. Have the patience and persistence to let your money grow, compounding each year.   

Have a large money tree. The more money you save, the more money you can put to work for yourself.    

Secret 3: He enjoyed his wealth.   

Arkad was famous for his wealth, kindness, and generosity. He gave graciously to charities, was generous with his family, and liberal with his own expenses. 

If you are serious about your wealth creation and becoming a millionaire, you will quickly differentiate between your needs versus your wants, and you will not be involved with instant gratification.   

The Amazing Secret of Compounding

Compounding can work for you or against you. When you borrow money, compounding works against you and takes more of your money, sometimes far more than the amount you initially borrowed. When you save and invest money, compounding works for you, paying you more money every day. 

You can become very wealthy. Compound interest grows gigantically faster than simple interest. The younger you are, the more you can use this "secret" to your advantage. Start now compounding interest and watch how fast your investments will grow. 

When comparing simple and compounding interest, imagine a duck and a jet, both ready to fly. The duck takes off slowly, staying close to the ground while gradually picking up height. The jet speeds down the runway, starts climbing rapidly, eventually climbing so high and so fast it appears to be going straight up. The jet is like compounding interest.   

Time is Magic 

"Compound interest is the greatest mathematical discovery of all time," said Dr. Albert Einstein. The results are determined by time, not just how much you invest!  Time really is magic.   

The Rule of 72 developed by Dr. Albert Einstein is an easy way to estimate how long it will take for your money to double with annual compounding. (Divide 72 by the percentage growth rate.) For example, with a 15% return your money doubles every 4.8 years. Round it to five years (for simplicity's sake). This means a $5,000 one-time investment made at birth by parents and grandparents would grow to $2,560,000 when the child is 45 years old. This awesome result is based on two major factors-compounding earned interest and time. 

Remember that Wealth is a Matter of Choice-Yours Alone. Choose today to become a millionaire, to focus on your wealth creation, to create a life you love for you and your loved ones. 

NOTE: This article is designed to inspire you into action and to provide accurate and authoritative information in regard to the subject matter covered. Factual material has been obtained from sources believed to be reliable, and is not guaranteed. All examples are for illustrative purposes only and are not to be construed as recommendations, advice, or tax counsel. The author is not engaged in rendering legal, accounting, or other professional service. If legal or other expert assistance is required, the author strongly recommends that the reader should contact his own professional advisors. 

Past performance should not be taken as being representative of future results. Anything tax-related should be discussed with your accountant before it is used for tax purposes. All information provided in this article is for informational purposes only.

The Richest Man in Babylon: Seven Cures for a Lean Purse Part 7, Increase Thy Ability to Earn

In the third chapter of The Richest Man in Babylon the book lists and details "seven cures for a lean purse." Today, we'll cover cure #7 which is:

Increase thy ability to earn.

Here's what the book has to say on this last cure:

As a man perfecteth himself in his calling even so doth his ability to earn increase.

Yes, it said "perfecteth" and "doth." ;-)

The book continues a bit later on:

The more wisdom we know, the more we may earn. That man who seeks to learn more of his craft shall be richly rewarded.

The cure ends with this:

Thus the seventh and last 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.

Here at Free Money Finance, we've already established that your career is your #1 financial asset -- and managing it appropriately can make you millions throughout your working years. The best way to jumpstart your career is to get a good (or additional) education. There is a big, big difference in starting salaries and earning power over a lifetime with a college degree versus not having one. And for those wanting to earn even more, getting an MBA is an option. Couple this with spending less than you earn and it's impossible not to become wealthy.

For those of you who are saving for college to give your kids a leg up in earning power, here are some posts from Free Money Finance that can help you  pay for it:

• 4 Ways to Save Big on College Costs


• A Great College Money Saving Tip


• Big Money Blunders to Avoid: Saving for College


• Four Basic Ways to Save for College, Part 1

The Richest Man in Babylon: Seven Cures for a Lean Purse Part 6, Insure a Future Income

In the third chapter of The Richest Man in Babylon the book lists and details "seven cures for a lean purse." Today, we'll cover cure #6 which is:

Insure a future income.

