Ancient Advice for a College Graduate
By David DeBellis, CFA
On May 17th of this year, I will have the joy of watching my son walk across the stage at his college graduation. Sure, some of that joy will be in knowing that I will no longer be sending money to Roger Williams University, but I am excited (and nervous) for my son as he starts a new chapter in his life. And while I know that his college professors have prepared him for life in the business world, I don’t think any of his lessons involved how to manage his own finances. And since I never had anyone sit me down and explain how I should deal with the paychecks I would soon be receiving, I plan on doing just that with my son.
Much of the advice that I plan on sharing with him comes from a book written over 90 years ago. The title of the book is “The Richest Man in Babylon” and was written by George Clason in 1926. The book is a collection of parables, based in the ancient city of Babylon. It is the story of Arkad – the son of a humble merchant – who grows to become the richest man in Babylon, thanks to wisdom he sought out from a rich money lender named Algamish. The parables are lessons that he teaches to others in the city, and calls the lessons the “Seven Cures for a Lean Purse.”
The first of Arkad’s lessons is the most important one in my opinion: “Start thy purse to fattening.” Translated into words that my son will understand: pay yourself first! In this lesson, he explains “I found the road to wealth when I decided that a part of all I earned was mine to keep.” We cannot accumulate wealth if we do not save what we earn. By paying ourselves first, we guarantee that this will happen. The book recommends that 10% be set aside before any other money is spent. The IRS takes our taxes off the top, why shouldn’t we?
His next lesson can be one of the most difficult: “Control thy expenses.” Essentially this means learning to live within your means. This is going to be tough for my son. Our consumer-driven society makes it incredibly easy to overspend. As a young man, I loved cars and was always looking to “trade up.” I now drive a vehicle with over 100,000 miles and have challenged myself to get at least 200,000 before considering a new vehicle. Arkad explains to his students not to confuse necessary expenses with their desires. I try to explain to my son that his iPhone is just as good at making calls and sending text messages as the new ones that Apple introduces each year, and while he may want the new one, he needs to ask himself “do I need it?”
In order to control expenses, you have to become a conscious spender and know where your money is going. Making a budget and tracking your spending is a great way to start. Tony Robbins, the self-help guru, wrote in one of his many books; “At the end of the day, the question to ask yourself is this: Do my expenses, big and small, bring me the thrill they once did?” Because even a small reduction in spending can make a big difference in long-term savings. Tony has a great example of this that I plan to show my son. If he can save just $5 a day and invest that in stocks, the $5 per day savings would grow to $30,727 in 10 years, $113,905 in 20 years and $948,612 in 40 years! If he increases the amount he can save, the results are even more dramatic. This ties in really well with the next lesson from the “Richest Man in Babylon”.
“Make thy gold multiply.”” This is one of my favorite explanations of compounding that I’ve ever read. Arkad explains to his students: “The gold we may retain from our earnings the company matches any of his contributions. A company match is free money…and who doesn’t want some free money? He should also take advantage of the tax-free compounding that an investment in a Traditional IRA or ROTH IRA provides. I prefer the ROTH IRA for him since he probably won’t be in a very high tax bracket. He can put up to $6,000 a year into this and when he reaches his retirement, he’ll have a tax- free source of money to draw from.
Arkad’s next lesson, “Guard thy treasures from loss” can be interpreted a couple of ways. From an investment standpoint, I interpret this as “know what you are investing in.” If someone is trying to sell you an investment that is too good to be true, it probably is. Make sure that your investments are diversified and don’t be afraid to ask for help if you’re not sure you know exactly what you are doing.
The other way that I interpret this is to make sure that you purchase insurance for your valuable assets. Car insurance, renter’s insurance and health insurance are all very important for a young person just starting out.
Another of the lessons from the book that I will pass along is to “Increase thy ability to earn.” Many employers offer reimbursement for employees who want to further their education, and this can lead to more lucrative job opportunities. Technology has also made it much easier to find work on the side. My son recently became qualified to be a driver for the ride-sharing company known as Lyft. This is a way for him to make some extra cash during his free time.
These are just a few of my favorite lessons from the book, which I plan on giving to him after his graduation. Of course, there are some lessons that our children need to learn on their own, but I hope that I can at least start him off on the right path.