As my first ever Finance Friday post I wanted to share with you one of my favorite books that helped shaped my mindset around how I view money. Throughout my blog I was be constantly be mentioning that you need to change your mindset on how to start saving, paying off debt and investing early in order to achieve financial freedom and retiring early.
First published in 1926, the book has sold over two million copies and expresses lessons learned from managing business and household finances. The book is an inspirational classic to many readers with stories and messages that are just as applicable as they were thousands of years ago. We’ll reflect on the eight major points of the book.
8 Main Lessons from the book
1. Pay Ourselves First
The first most important lesson in the book is to pay yourself first. The rich man in the story imparted valuable advice to the folks asking how he did it: “I found the road to wealth when I decided that a part of all I earned was mine to keep; and so will you.” Although this is a very subtle message it is very powerful in accumulating wealth. We cannot create a nest egg if we do not save what we earn. Pay yourself first and foremost before spending any of your money earned. The parable advocates putting aside 10% of your pay.
2. Live below our means.
After paying ourselves first 10% of what we earn that leaves 90% of our income to live on. Controlling expenditures enable us to make good use of the money we have left after we have paid ourselves. Defining the difference of need vs. want is the key here. Even with all the frugal living advice you can absorb under your belt, if the problem of need vs want isn’t resolved then money will leak from your potential savings.
3. Make our money work for us.
Making our money work for us is a great way to become debt free. There are many investment vehicles but the best thing we should all be aware of is that we should never invest in anything we do not completely understand. Investing our money will mean becoming knowledgeable about what we are investing in, as well as the repercussions if the investment does not pan out, as well as our potential exit strategies when we are ready to take our money out. There are many ways we can invest our money such as stock markets, real estate, businesses, and so on.
4. Insurance protects our wealth.
Insurance helps safeguard our finances. There are many types of insurance we can buy and we should do our research on which one and how much we need. A renter’s insurance or a homeowner’s insurance helps protect our homes. Another one is income insurance which becomes suitable to help us if we become unable to work and may even help protect us from medical expenses and long-term care. Insurance in case we need it if something happens is a proactive approach. The idea is that we will never have to use the insurance but in case something does happen we are protected financially from the loss it would have caused.
5. Our home is our biggest expense.
Since our home is our biggest expense the book suggests to lessen that expense as much as possible. Many of us have decided to take on a huge mortgage to buy a home and after the real estate bust many were left with homes that lost their value. Many of us do not own a home and instead rent one. There is absolutely nothing wrong with that. I know that many think their homes are an investment but it is an expense and a very high expense at that and one we must manage carefully.
6. Have a retirement plan.
The younger we can start putting money away for our retirement the better. When we start putting money away for retirement early we take advantage of a magical thing called ‘compounding interest‘.
7. Invest in ourselves.
The best way we can increase our earning is by investing in ourselves. We can do that by continually learning and striving to develop ourselves. We are now in a very exciting time: the Information Age where knowledge is literally within our fingertips thanks to the Internet.
8. Track Our Wealth.
In order for us to know where we stand financially we need to face the whole truth of our current situation. We can track our wealth by creating a spreadsheet of all our months earnings and expenses and tallying the difference between the money we earn and how much we spend. Or there are many, many apps out that can do that for us. When we do this work, we are able to gauge how we are doing financially.
If you are interested in purchasing the book you can buy it on Amazon here or watch a quick 3 minute summary on the book itself.