Here's what the book has to say about saving for retirement:

Therefore do I say that it behooves a man to make preparation for a suitable income in the days to come, when he is no longer young, and to make preparations for his family should he be no longer with them to comfort and support them.

Later it gives this similar advice:

The man who, because of his understanding of the laws of wealth, acquireth a growing surplus, should give thought to those future days. He should plan certain investments or provisions that may endure safely for many years, yet will be available when the time arrives which he has so wisely anticipated.

And finally, it recognizes that everyone needs to plan for retirement:

No man can afford not to insure a treasure for his old age and the protection of his family, no matter how prosperous his business and investments may be.

So what are the practical applications today of what this cure is saying? I'd list the following:

1. Plan for retirement by setting your retirement number. Retirement is more expensive than most of us think it is, so take the time to figure out what you need to save for retirement. This will help you avoid major retirement mistakes and make sure your retirement savings outlasts you. A key part of this, of course, is figuring out your 401k -- deciding how much goes in your 401k and, at a minimum, contributing enough to at least get the full employer match. If that doesn't work, consider tricking yourself into saving. Doing this, you may even be able to retire early.

2. Don't forget about updating/writing your will. There are many benefits of having a will (including naming a guardian for your kids) and a simple, effective will is rather easy to draw up.

Click here to read cure #7.

The Richest Man in Babylon: Seven Cures for a Lean Purse Part 5, Make of Thy Dwelling a Profitable Investment

In the third chapter of The Richest Man in Babylon the book lists and details "seven cures for a lean purse." Today, we'll cover cure #5 which is:

Make of thy dwelling a profitable investment.

Yes, before David Bach and The Automatic Millionaire Homeowner there was The Richest Man in Babylon, giving advice on how a home can make you wealthy.

The book goes on a bit about how every man needs to enjoy his own property as does his wife and family. It talks a bit about putting down a good-sized downpayment and paying off the lender quickly. Then, it ends with this:

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. This, then, is the fifth cure for a lean purse: Own thy own home.

I've talked a lot about the value of home ownership here at Free Money Finance. It's a fact that homeowners have higher net worths than renters on average and that there are good reasons why homeowners get rich and renters stay poor. However, you still need to follow a reasonable formula when buying a house to make sure your home is the financial asset you want it to be.

Click here to read cure #6.

Comments: The Richest Man in Babylon, The Power of Compounding, Part 2

Awhile back, I post on The Richest Man in Babylon, The Power of Compounding where I quoted from the book The Richest Man in Babylon and highlighted the power of compounding.

Next, I received a comment from a reader and posted it in Comments: The Richest Man in Babylon, The Power of Compounding. The reader wondered how much was enough for the power of compounding to really make a difference. I asked readers to make suggestions on this questions and here's what the first had to say:

To me the "magic" point is when you're consistently making more in interest or other earnings each year than you're making in contributions. That's when you really go "whoa, money for nothing!" At 8% APY that happens around the end of your ninth year, assuming you keep the contribution constant. That's why a guy who saves $500 a month starting at age 20 and STOPS at age 30 will end up with more than a guy who starts saving the same amount at 30 and continues for the rest of his life. By the time the 20-year-old hits 30, his savings is making his $500 monthly investment for him.

Good thought. Here's another one:

There are lots of important milestones for me in saving for retirement. However, unlike a lot of people I base them on exactly this sort of question rather than when I have saved round numbers. For example, I recently hit an important milestone: my retirement savings will compound on its own to an amount that will be sufficient to sustain my income at an the inflation-adjusted equivalent of what it is today, without any further contributions from me. That means that everything I save from now on toward retirement serves one of two purposes. The first is that it will increase my income after retirement. Since I still expect my pre-retirement income to increase, some of that will be necessary to maintain my lifestyle at the level I'll be enjoying just before I retire. Second, I can bring my retirement date closer.

