In my journey in learning about managing and growing my money, I have read many books on Personal Finance.
Among all these books, the book that has the most influence on me is this book published in 1926 entitled, “The Richest Man in Babylon”, written by George Samuel Clason. Unlike other books on Personal Finance, this book uses a story telling format to tell the story of the richest man in Babylon named Arkad, sharing practical and useful tips on how to grow one’s wealth with his childhood friends.
Arkad was born poor, but through learning how to plan, manage and grow his money, he became the richest man in Babylon. Similarly, I was born in a poor family as well, with eight of us living in a 1-bedroom HDB rental flat then. However, in the last 18 years, after learning how to manage and grow my money, I achieved financial freedom by the year 2008.
What is Financial Freedom or Financial Independence? It means that if I decide to stop working, I would have enough money to continue maintaining the current standard of living for myself and my family for the rest of our lives.
Do you sometimes feel that money is not enough? Let me share with you “7 cures for a lean purse”, useful Tips shared in this book on how to fatten your purse.
First Cure: Save at least 10% of your income
Arkad says that typically when a person increases his income, he also increases his expenses, thus failing to accumulate any savings or wealth for himself. Arkad says that the first step to riches is to start the good habit of savings, and the simplest way is to save at least 10% of your income.
I started working in 1993, from the very first month I started working, I have been following Arkad’s recommendation to save money, in fact, I save 20% of my income monthly. To make the saving habit “automatic”, you can ask your bank to “GIRO” (automatically transfer) your money from the account you receive your income into another separate savings account. By doing so, you separate your savings from the bank account for your daily transactions, and thereby will not mix all your money together.
Imagine if you save 10% of your income, by working for 10 years, you would have saved more than 1 year’s of income!
2nd Cure: Control your expenses
Our desires and wants are unlimited but our financial resources are limited. Thus, we need to differentiate between “needs” and “wants”. For instance, you need a mobile phone, and you may want an expensive smart phone. Thus, in learning how to manage your money wisely, you need to first prioritise to buy what you need first, and only use the remaining money to buy what you want. However, no matter what happens, your total expenditure should not exceed 90% of your income. By doing so, you can satisfy your desires and wants without spending more than you earn.
3rd Cure: Learn how to grow your money
Most people only know how to save, but they don't know how to grow their money. If the interest you earn from bank deposits is only 1% and if inflation rate is 3%, you end up losing 2% every year! Over time, you become poorer and poorer, not richer.
Thus, to help us lay more golden eggs (money make money), we need to learn how to convert our “golden eggs” into “golden goose”. Over time, when the income from your golden goose (different investments) exceeds your expenses, you would have reached financial freedom and can choose to stop working and yet continue to maintain you and your family’s lifestyle.
4th Cure: Protect your Capital from Losses
Warren Buffett, the richest investor in the world said that the first rule of investing is “do not lose money”, i.e. protect your capital from losses. How can you protect your capital? Before you invest, you need to find out in the worst case scenario, how much you stand to lose from the investment. Do not put all your eggs into one basket, diversify your savings into different investments. By doing so, even if some of the investments incur losses, overall, you might still be able to keep your capital intact.
5th Cure: Buy a House instead of Rent
Everyone needs a roof above our heads. If you rent, over the years, the rental can add up to a significant amount. However, if you buy a house, instead of paying rent monthly, you are paying monthly housing loan instalment. However, when you finally pay off your loan, you would have a valuable asset, your house!
When you buy a house and imagine that one day you will own the house, this may help to motivate you to strive to improve yourself, work hard and motivate you to achieve success.
I bought a HDB Resale flat in 1995 when property prices were high, despite going through the 1998’s Asian Financial Crisis and the 2003’s Sars Crisis, the market value of this HDB flat currently 50% higher, and the house remains a valuable asset.
6th Cure: Transfer risk through Insurance
There might be unexpected contingencies, accidents and events that may wipe out our assets and income and ruined our financial plans.
By choosing and getting suitable insurance plans, we can transfer the risk to insurance companies. For instance, you can choose insurance plans such as Term Insurance, Comprehensive Medical Insurance plans, Critical Illness plans, accident plans etc, to ensure that no matter what happens, you and your family’s financial wellbeing is being taken care of.
7th Cure: Increase your earning capacity
If your income is limited, how much you can save is also limited. Thus, in order to increase your savings, you can either cut down our expenses or increase your income. There is a limit on how much you can cut down your expenses, thus, if you want to get richer, you should aim to increase your income instead.
How? You can try to increase your earning capacity, by upgrading yourself through attending courses and training. Once your knowledge and skill level increased, you’re likely to increase your income. We should aim for lifelong learning and continuous growth. Because the world is moving ahead, if you’re not improving, you’ll be lagging behind others. If you continue to upgrade yourself increase your value add, you can definitely increase your income and fatten your purse.
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Category: Financial Planning, Cash Flow | 1 Comments