We wake up every day with the same 24 hours as everybody else. Why then are some wealthy and the others just getting by? George S. Clason’s book “The Richest Man in Babylon” offers a timeless answer to this question.
Clason’s inspiring book published in 1926 is really about personal finance. It is a collection of short stories centered primarily around the main character Arkad. Arkad made his way from humble beginnings to become the richest man in the ancient city of Babylon.
For that reason, the benevolent king of Babylon, wishing to help others, asks Arkad to teach them the “seven cures for a lean purse” that made Arkad wealthy.
Seven Cures for a Lean Purse
The king thinks if everyone in Babylon is prosperous, the city will prosper too. He asks Arkad; “is there any secret? Can it be taught?”
Arkad replies; “It is practical your majesty. That which one man knows can be taught to others.” The king is certainly delighted at that response.
The Richest Man in Babylon starts with the seven steps to wealth as taught by Arkad. Consequently, these seven lessons are often viewed as the primary message in the book. And, seen by many as a successful formula for wealth creation and preservation proven over thousands of years and still relevant today.
1. Start Thy Purse to Fattening (Pay Yourself First).
“For every ten coins, thou placest within thy purse take out for use but nine.” The author recommends saving at least 10% of all income even for those still paying off debt.
Clason advocates to start the saving habit early and learn to live off of the remainder. This way you eliminate the problem of not having money to save by saving it before spending.
“Now I will tell a strange truth, the reason for which I know not. When I ceased to pay out more than nine-tenths of my earnings, I managed to get along just as well. I was not shorter than before. Also, ere long, did coins come to me more easily than before.”
Warren Buffett the third wealthiest person in the world (and The Richest Man in Omaha) agrees. Similarly, he says, “Don’t save what is left after spending; spend what is left after saving.”
2. Control Thy Expenditures (Live Within Your Means)
“Budget thy expenses that thou mayest have coins to pay for thy necessities, to pay for thy enjoyments and to gratify thy worthwhile desires without spending more than nine-tenths of thy earnings.”
This is learning to live within your means, avoiding lifestyle inflation but still making allowances for “enjoyments and desires.”
Clason shares another “unusual truth” that ‘necessary expenses’ will always grow to equal our incomes “unless we protest to the contrary…(and)…confuse not necessary expenses with desires.”
Arkad’s modern day contemporary, The Richest Man in Omaha has a similar: “I’m not interested in cars, and my goal is not to make people envious. Don’t confuse the cost of living with the standard of living.”
3. Make Thy Gold Multiply (Make Your Money Work for You)
“…put each coin to laboring that it may reproduce its kind…and help bring to thee income, a stream of wealth that shall flow constantly…”
Arkad is talking about investment returns and compounding those returns. Therefore invest your savings for a reasonable return, and it will work wonders as shown here.
Another benefit of growing your income stream with investments is it diversifies your income because it is another source not related to your job.
“My wealth has come from a combination of living in America, some lucky genes, and compound interest” explains Warren Buffett.
4. Guard Thy Treasures from Loss (Investment vs. Speculation)
“The first sound principle of investment is security for thy principal. Is it wise to be intrigued by larger earnings when thy principal may be lost? I say not…Be not misled by thine own romantic desires to make wealth rapidly.”
Here The Richest Man in Babylon touches on three essential principles of investing.
- Protect Your Principle; It’s insane to risk what you have for something you don’t need;
- Circle of Competence; invest within your area of skill and competence; and,
- Investing is not speculating.
Investment is taking a moderate risk for satisfactory returns whereas speculation is taking more substantial risk expecting abnormal gains. Furthermore, investments require thorough analysis that promises the safety of principal and an adequate return. All others are speculation.
5. Make of Thy Dwelling a Profitable Investment
“…who owneth his own house…greatly will it reduce his cost of living, making available more of his earnings…”
Clason advocates that it makes more sense to make payments that will eventually become your equity rather than rent where the payments become the landlord’s equity.
Likewise, the Richest Man in Omaha lives in a five-bedroom, 2.5 bath house he bought in Omaha in 1958 for $31,500.