That second point is the whole reason for paying attention to this particular milestone. I've based my retirement date on when I can start drawing from retirement accounts at 59 1/2 years old. If I want to have money to live off of if I retire at 57, I'd better have it in other accounts that I can tap earlier. Yes, I've reached the point where I need to carefully consider how much I'm putting into retirement accounts vs. non-retirement accounts.

Wow! This person has done a great job of saving. To be in a position where the investment income will take care of the rest of the money needed for retirement is fantastic. Can't wait until I get there! ;-)

Finally, here's a more quantitative take on the question:

The magic number is pretty simple. Take your savings and multiply by .04 (4%), if you can live on that amount of money, go ahead and retire. Theoretically you should never run out of money. Of course expenses can rise dramatically (think taxes, health care and energy) which may make this theory obsolete.

I don't think this guarantees you of not running out of money, but gives you something like a 95% chance of having the money you need through age 90 or so -- which should be plenty.

For more thoughts on saving for retirement, see these links:

• Three Ways to Make Sure Your Retirement Savings Outlasts You
• Figuring Out Your 401k
• Why You Need a Roth IRA

The Richest Man in Babylon: Seven Cures for a Lean Purse Part 4, Guard Thy Treasures from Loss

In the third chapter of The Richest Man in Babylon the book lists and details "seven cures for a lean purse." Today, we'll cover cure #4 which is:

Guard thy treasures from loss.

The first part of the book's advice centers on protection of your principal:

The first sound principle of investment is security for thy principal. Is it wise to be intrigued by larger earnings when thy principal may be lost? I say not.

In other words, you want a decent return, but you don't need to push it so much that your principal is greatly at risk. Now any investment has some sort of risk, but what they're talking about is undue risk that could cost you a decent portion of your money. It's just not worth the risk.

The book ends this cure with the following:

This, then, is the fourth cure for a lean purse, and of great importance if it prevent thy purse from being emptied once it has become well filled. Guard thy treasure from loss by investing only where thy principal is safe, where it may be reclaimed if desirable, and where thou will not fail to collect a fair rental. 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.

The Richest Man in Babylon doesn't address it directly, but I believe the concept of insurance for non-investment assets is covered in this suggestion. For more information on the proper use of all kinds of insurance, see these links:

• Saving Money on Car Insurance

• Comments: Getting Homeowner's Insurance (And Saving Money Too)

• 16 Ways to Slash Your Health Insurance Rates

• Should Retirees Carry Life Insurance?

Click here to read cure #5.

The Richest Man in Babylon: Seven Cures for a Lean Purse Part 3, Make Thy Gold Multipy

In the third chapter of The Richest Man in Babylon the book lists and details "seven cures for a lean purse." Today, we'll cover cure #3 which is:

Make thy gold multiply.

This is the cure that focuses on investing and, in particular, making sure the money you earn on your investments starts earning money itself. Here's what the book has to say:

I tell you, my students, a man's wealth is not in the coins he carries in his purse; it is in the income he buildeth, the golden stream that continually floweth into his purse and keepeth it always bulging. That is what every man desireth. That is what thou, each one of thee desireth; an income that continueth to come whether thou work or travel.

In other words, work to make your money a renewable source -- something that itself generates a good income.

The book continues:

Behold, from my humble earnings I had begotton a hoard of golden slaves, each laboring and earning more gold. As they labored for me, so their children also labored and their children's children until great was the income from their combined efforts.

Quite simply: save and invest your money (from the portion of your salary you keep for yourself) and then let time and the power of compounding take over to make you rich.

Click here to read cure #4.

The Richest Man in Babylon: Seven Cures for a Lean Purse Part 2, Control Thy Expenditures

In the third chapter of The Richest Man in Babylon the book lists and details "seven cures for a lean purse." Today, we'll cover cure #2 which is:

Control thy expenditures.

