Book Reviews
The Richest Man in Babylon – George S Clason
This is an easy read that reviews core financial habits. It was written in the 1920’s as a series of parables from ancient Babylon.
The parables cover The 7 Cures for a Lean Purse and The Five Laws of Gold as well as several other parables with additional valuable lessons. I will summarize the key lessons from the parables and put them in today’s context.
The 7 Cures for a Lean Purse:
1) Start thy Purse to Fattening
The lesson here is to pay yourself first. You should save 10% of all of your earnings. Do this before you start spending and figure out a way to live on the remaining 90%.
2) Control the Expenditures
Live within your means. In this case, your means are 90% of what you earn. This section also touches on the fact that building wealth is not a function of how much people earn. Rather it is a function of them living within their means. You can find people of all different levels of earnings who perpetually spend more than they earn.
3) Make the Gold Multiply
Invest your money. The worth of your savings is not in the fact that it is there, it is in the income that your savings earns. Also, don’t spend the money that your savings earn, re-invest your earning to take advantage of compound interest.
4) Guard the Treasures from Loss
The first rule for investing is to ensure that your principle is secure and the returns are reasonable. Promises of unrealistic returns are usually false and put your hard-earned capital at risk.
5) Make thy Dwelling a Profitable Investment
Owning a house is better than paying rent, those payments go to building up your equity rather than be just an expenditure.
6) Insure a Future Income
Ensure that your investments will sustain an adequate level of income for the years when you are no longer earning. Build your portfolio of income generating investments for the time when you will need to live off of them.
7) Increase Thy Ability to Earn
Invest in yourself. Improve your skills so that you have the ability to increase your earning power throughout your career.
The 5 Laws of Gold:
1) Gold Cometh gladly and in increasing quantity to any man who will put by not less than one-tenth of his earnings to create an estate for his future and that of his family.
This is a repeat of the save 10% rule, but some rules are so good that they are worth repeating.
2) Gold laboreth diligently and contentedly for the wise owner who finds for it profitable employment, multiplying even as the flocks of the field.
Choose prudent investments that will generate returns and allow the earnings to compound.
3) Gold clingeth to the protection of the cautious owner who invests it under the advice of men wise in its handling.
Focus first on principal protection, and reasonable growth. Don’t be careless in selecting your investments.
4) Gold slippeth away from the man who invests it in businesses or purposes with which he is not familiar or which are not approved by those skilled in its keep.
Trust the judgement of others who are more experienced in managing investments. Learn the strategies to prudently grow your wealth without undo risk.
5) Gold flees the man who would force it to impossible earnings or who followeth the alluring advice of tricksters and schemers or who trusts it to his own inexperience and romantic desires in investment.
If something is too good to be true it probably is. Don’t be swayed by amazing, yet unrealistic returns that will in reality likely never materialize.
The Gold Lender of Babylon:
This parable covers some great territory. It includes:
- The benefits of diversification – spread your investments into different areas, so if one is challenged, others will prop up your portfolio
- Understanding Collateral – collateral can be an asset that secures something, or an ability to earn income. These are worth lending against if the borrower is also of character and honours their word
- Doing business with family and friends – assess the individual and opportunity on merit, not on familial obligation or else you risk taking their burden (there is a really great story that drives this message home)
The Camel Trader of Babylon:
This story was another get and presents a get out of debt plan. It proposes that if one has debts, live on still invest 10% of their earnings, but in addition to that use 20% to pay down their debt. The remaining 70% they need to find a way to live on. This type of strategy takes character but the reward makes the effort worthwhile.
The Goddess of Good Luck:
This was a very interesting parable/discussion of luck. The author led us down a path of defining luck. Luck isn’t a windfall of money, like winning a lottery. While that is possible, it is extremely unlikely and not something to base your hopes and dreams on.
While the book doesn’t use this term, it is really talking about creating the pre-conditions for luck. Luck comes to those who put in the hard work to prepare for it and are ready to seize the opportunities that come because of that.
Conclusion:
It is interesting to note, that a couple of consistent themes throughout all of the parables were time and discipline. All of the stories are of people who had built large fortunes through diligent work, following the principles and consistently doing it over time. Today is no different. Chasing the latest fad investment isn’t the path to success.
While this book was written almost 100 years ago, the lessons in it stand the test of time. Definitely a worthwhile read.
