7 Steps to Start Building Long-Term Wealth (The Richest Man in Babylon)

George S. Clayson first published The Richest Man in Babylon in 1926. Today, this book is still regarded as one of the best personal finance books ever written due to the wealth of wisdom that lies within its pages. Now, in this book, Clayson focuses on seven rules to start building wealth, and these rules seem so simple yet so comprehensive that I wanted to share them with you guys. Yes, I do think that these seven steps are all you need to start building your own long-term wealth.

So let's examine Clayson's seven rules to wealth and see how we can apply them in a modern context. [Music] This video is sponsored by Hyper Charts. Sign up to Hyper Charts using the referral code NEW MONEY or use the referral link in the description and save 10% for your first year of Hyper Charts premium. Details in the description.

So, seven steps to wealth, and we start at the start of the start. Step number one is to pay yourself first. Each of us has a stream of income; we work hard to earn a certain amount of money, then we spend that money on the things we need: food, clothing, leisure, transport, whatever. Now, the problem why most people aren't getting ahead is that all the money flowing in ends up flowing out. Paying yourself first is the concept of taking, you know, one-tenth of your fortnightly pay and setting it aside elsewhere.

This happens before anything else, and you aren't allowed to touch that money either. You're literally paying yourself first; then it's your job to just make do with the other nine-tenths. The example they use in the book is an egg merchant. If the egg merchant puts 10 eggs into his basket each day but only removes nine and does that day after day after day after day, what's going to happen to the basket? Well, it will begin overflowing in time.

Now imagine that the egg basket is your wallet and the eggs are coins; soon enough, your wallet will be overflowing too. Now, in reality, you might be able to pay yourself two-tenths or three-tenths of your income, but nevertheless, the first rule of wealth is to pay yourself first. However, once you begin paying yourself first, you might bump into a problem if you live, you know, paycheck to paycheck, because now that you're removing one, two, or three tenths of your income each fortnight to start growing your savings, well, you might find that you don't have enough money to pay for all of your expenses.

Thus, the second rule of building wealth is to eliminate unnecessary expenses. If you can't put aside like at least one-tenth of your income each fortnight, you need to start paying very close attention to where your money goes. So my suggestion is to log into your bank account, look at the past month of transactions, and take the time to mark each transaction as either absolutely necessary or not really essential.

For example, rent costs, supermarket costs, fuel costs—you'd mark those as essential. But maybe mac is three times per week, Netflix subscription, gym membership that you haven't used in three months—mark those as non-essential. Then your task is to work through that list and get rid of as many of those non-essential expenses as you can.

So, number one: pay yourself first; number two: get rid of unnecessary expenses; and then number three: that money that you're accumulating, you have to put it to work. You see, most people see money as, you know, tokens that allow you to buy stuff. You save enough shoe tokens, and you can buy a pair of shoes. The rich really don't see money that way. They see money as work tokens. Each dollar you have has the potential to work for you and earn you income.

In other words, you can invest that money so that it makes you even more money. Then that creates a bigger pile of money, and you invest that bigger pile of money, and it makes you even more money, and so on and so forth. Now, there are many ways that you can put your money to work—there are lots of different ways.

One of the most common is the stock market; you put all those dollars in some sort of market-tracking ETF, and over time they will multiply. You know, people also put those tokens to work in property, but I think the best example of this point is, you know, if you run a business. If you make, say, shoes for a living, you can use those saved dollars to pay for another worker that can make the same number of shoes in the year that you can. Now your business is making twice the amount of shoes and thus earning twice the income.

Now the business is making, you know, twice the income, and you can afford to hire another couple of people, which helps, you know, double the business production again, thus doubling your income again. This system keeps compounding. The exact same happens in the stock market; the market compounds your money at an average rate of, you know, eight percent per year.

So if you put in, say, five thousand dollars into that compounding machine, each year in 30 years, you'll have put in 150,000 dollars, but the portfolio value will be six hundred and seventeen thousand dollars. So definitely rule number three: you must put your money to work. Then rule number four is to protect your wealth, because, you know, now that you're up and running and your savings are being put to work, no doubt you're setting yourself up to make quite the small fortune.

But it's astounding how fast people can ruin all of their hard work with silly mistakes or unnecessary risk-taking. So step number four is to protect your wealth, and no, this doesn't mean put all your money in a reinforced concrete safe. This step is all about ensuring you don't do anything stupid to stuff up your system, and if this happens, it's usually from bad investments.

One rule to always follow is to never put your money into an investment that you don't understand. You know, think Tesla is the next big thing. If you don't understand how their factories are performing and the timeline for their vehicle production and the current state of their full self-driving software and the bottlenecks of their supply chain, then just don't buy Tesla.