As you might imagine, I love this cure! ;-)

The book starts this cure by addressing the objection that everyone always brings up first when it's suggested that they spend less than they earn and save a part of everything they make:

How can a man keep one-tenth of all he earns in his purse when all the coins he earns are not enough for his necessary expenses?

Here's the answer the book gives -- which I agree with 100%:

Now I will tell thee an unusual truth about men and sons of men. It is this: That what each of us calls our "necessary expenses" will always grow to equal our incomes unless we protest to the contrary.

That's right. It always seems that outgoes equal (or surpass!) incomes -- no matter how much the incomes grow. I've helped people who have made $20,000 a year and others who've made $150,000 and the problem is the same: their "necessary expenses" exceed their incomes.

The book goes on:

Confuse not the necessary expenses with thy desires. Each of you, together with your good families, have more desires than your earnings can gratify. Therefore are thy earnings spent to gratify these desires insofar as they go. Still thou retainest many ungratified desires.

Let's face it, most of us will still want "more" no matter how much we earn. So at some point you need to control your spending -- why not now?

This cure ends with the following advice:

Budget then thy necessary expenses. Touch not the one-tenth that is fattening thy purse. Let this be thy great desire that is being fulfilled. Keep working with thy budget, keep adjusting it to help thee. Make it thy first assistant in defending thy fattening purse.

I've written a lot about budgeting here at Free Money Finance. If you need more information on budgeting, check out these posts:

• Why We Hate Budgeting - But Shouldn't


• A Great Alternative to Quicken and Microsoft Money, Part 2


• Five Keys to Developing a Successful Budget


• Avoid the "Budget-Busters" that Kill Us Financially


• Pretend It's Not a Budget: How to Create a 'Spending Plan' You Can Stick To


• MND: Why do Millionaires have Budgets?

Click here to read cure #3.

The Richest Man in Babylon: Seven Cures for a Lean Purse Part 1, Start Thy Purse to Fattening

In the third chapter of The Richest Man in Babylon the book lists and details "seven cures for a lean purse." I'd like to share those with you over the next week and add my comments to the already great insights this book provides.

Cure #1 of the seven cures for a lean purse is:

Start thy purse to fattening.

Here's how the book summarizes this cure:

For every ten coins thou placest within thy purse take out for use but nine. Thy purse will start to fatten at once and its increasing weight will feel good in thy hand and bring satisfaction to thy soul.

In other words, save 10% of what you make. In order to do this, you need to spend less than you earn (save a portion of all you make as The Richest Man in Babylon states it). I've found that much of America has this backwards -- they spend ten coins for every nine they make. ;-)

The book goes on to highlight an associated principle that I've found to be true in my own life:

Now I will tell a strange truth, the reason for which I know not. When I ceased to pay out more than nine-tenths of my earnings, I managed to get along just as well. I was not shorter than before.

All you really need to do is separate needs versus wants versus desires. When you desire to have a high net worth, you spend on your needs and SOME of your wants. Other wants go by the wayside and, quite honestly, aren't that important to you -- you really don't "feel" the impact of not buying them. Why? Because you desire (want more) your financial independence.

The Richest Man in Babylon hits this issue of needs versus wants versus desires in the next paragraph:

Which desirest thou the most? Is it gratification of thy desires of each day, a jewel, a bit of finery, better raiment, more food; things quickly gone and forgotten? Or is it substantial belongings, gold, lands, herds, merchandise, income-bringing investments? The coins thou takest from thy purse bring the first. The coins thou leavest within it will bring the latter.

So, which do you want more -- purchases today that will be gone tomorrow or to store your treasure to grow you net worth? If you choose the latter and can follow through with that decision, it really is easy to become rich.

Click here to read cure 2.

The Richest Man in Babylon: Three Key Lessons

Here's a quote from The Richest Man in Babylon that summarizes the three key lessons learned in chapter one:

You have learned your lessons well. You first learned to live upon less than you could earn. Next you learned to seek advice from those who were competent through their own experiences to give it. And, lastly, you have learned to make gold work for you.

