I have been reading the book “The Richest Man in Babylon
” the seven cures or steps to fatten your wallet was the teaching given by the richest man himself, Arkad.
source: http://www.smarthealthmagazine.org
Below are the 7 steps(translated to my own words or understanding)
1. Save – set aside 10% of your income
2. Budget – allot your 90% to satisfy your needs, wants, and worthwhile desires
3. Cashflow – invest your savings in income generating vehicles
4. Risk Management – invest only in safe investments. Consult or seek advice from those who have proven themselves in accumulating wealth
5. Own your home where you can also generate additional income
6. Insure yourself. Prepare for retirement now
7. Learn – acquire new skills and new ways to earn and be confident with your skills
I will be expounding on these steps or cures in a several blog post to really explain the whole idea and how can you really apply these to your own situation and eventually achieve financial freedom.
To start, let me explain why savings is important.
In the story, Arkad explains that we must leave a piece of coin for every ten coins in our purse to fatten our purse. This is simply a formula for saving. To save practically means to set aside a small portion.
The problem in today’s income earners is that savings has a very different formula and that is earnings less expenses equals savings. Savings is actually the left over after spending or paying bills. This is a very sad fact, because as we all know it man has unlimited needs and wants. With that man will keep on spending, thus end up saving zero money.
IN the steps that Arkad introduced, it was actually the other way around, that is to save first before spending. This lesson has also been re-iterated by our modern Arkad’s and good financial advisers. If we don’t save first the chances of having any savings at all is next to nothing. Saving should be something huge, again the suggested is “one coin for every ten should be set aside in the purse”.
Now, besides the bad savings formula nearly everyone carries one reason why most don’t have any savings is that they believe they deserved every penny of their own labor thus they can do or part with it to their liking. This is no doubt true since you have the right to enjoy the fruits of your labor. But saving has a purpose. Savings are not just for saving’s sake, but it is for you to have something to rely on in case of emergencies, in case of a big opportunity needing financial capital, a certain want or opportunity for self development, and even for your retirement in the future.
Savings as emergency fund
Most of financial literacy advocates(that includes me) suggest putting up first your emergency fud before putting money in investments. Your emergency fund acts as the buffer so that you won’t be forced to touch your savings put into investments. With this perspective, then savings itself should be categories into several other things that you need. Savings must have intended use to really inculcate in you its importance. Thus, you have to set aside money for emergencies, for your wants, for your retirement, and even for the little things in life that you think would help you in achieving financial freedom.
Of all, the very first thing that you must save for is your emergency fund. Such would be very essential since life is uncertain. You never know what will life bring to you and it is a lot easier to be prepared for it rather than ending begging for help when it happens.
As a rule, establish a savings fund equivalent to about 3 to 6 months salary if you are employed or about 6 months worth of your daily essential expenditures. This would be your rent/mortgage, utilities, food, and payments that you already have that needs to get paid on time to avoid penalties. Don’t count in wants and your other non-essential expenses like your daily artisinal coffee, weekly movie dates, weekly shopping and others. You don’t have to have this amount right away or in one drop. Again saving means setting aside a portion of your earnings, which ideally is 10%. You may be able to achieve this in 6 months or a year if diligently done. Once done’ put this in a bank account that earns decent interest and at the same time could be easily accessed when such emergency comes.
Again, remember that the purpose of this savings is for emergency so don’t pull out funds from this when there is a sudden big sale. Such fund should be wisely used. You need to set rules of what should be considered as an emergency like sudden and unwanted hospitalization, accidents, calamity, and the likes.
Savings for opportunity
You are also aware that the best time to be in the stock market is now, but even better is during a sudden drop of stock prices due tot he fact that you can buy blue chip stocks at a bargain. You must set aside money as well for such opportunities. This will be your savings for investment opportunities. At times we end up losing such opportunities because we are short of funds. Getting ready for such time gives you advantage over those who are not prepared to take on such opportunities.
Savings for wants or opportunity for self-improvement
Ever had that experience of wanting to buy your dream car or dream dress, but was not able to do so because you dint have the money and finding out next day that such was already sold? Or having the free time to learn and enroll yourself into a course you have been praying for like a cooking class, art class, and seminars and the like only to end up not pursuing it because you don’t have extra cash to pay for the tuition or seminar fee?
Having wants is not bad at all as long as you save for it first rather than impulsively getting it now resulting in debt. If the stuff or desire will surely improve your skill or your personality it is worth every cent to spend for. Attending a seminar about stock investment and money management that will help you master and take control of your finances. Enrolling in a cooking class to help you better cook for your husband, family or special someone is a great way to show your love for them because after it you will be able to serve them better food.
Saving for retirement
Again, the ultimate purpose of why you and I save today and invest is for the uncertainties of tomorrow.
Making a little sacrifice now by setting aside a part of your earnings instead of spending it all will in the long run be beneficial and will take lots of headache and heartaches when you are retired. In our present society’ most senior citizens are dependent on the small pension they get and to their working children who are themselves have financial problems to look after. Thus preparing for old age, which would require medical care is a wiser idea than relying on one’s children or relatives. Being a burden is not a good way to enjoy your golden years.
At that stage of life you must be enjoying life to the fullest either going to places you have never been or enjoying the small joys of life at the comfort of your own cozy home where no one will bother you. Also, it would be a great pride that instead of the one receiving financial help you are the one giving tot hose who are really in need.
Saving is the very first step towards financial freedom.
To go to the second step click Budget