The Richest Man in Babylon, Part 4

Harry and I couldn’t help discussing wealth and poverty. After all, he is a government executive in charge of aiding poverty-stricken Third World countries. I’m a private businessman who writes about wealth building. And we were spending the week at my home in Nicaragua, the second-poorest country in Latin America.

Harry talked about the enormous disparity between the rich (i.e., me and my Nicaraguan partners) and the poor (i.e., Enrique and Yessenia, my household help) in this country. He was disturbed by it and had his theories about how the wealth had been taken from the poor. I countered with my theory of productivity: that any culture where the men sit idly talking while their wives and sisters work is doomed to poverty. At the end of the day, we agreed that a lack of education is the greatest impediment to the wealth of a nation and that an ignorance of the fundamentals of wealth building is the biggest reason for personal poverty.

That was precisely the conclusion that the King and his Chancellor came to in the third chapter of “The Richest Man in Babylon.”

“Where is all the gold that we spent for these great improvements?” demanded the King.

“It has found its way, I fear,” responded the Chancellor, “into the possession of a few very rich men of our city. It filtered through the fingers of most of our people as quickly as the goat’s milk goes through the strainer. Now that the stream of gold has ceased to flow, most of our people have nothing to show for their earnings.”

“Why should so few men be able to acquire all the gold?” the King asked.

“Because they know how,” replied the Chancellor. “One may not condemn a man for succeeding because he knows how. Neither may one with justice take away from a man what he has fairly earned, to give to men of less ability.”

“But why,” demanded the king, “should not all the people learn how to accumulate gold and therefore become themselves rich and prosperous?”

“Quite possible, Your Excellency. But who can teach them?”

“Who knows best in all our city how to become wealthy?” the King asked.

“Thy question answers itself,” the Chancellor said. “It must be the man who has amassed the greatest wealth in Babylon.”

And so it was that Arkad was summoned before the King, who interrogated him about his success. He discovered that Arkad had not begun with anything that anyone else didn’t have, including “a great desire for wealth.”

Since it was the King’s desire for all Babylonians to know how to become wealthy, Arkad promised to teach all that he knew to 100 men. “I will teach them those seven cures that did fatten my purse, one that was once as lean as any in Babylon.”

Arkad’s Seven Cures for a Lean Purse:

1. Start Thy Purse to Fattening.

If you want to become wealthy, you must save. And to save, you need to spend less than you earn. That’s the lesson Arkad taught his students on the first day of class. Arkad’s recommendation is to save at least 10% of your gross income. That’s a number many financial planners suggest too. At some point in time, you’ll want to be saving much more than that. But for starters, 10% is a good number.

2. Control Thy Expenditures.

“How can I save money when the money I earn is barely able to cover my current expenses?” That’s not only the question Arkad’s students asked him on the second day of class. It’s also one that I am asked all the time by people I am trying to help.

Start by recognizing that everyone feels this way. Put together a group of 100 people (as Arkad did) and you’ll have all sorts of workers making various amounts of money. Their professions will be different, their dreams will be different, and their spending patterns will be different. There is only one thing that will be the same: They will all spend every shekel they make.

There is only one explanation for this: What people think they need and what they actually need are two very different things. In their book “Getting Rich in America”, authors Dwight Lee and Richard McKenzie say, “There is a natural tendency for people to claim that they need certain things . . . when what they are saying is, ‘I want them.'”

Consider this fact: It costs about $1,700 a year to provide an adult male, living alone, with a healthy and nutritious diet. Yet, the average man living alone spends almost twice that amount — $3,268. If the discrepancy between want and need is so great when it comes to food, imagine what it is when it comes to housing, transportation, and clothing.

The point is this: You can save at least 10% of your gross income — even if you think you can’t. If you have trouble sticking to your budget, consider the metaphor Arkad used. Think of your possessions as objects you must carry throughout the journey of life. Imagine them as various-sized lead balls. Imagine yourself filling up a large backpack with them. You certainly need to carry food, water, bedding, etc. But do you also need to carry that extra car? All those expensive shoes?

3. Make Thy Gold Multiply.

“Gold in a purse is gratifying to own and satisfieth a miserly soul but earns nothing. The gold we may retain from our earnings is but the start. The earnings it will make shall build our fortunes.” So said Arkad to his students on the third day of class.

Arkad learned an important lesson when he invested his first year’s worth of savings ignorantly and lost it all. His next investment was a loan to Aggar the shield maker. Loans are generally safe investments, because they carry a fixed return and an obligation to repay not only the principal but also an agreed-upon rate of interest.

In the parlance of modern finance, loans are referred to as debt instruments. Federal (Treasury) bonds, municipal bonds, corporate bonds (insured, uninsured, quality, junk, etc.), and personal loans are all debt instruments. Equity — owning an interest in a business (usually by buying shares) — is generally considered more risky than debt. That’s mostly because an equity investment doesn’t come with a promise to repay as a debt does. The promise you get when you invest in equities is only this: that if the business becomes more valuable, the stock you have in it will become more valuable too.

A combination of debt and equity investments is the cornerstone of any sensible investment plan.

“I tell you, my students,” Arkad said, “a man’s wealth is not in the coins he carries in his purse; it is the income he buildeth, the golden stream that continually floweth into his purse and keepeth it always bulging.”

4. Guard Thy Treasures.

“It is wise that we must first secure small amounts and learn to protect them before the gods entrust us with larger.” So said Arkad to his students on the fourth day of class.

We are all tempted to invest in projects and schemes that offer extraordinary returns. Just the thought of doubling and tripling one’s money in a short period of time is enough to inspire the imagination of most investors.

But as Arkad said, “the first sound principle of investment is security for thy principal. Is it wise to be intrigued by larger earnings when the principal may be lost?” Will Rogers put it this way: “The return of your investment is more important than the return on your investment.”

5. Make of Thy Dwelling a Profitable Investment.

“If a man setteth aside nine parts of his earnings upon which to live and enjoy life, and if any part of this nine parts he can turn into a profitable investment without detriment to his well-being, then so much faster will his treasures grow.” So taught Arkad to his class at their fifth lesson.

Owning your own home is almost always a good idea. There are times, however, when the rental market is so weak that it’s cheaper to lease. This is true in some places right now. It’s not hard to figure out the relative merits of renting vs. owning. We discussed this topic in Message #864.

6. Ensure a Future Income.

“It behooves a man to make preparation for a suitable income in his days to come, when he is no longer young, and to make preparation for his family should he be no longer with them to comfort and support them.”

Providing for retirement, as Arkad recommends to his students on the sixth day of class, can be done in many ways: with a simple savings account, by buying property, by investing in bonds and other debt instruments, or by buying businesses or shares in businesses. Employing the power of compound interest over time is the secret to retirement investing. The longer you have to allow your savings to compound, the less you need to save. If you are middle-aged already and have nothing set aside, you’ll need to do more than simply save a tenth of your income and wait. You’ll have to find a second stream of income.

7. Increase Thy Ability to Earn.

Arkad’s final lesson to his students: “The more wisdom we know, the more we may earn. That man who seeks to learn more of his craft shall be richly rewarded. If he is an artisan, he may seek to learn the methods and the tools of those most skillful in the same line. If he laboreth at the law or at healing, he may consult and exchange knowledge with others of his calling. If he be a merchant, he may continually seek better goods that can be purchased at lower prices.”