Simply great advice. Here's how I translate these three key learnings and recommend you apply them:

1. Spend less than you earn. It's the one way that the majority of people reading this can become wealthy.

2. Seek advice from people/resources you know and trust. This means friends and family as well as magazines (I recommend Money), books (here's my recommended list) and websites like Free Money Finance. Learn all you can with the intention of becoming your own best advisor. In my opinion, the best manager of your money is you.

3. Make your money work for you. Simply said, invest the amount you generated from spending less than you earn (I like index funds as investments) and do this for many, many years. Then, time and the power of compounding will start to work for you -- making you wealthy over time.

The Richest Man in Babylon: Get Advice from Someone Who Knows What He's Talking About

It's mind-boggling to me how some people turn over their finances to a salesperson or an unqualified loser without a second thought. They might as well just use their money to build a fire in their fireplace. At least then it's put to a good use.

This is the same thought highlighted in this excerpt from The Richest Man in Babylon:

Advice is one thing that is freely given away, but watch that you take only what is worth having. He who takes advice about his savings from one who is inexperienced in such matters shall pay with his savings for proving the falsity of their opinions.

As far as I'm concerned, the best person to manage your money is you. That's why Free Money Finance is here: to help you (and me!) become knowledgeable so we can manage our own money and grow our net worths.

I have to end with a mini-commercial for this book The Richest Man in Babylon. If you haven't read it -- you simply have to get a copy. Even if you don't want to buy one (though you should -- so you can read it several times and highlight key parts), you should still get a copy from your library and read it a few times. There's tons of simple, financial wisdom that with certainly help you grow your net worth tremendously.

Comments: The Richest Man in Babylon, The Power of Compounding

Here's a comment made to my post titled The Richest Man in Babylon, The Power of Compounding where I quoted from the book The Richest Man in Babylon and highlighted the power of compounding:

I agree with FMF about The Richest Man in Babylon. It's a great little book (a very quick read too). As I read FMF's post about compounding, I found myself nodding my head in agreement. Then a question popped into my mind: how much is enough for the power of compounding to really make a difference? Now I'm not asking for a retirement "magic number" where you're tapping into principal. Any thoughts on a figure? I'll throw out $625,000... at that point assuming about 8% per annum things can grow pretty quickly ($50K+ per year). This is coming from someone on the low side of that figure. Anyone who's a bit further along care to add their 2 cents about where they think their figure was/is? =)

Interesting question. Anyone out there have any thoughts/comments on this?

The Richest Man in Babylon: Save a Portion of All You Make

Here's another thought from The Richest Man in Babylon:

Each time I was paid I took one from each ten pieces of copper and hid it away. And strange as it may seem, I was no shorter of funds than before. I noticed little difference as I managed to get along without it. But often I was tempted, as my hoard began to grow, to spend it for some of the good things the merchants displayed, brought by camels and ships from the land of the Phoenicians. But I wisely refrained.

There are three main thoughts here (stated or implied):

1. Spend less than you earn.

2. Take the surplus generated and invest it.

3. Don't touch it -- let the power of compounding work for you.

In the end, if you spend less than you earn and do it over a long period of time, you can become very wealthy. That's the heart of this book and why I love it so much.

How to Become a Millionaire (How to Become Rich)

If you'd like to learn more about how to grow your net worth, you can subscribe to Free Money Finance's RSS feed for free by clicking this link.

Yeah, yeah, a million dollars ain't what it used to be. But it's more than 90%+ of all U.S. households have. So who wouldn't want to be a millionaire?

This article from Money Central is written by a millionaire and in it she shares her tips on how to become a millionaire. The key tips:

• Make financial security a priority.
• Spend less than you earn.
• Save and invest regularly.
• Pay down debt.
• Own a home.