You know, if you heard Bitcoin was the next big thing but you have no clue how it works, don't buy it. Stick to investments that you understand and ones where you're confident you'll get a good return with safety of principal. Ben Graham, author of The Intelligent Investor, says, “An investment operation is one which upon thorough analysis promises here we go safety of principle and an adequate return. Operations not meeting these requirements are speculative.”

So follow Graham's advice. That's my biggest piece of advice: follow his advice. You'd hate to be stuck in a situation where you lose all that you've worked so hard to achieve. So step four: protect what you build. Then from there, step five is own your own home. So of course, everybody needs a place to eat and sleep, and if you're constantly paying for that necessity, then you'll never be truly financially free.

Now, of course, owning your own home may not be viable immediately, but it is a longer-term goal that you should definitely work towards. Think about it this way: if you don't own your own home, you will always be a slave to the landlord. Owning your own home in modern society is probably the biggest step that most people can take towards financial freedom.

This one has to be achieved at some point in your life, and achieving it will give you a huge sense of financial security. It's one less thing to worry about, right? Personally, I see owning your own home as kind of like a launch pad. You know, once you've got that sorted, then you can really devote a lot of your income into investments.

So personally, I think it really does unlock your full potential as a financial powerhouse. So owning your own home is definitely step number five, a huge step in the modern idea of financial independence. But there's also another massive factor to financial independence that needs to be factored in as well.

Step number six is to always ensure you'll have a future income. It makes sense; one day you won't be able to work anymore. When that happens, how will your life look? Well, it'll look great, of course! What are you talking about? It'll look great because of the steps we put into place to ensure you'll always have healthy passive income.

And this really comes down to three things. It comes down to retirement accounts, it comes down to investments, and if you have one, your own business. So firstly, here in Australia, we have our superannuation as our retirement account. We contribute 10% of our wage into that account, and then when we're old, we withdraw an income tax-free.

But did you know that you can make additional contributions along the way? I mean, additional contributions early on in the piece will go a long way to a much, much better retirement. Or maybe you've focused your efforts on a share portfolio. You know, as you get ready to retire, it might be worth switching your portfolio from all these growth investments to maybe some income-based investments that pay reliable dividends every three or six months.

Or lastly, if you own your own business, can you structure it in a way where you can get other people to keep the business running profitably while you're no longer able to put in the hard manual labor? Whichever route you take, just remember to take those steps to ensure your income is always protected into the future when you're not working. Protect yourself and protect your family too.

And then lastly, the seventh key pillar, one that is applicable right the way through life, is to always increase your ability to earn, aka always make self-improvement a priority. You know, if you're a cabinet maker, invest in skills that enhance your craft. If you're a tax accountant, invest in learning new skills to help your clients save more money. If you're a physiotherapist, invest in improving your knowledge of rehabilitation.

If you invest in skills that improve your craft—whatever it is you do—then you increase your own productivity and are able to achieve the other pillars of wealth much faster. But this step always comes back to having the desire to improve your financial position. If you have the desire to be better off in life, then you will have that drive to earn more.

You will have that mental fortitude to work and save hard and to learn about investing, but this has to come from within you. So my advice would be to find goals, find things that matter to you to help drive your determination. Maybe you have kids and you want them to have the best life ever; you know, use that as your driver to earn more.

Maybe you always wanted a lakefront house; use that to fuel your desire. Maybe—and holler in the comments if this is you—you don't want to be trapped working for someone else for 40 years straight, and that's your driver to increase your earning power. Whatever it is, find the spark from within and always focus on improvement. You do that, and you are absolutely unstoppable.

Anyway, guys, they are the seven pillars to long-term wealth as discussed in The Richest Man in Babylon. I'd really recommend, if you haven't checked out that book before, definitely check it out. There's just so much wisdom in that book about how to structure your life from a personal finance point of view. I definitely recommend it, particularly if you're early on in the whole personal finance investing piece or if you're very young.

Then definitely check it out; I’d highly recommend it. It's not a long read, it's not a hard read; it's a very short book, but there's just so much knowledge within that I think you guys will really enjoy it. But anyway, that will do us for today. Thank you guys very much for watching the video. Of course, leave a like on the video if you did enjoy it or if you found it useful. Subscribe to the channel if you're new around here, and if you're interested in learning how to go about passive or active investing, then you can check out profitable links down in the description below.

I've got two courses over on Profitable: one for passive and one for active investing if you would like to learn about those strategies and how to implement them. But apart from that, guys, that will do us for today. Thank you guys very much for watching. That's always the most important thing—thank you very, very much for watching through to the end of the video, and I'll see you guys in the next one.

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Thanks very much to Hyper Charts for reaching out and agreeing to sponsor some of this content. So if you're interested, check it out. But that is it for today. Thanks very much for watching, and I'll see you guys next time. [Music] [Music]