6. Insure a Future Income (Plan for Retirement and Family Well-being)
“Provide in advance for the needs of thy growing age and the protection of thy family.”
Plan and prepare for all aspects of life after work including the wellbeing of the family who may be dependent on you when you pass away.
Make things easy for you and your family in case of your early death, disablement, or impairment through insurance, retirement plans, and getting your affairs in order.
Therefore, an excellent place to start is with a Personal Financial Plan and to take advantage of the “miracle of compounding.”
7. Increase Thy Ability to Earn (Sharpen the Saw)
“Cultivate thy own powers, to study and become wiser, to become more skillful, to so act as to respect thyself.”
We must continue to improve our skills and knowledge so our earnings power increases (or doesn’t decrease) over time. And, be specific and focused on what it is to be improved. “General desires are but weak longings. For a man to wish to be rich is of little purpose.”
Furthermore, “Desires must be simple and definite. Because they defeat their own purpose should they be too many, too confusing, or beyond a man’s training to accomplish.”
In another highly recommended book “The Seven Habits of Highly Effective People” author Stephen Covey describes this as a renewal in Habit 7 “Sharpen the Saw.”
“Renewal is the principle—and the process—that empowers us to move on an upward spiral of growth and change, of continuous improvement.” – Dr. Stephen R. Covey
Covey explains, as a result, continuous improvement increases “your capacity to produce and handle the challenges around you. Consequently, without renewal, “the body becomes weak, the mind mechanical, the emotions raw, the spirit insensitive, and the person selfish.”
Parables on Wealth Creation and Preservation
The Richest Man in Babylon’s Seven Cures for a Lean Purse is Clason’s seven steps to wealth. The book then follows with seven more useful parables on wealth creation and preservation.
- Meet the Goddess of Good Luck. Shows how the goddess of good luck favors people of action. Thomas A. Edison sums up this notion well; “We often miss opportunity because it’s dressed in overalls and looks like work.“
- The Five Laws of Gold. This parable provides five reminders on growing and preserving wealth because those without this wisdom will waste their money. “Gold is reserved for those who know its laws and abide by them.”
- The Gold Lender of Babylon. The moral of this story is; better a little caution than a great regret. Wealth accumulation may be the goal but with it comes another whole set of issues. As a result, the successful lender shares his insights on how to preserve wealth.
- The Walls of Babylon. Like those walls, we need adequate protection. The walls of Babylon are an example of human’s inherent desire for protection. It is just as strong today as it ever was. The “walls” of insurance, a rainy day fund, and dependable investments, guard us against the unexpected tragedies that we may face.
- The Camel Trader of Babylon. The camel trader shows us that where there is a will there is a way. He shares how he overcame mistakes and debt by looking at himself and the world differently. He viewed himself as a product of his decisions, not circumstances. This simple thought change enabled him to overcome seemingly insurmountable odds to change his fortune.
- The Clay Tablets from Babylon. Professor Shrewsbury an Archaeologist at Nottingham University deciphers five clay tablets from Babylon. He and his wife who are hopelessly in debt and facing humiliation find a solution to their problem in the tablets.
- The Luckiest Man in Babylon. The book concludes with a story about the seemingly impossible rise of a slave to prosperity. How does he’d do it against those odds? Most importantly, he prepares in advance to maximize any opportunity that may come his way. He creates his own “luck” by preparing for an opportunity when it presents itself. “Remember, work, well-done, does good to the man who does it. It makes him a better man.”
An Enjoyable Short Book and Conceptional Recipe for Success
The Richest Man in Babylon lays out the essential points of income generation, wealth accumulation, and preservation. For that reason, it is useful for those focused on wealth accumulation or just in need of a refresher on wealth preservation.
Finally, it provides; 1) the things we need to know in the seven cures, and 2) how to think about what we don’t understand in the context of the parables.
It doesn’t give all the answers, but it lights the path ahead. Above all, this proven classic is for those who are looking for a simple and conceptional recipe for financial success.
Part 2: The Miracle of Compounding