Good, simple, basic, effective tips. I'll come back to these in a minute, but let's first review a few other tidbits from the piece:

• If you haven't got a plan, it's way too easy to lose your way: spending money on stuff that isn't important, taking on debt that's toxic rather than helpful, giving in to despair when markets turn against you. Having a long-term goal, and a long-term view, are essential to keeping your balance.
• I bless my Depression-era mother, who grew up poor, knew how to pinch a penny and put a high priority on savings. She understood the importance of "paying yourself first," so from my first job I've been in the habit of saving at least 10%, and often 20%, of my gross pay. She taught me to use credit cards as a convenience, not an excuse to buy stuff I couldn't afford. She viewed people who carried credit card balances with the same suspicion and displeasure with which she regarded people who didn't keep a tidy house.
• Again, automated investing plans really help. We invest regardless of whether the market is up, down or sideways. We know that, in the long run, a well-diversified portfolio of stocks beats out every other investment, even if there are some bumpy times along the way.
• Another key: Don't cash out your 401(k) when you leave a job. About half of all workers do, and that's nuts. It's not just the taxes and penalties that eat up a quarter to a half of your withdrawal. More importantly, every $1,000 cash-out costs you $10,000 or more in future retirement income. So roll the money over into an IRA or your next employer's plan.
• But it does mean you should avoid high-rate debt and be cautious about your total debt load. Keeping your housing expenses to 25% of your gross pay, for example, will help ensure you've got enough left over to fund your other goals and have some fun once in awhile.
• Despite the ups and downs, owning a home has long been the cornerstone for wealth for most people. Consider that the median net worth of all homeowners in America in 2004 was $184,400. For renters, it was $4,000. Among the richest 10% of households, 96.9% are homeowners, compared with 69.1% of all households.
• We’ve discovered (duh) that it's easier to meet your goals, and have money for fun, if your income is rising. So we've invested in education, launched our own businesses and looked for new ways to generate cash. In today's ever-changing economy, you have to be ready to learn new skills and take new directions.
• Finally, and maybe most importantly: My husband and I don't live just for tomorrow. Our long-term goals are important to us, but we also want to enjoy life today. The fattest bank account in the world wouldn't be worthwhile to us if we didn't have a chance to enjoy each other, our daughter and our lives. So we appreciate the financial mileposts when we achieve them, but we know there's more -- a lot more --to life than money.

Just an excellent, excellent, excellent article all the way around. All this, and she also recommends two of my all-time favorite finance books -- The Millionaire Next Door and The Automatic Millionaire. What's not to love??!!

If you've been reading Free Money Finance for more than two seconds, you know how I talk about these issues on a regular basis. Here are some links that provide additional thoughts on what the article has highlighted:

Have a Financial Plan

• Pretend It's Not a Budget: How to Create a 'Spending Plan' You Can Stick To
• MND: Why do Millionaires have Budgets?
• MND: Have a Budget

Spend Less than You Earn

• How You Can Become Wealthy
• Even the Rich Need to Spend Less than They Earn
• It's Not What You Make, It's What You Spend, Part 3

Save and Invest Regularly

• Why I Like Index Funds
• Poverty to Prosperity
• The 15 Minute Investment Portfolio

Pay Down Debt

• 7 Credit Card Trends that Can Cost You
• Yes, You Can Erase 15 Years of Debt in 14 Months
• Get Out of Debt, Part 1

Own a Home

• My Formula for Buying a House
• Why Homeowners Get Rich and Renters Stay Poor
• Increase Your Home's Value with Cheap Landscaping Tricks

Importance of Education

• Sell College to Your Kids
• The Value of an Education
• Facts on Education (and the Value of It)

Other Topics Mentioned

• The Richest Man in Babylon, Keep Part of All You Earn
• Don't Kill Your Retirement Fund When You Change Jobs
• Maximizing Your Greatest Asset: Why Your Career is So Important

The Richest Man in Babylon, The Power of Time

Here's another thought from The Richest Man in Babylon:

Wealth, like a tree, grows from a tiny seed. The first copper you save is the seed from which your tree of wealth shall grow. The sooner you plant that seed the sooner shall the tree grow. And the more faithfully you nourish and water that tree with consistent savings, the sooner may you bask in contentment beneath its shade.

