The Richest Man In Babylon was originally a collection of parables penned by George Clason in 1926 that focused on the judicious handling of money. Ninety years later these stories are still very applicable to our modern financial lives, with many of the lessons having been repeated numerous times in various forums. For all the time spent analyzing portfolio strategies and understanding asset class behavior there are some foundational concepts that must be in place to ensure personal financial success. Sound advice seldom, if ever, changes.
What is risk?
The search for an answer to this question has puzzled philosophers, mathematicians and thinkers for centuries. The question seems so simple but attempting to answer it proves to be quite challenging. The various definitions of risk floating around are fairly broad–so broad that Peter Bernstein wrote an entire book on the subject.
When I first got out of college and started earning “real money” I found that a good chunk of my paycheck was being used to service debt payments. The majority of my obligations were student loans but I also had a a car payment and some credit card debt. All of these payments left me with limited money to pursue the activities that I enjoyed or save for my future. To add insult to injury a lot of the “things” I had purchased with debt weren’t exactly making me happier. A few expensive car repairs and the stress involved with continually paying off debt made me realize that I had to change my ways. The first thing I did was build up an emergency fund of cash in a savings account. This prevented me from having to take on more debt when unexpected expenses found their way into my life. The next thing I had to do was find ways to save so I could put more money towards paying off my debt quicker. Here’s some of the methods that I employed.
There are better places to put your emergency fund cash than under the mattress. When looking at where to keep emergency funds there are two key features to keep in mind: the funds need to be safe during bad economic times and easily convert into cash. As a consequence one shouldn’t expect to earn high rates of return. Safety has its cost.