Pay yourself first – the oldest saving advice that still holds

In 1926 the American publisher George S. Clason issued a series of short pamphlets on saving, written as parables from ancient Babylon. Banks and insurance companies handed them out, and they have since been gathered into one of the best-selling books on personal finance there is.

The form is old-fashioned – stories about Arkad, the richest man in Babylon, explaining how he got there. But the advice is strikingly familiar, and some of it is exactly what modern books repeat.

Pay yourself first

The best-known piece of advice is also the simplest: set aside a tenth of everything you earn, before you pay anything else.

The order is the whole point. If you save what is left when the month is over, there is rarely anything. If you save first, spending adapts to the rest. It is the same mechanism that is now called automatic saving, built on the fact that willpower is a poor plan.

The same pay, two orders

The way most people do it

Save what is left

• The pay comes in
• Bills, food, rent, everything else
• Whatever remains on the 30th gets saved
• Result: rarely anything, and never the same two months running

Clason's advice

Save first

• The pay comes in
• A tenth goes straight aside, the same day
• Everything else is paid out of the nine tenths that remain
• Result: spending adjusts to what is actually there

The seven cures

The book sums itself up in seven points, given here in modern language:

1. Start filling the purse. Save a tenth of your income.
2. Control your spending. Separate what is necessary from what you have come to count as necessary. Spending always grows to meet income unless you stop it.
3. Make the money work. Money sitting still does nothing. Returns that are reinvested keep working on their own.
4. Guard against loss. The principal comes first. Seek advice from people who actually know what you are asking about – not from those selling you something.
5. Make your home a profitable investment. The advice is to own, not rent.
6. Ensure a future income. Plan for old age and for others becoming dependent on you.
7. Increase your ability to earn. Skills are the one investment no one can take from you.

Cure number three: make your money work

On debt

The book has its own story about a man who owes money in several places, and it is surprisingly concrete: set aside a fixed share of income to pay down debt, divide it among those you owe, and keep going until it is done. No drama, no quick fix – just a fixed amount every month, and time.

The debt advice, as the book sets it out

1. Split the income in threeOne part to live on, one to repayment, one to saving. The saving continues even while you owe money.
2. Spread the repaymentEveryone you owe gets something each month, in proportion to what they are owed. Nobody is passed over.
3. Tell them what the plan isThe book puts weight on laying the plan out openly rather than hiding from it.
4. Keep at it until it is doneThe same amount, every month, until the debt is gone. That is the whole method.

What has not survived a hundred years

The advice to own your home stood stronger in 1926 than it does today. It takes no account of current house prices, interest rates, or of the fact that tying all your equity up in a single property is itself a concentrated risk. The book also takes no account of inflation as a phenomenon, and the returns in its examples are consistently optimistic.

It is also worth saying that the Babylon setting is literary, not historical. Clason used the scenery to make the advice memorable.

Why it is still read

Because the advice is simple enough to remember, and because the hard part is not understanding it. The hard part is actually doing it, every month, for many years. That has not changed in a hundred years.

Main topics

• Paying yourself first, and why the order is the whole point
• The seven cures for a lean purse
• Separating necessary spending from wants that feel necessary
• Putting money to work – compounding explained in 1926
• Guarding against loss before chasing returns
• The advice that has not survived a hundred years as well

Questions this episode answers

• What does it mean to pay yourself first?
• How much of your income should you save?
• What are the seven cures in The Richest Man in Babylon?
• How do you get out of debt according to the book?
• Why does spending always grow to meet income?
• What in the book still holds, and what is dated?

Key points

• Save a tenth of everything you earn, before anything else is paid.
• Separate what you need from what you have come to count as necessary.
• Money sitting still does nothing – it has to be put to work.
• Protect the principal first. Returns without risk do not exist.
• The advice is simple on purpose. The difficulty is in following it.

Sources and references

• George S. Clason – The Richest Man in Babylon (1926)