There are a couple of thoughts he's talking about here. The first is the power of compounding. The second is time. If you save a bit for a long period of time, it will grow and grow and grow -- and you will be able to grow your net worth tremendously.

The Richest Man in Babylon, The Power of Compounding

Here's another thought from The Richest Man in Babylon:

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. If you would become wealthy, then what you save must earn, and its children must earn, that all may help to give to you the abundance you crave.

What he's talking about here is the power of compounding. That's when you really start to grow your net worth -- when your money starts earning money.

It takes awhile before you get to a place where your money starts earning a significant amount on its own. But once it does, it REALLY starts to grow. And believe me, it's a beautiful thing. ;-)

The Richest Man in Babylon, Keep Part of All You Earn

Here's another thought from The Richest Man in Babylon:

I found the road to wealth when I decided that a part of all I earned was mine to keep. And so will you.

Yep, it's hard to grow your net worth if you don't keep a portion for yourself.

So, how do you do this? First, you have to spend less than you earn. Next, develop a plan to put a portion of your excess in savings. And do it automatically, so you don't have to remember to do it over and over again. My favorite way to do this? Fund your 401k -- at least enough to get the full company match.

The Richest Man in Babylon, New Series at Free Money Finance

For those of you who have read Free Money Finance for some time, you probably remember the series we did on the book The Millionaire Next Door. I haven't posted on it in quite some time, but I will again before long. For now, I want to kick off a series of posts on another one of my favorite money books of all time, The Richest Man in Babylon.

Today we'll start by letting the book explain what it's about. Here's a quote from the foreward:

This book of cures for lean purses has been termed a guide to financial understanding. That, indeed, is its purpose: to offer those who are ambitious for financial success an insight which will aid them to acquire money, to keep money and to make their surpluses earn more money.

I guess you can see why I like it. :-)

Stay tuned. I'll be sharing more from the book all week.

Save First, Pay Taxes Later

An article that talks about paying yourself first? And also talks about lowering taxes? I'm all over it! Plus, it's written by David Bach, author of The Automatic Millionaire, one of my recommended personal finance books.  Here's a summary of his "pay yourself first" thoughts:

Most people pay everyone else first -- taxman, landlord, credit-card company, and so on. They try and budget every week, month, and year hoping that if they're careful they'll have some money left over. This is absolutely, positively backwards. And because of it over 70 percent of Americans continue to live paycheck to paycheck regardless of increasing incomes. We make more. We spend more. And at the end of the day we're still broke. Are you tired of this game?

"Pay yourself first" means just what it says: When you earn a dollar, the first person you pay is you. Sounds simple, but most people don't do it.

Most people think they have to pay taxes first. Is this correct? Nope. Here's his thought:

You have a right to legally avoid federal and state taxes on the money you earn. You can legally pay yourself first by simply using a retirement account. There are many different types, including 401(k) and 403(b) plans, IRAs and SEP IRAs. The one thing that makes all of these "pay yourself first" accounts is that the money you put in them is either pre-tax or tax deductible.

And using these investment vehicles, you can pile you a significant net worth:

Your goal should be to save one hour a day of your income.

Let's assume you make $50,000 a year. That's about $2,000 every two weeks. If you invested $200 every two weeks for 35 years in a retirement account that earned an annual return of 10 percent what would you have? Quite a pot of gold: $1,678,293.78.

Here's the bottom line:

The point is you can make a lot by setting up a retirement account that pays you before Uncle Sam takes his cut.

Simply great advice all the way around. It's stuff like this that makes The Automatic Millionaire so valuable -- an investment with an almost infinite return.

"Pay yourself first" is also one of the key messages in another of my favorite personal finance books, The Richest Man in Babylon. It's a cheap, quick read that will really help you grow your net worth. If you don't have a copy, get one today, read it, study it, apply it and you'll be on your way to a better bottom line.