This series of posts has examined the classic book The Richest Man in Babylon to examine if it is still relevant ninety years after it was first published. I would answer this question with a resounding yes. Some of the examples in the book may be a bit simplistic given the complexity of modern financial landscapes; for example, there is no mention throughout of any legal aspects of finance. Some examples may be a bit optimistic and naïve; for example, if you get into debt, creditors may not be as patient and accommodating as those in the story.
However, overall, this book provides seven useful principles which can help anyone improve their financial position. This book empowers you to realise that even if you don't earn much, you can still be setting aside a small amount like 10% to teach yourself the art of saving. Even small amounts can be invested in income producing ways via the share market or term deposits. As this capital grows, property or business investment becomes possible. After that, the sky is the limit!!
Clason's final recommendation was that people need to increase their abilities to earn via education and training.
In the 21st century there are many ways of doing this.
In some fields, it may be via obtaining formal degrees and qualifications; for example, I went beyond my Bachelor's degree by studying further to become a Chartered Accountant and to gain my financial planning qualifications.
But sometimes you may not need to attend formal schooling to improve your abilities to earn.
For example, perhaps you could communicate more effectively or better market yourself or your business if you were a more confident public speaker; to improve in this area, I joined my local Toastmasters club.
Or perhaps you can get an edge on the competition by bringing something different to the table; that is why I got my private pilot's licence as it meant I could fly to visit clients who lived in rural and remote locations.
Reading books about relevant business and financial topics may also help you develop your professional abilities.
For each person, the ideal path of self-education will be different, but everyone can clearly benefit by continuously learning and improving their professional skills.
Clason talks about the importance of planning for the future. How will you continue to support your lifestyle when you are no longer actively earning money within your given profession? While within Australia we have a superannuation system in place to try to help people set aside funds for retirement, for most people, the amount they have put away in superannuation will be insufficient. Hence, it is very important to identify other ways you can continue to earn revenue whether this be via managed funds, rental properties, or investment in businesses.
Clason argues for the importance of owning your own home as it will help you keep your living costs lower over the longer term. However, his take on this fairly complex issue is quite simplistic. While I agree that owning your home can save you money, the key is in owning it outright rather than 'owning' it, but having a huge mortgage and making just minimal repayments. It is important to remember that interest you pay on your own home is not tax deductible. Hence, buying your own home can be a good investment when you strategically buy a piece of property which will likely appreciate in value (remember, in real estate, you usually make your money when you buy rather than when you sell). You could also choose to buy a 'home' which can be income producing (e.g., a farm, a block which you can subdivide, one where you can rent out one or more rooms).
However, there are times when renting can leave you financially better off. For example, buying a home can potentially erode your wealth when you:
a) buy something you like but can't really afford,
b) have all your money and borrowing capacity tied up in this asset, meaning you can't do any other investing,
c) can't repay the principle quickly, or
d) overcapitalising on the house.
Hence, before buying a home, you need to figure out how quickly you can pay it off and make sure you choose something you can really afford.
One of my favourite quotes from this book is "Advice is one thing 
that is freely given away, but watch that you take only what is worth having" (Clason, 1926, p. 16). Clason talks extensively about the importance of gaining trustworthy financial advice, encouraging readers to seek out knowledge from people who have been successful financially. He also warns about becoming involved in business ventures run by people who are not experts in the field, seeing this as a sure-fire way of losing money. Gambling and 'get rich quick' schemes that sound too good to be true are also put forwards as good ways to lose your wealth.
Today's financial landscape is complex and I wholeheartedly agree with Clason about the importance of making secure investments and relying only on trustworthy and knowledgeable advice. While no investment is 100% secure as nobody can predict the future and market conditions can shift without warning, relying on expert advice will certainly help minimise your risk and maximise your profit.
The Richest Man in Babylon provides several examples of how to make money grow. In most of the stories, money is given to a money lender and (quite generous) interest is paid on this principle. In others, characters invest in business enterprises which invariably succeed. The key idea is to take the 10% (or more) that you can save from your income and invest it in ways so it continues to grow.
While Clason's principle about the importance of using money to make money is still highly relevant today, his parables do gloss over some aspects which are important to consider. First is inflation. If you just put your money in a jar under the bed and sit on it, it will actually go backwards in value due to inflation. Unfortunately, because of historically low interest rate levels, today's modern money lenders (the banks) are offering such low interest rates that the interest you receive may be marginally higher than inflation. Hence, it is important to look for other investment opportunities if you want your profits to really grow over time. Direct shares offer good opportunities however you need to determine what shares to buy and when to buy them. Investing in managed funds is a good way to have professional investment managers making the day to day investment decisions. As the funds have accurate reports available it makes it easy for investors to determine how their investments are performing. Owning investment properties is another alternative which should also be considered. The best alternative for you will depend on the amount of money you have available to invest, your risk profile and your investment timeframe
While it may seem like a no brainer that you need to control your expenditure if you want to accumulate wealth, this seems to be something easier said than done.
Everywhere you look, you can buy things on credit or finance; have today and pay tomorrow!
While everyone wants the good life, it is very important to live within your means and learn to budget so you don't spend impulsively.
While getting a loan to purchase a piece of property or other asset which is likely to appreciate in value may be okay, I strongly advise against ever going into debt to purchase consumer goods.
For those in business, controlling your expenditure is even more critical; you need to constantly have your finger on the pulse of your business so you know what your income is and what you can afford to have going out.
Unlike those with a fixed salary, business owners can go through periods where they do not generate any profit.
Here, it is even more vital to know and control your expenditure so you can make sure you are not going to end up spending more than you are earning.
Probably what this book is best known for is its recommended strategy of setting aside 10% of what you earn.
Clason calls this 'paying yourself first', meaning you put some money aside to invest before you pay bills or make discretionary purchases.
So, if you make $1,000, you save at least $100.
Clason argues that you are unlikely to even miss the 10% you are putting away, but that over time, this money accumulates into a tidy sum which can then be invested and earn more income.
I would argue that this strategy is still critical for anyone seeking to improve their own financial position.
If you are living from pay cheque to pay cheque, you are never going to get ahead financially.
While 10% may seem like a relatively small amount to put aside, what you are simultaneously doing is teaching yourself financial discipline.
Growing wealth is often about giving up immediate gratification for longer term benefit.
If you can learn to do that with small sums of money, you will be able to train yourself to do it when bigger investment opportunities come along.
Recently, I have been revisiting a book I have read many times, The Richest Man in Babylon by George S. Clason.
Even if you haven't read it, chances are you have at least heard of it.
Published in 1926, it is a series of stories set in ancient Babylon designed to illustrate the basic economic principles people need to follow in order to gain and maintain wealth.
Ninety years on, to what extent are its messages still relevant?
Over the coming posts, I'm going to examine the arguments set out in this book and discuss their relevance to modern times, sharing some of my own philosophy on wealth acquisition and maintenance.
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