Richest Man in Babylon 2 – 7 Cures

Today’s post is our second visit to The Richest Man in Babylon by George Clason.

Cure 2 – Control thy expenditures

We covered cure number one in the previous article – it told us to save 10% of our income.

• Cure two is about spending.

What each of us calls our ‘necessary expenses’ will always grow to equal our incomes unless we protest to the contrary.

Confuse not the necessary expenses with thy desires. Each of you have more desires than your earnings can gratify.

This cure is pretty simple to understand – don’t confuse needs and wants.

• Pay for your needs, but control your wants so that you can save your 10%.

In other words, stick to a budget.

There are limits to my time. There are limits to my strength. There are limits to the distance I may travel. There are limits to what I may eat.

And there are limits you how much you can spend and still have money left to save.

• There will be things that you have grown accustomed to spending money on which can be eliminated.

Cure 3 – Make thy gold multiply

The message of this cure is that gold earns nothing.

• Cash savings may appear to make money in terms of interest received, but usually, the interest rate is lower than the inflation rate, and your purchasing power is being eroded.

You need to invest your savings in assets which will produce returns above inflation.

• The emphasis in the book is on income flow, but total returns (capital growth plus income) are really what you should be looking at.

The book makes clear that compounding is important – you must not spend your income/capital growth each year.

• The specific examples of investments in the book are all from ancient Babylon and are no longer appropriate.

Today you need stocks and some diversifying stability assets (bonds, cash, gold, alternatives) in some proportion determined by your appetite for risk.

Cure 4 – Guard thy treasures against loss.

This sounds like it’s about insurance but in fact, it’s about avoiding high-risk ventures.

• If it sounds too good to be true, it probably is.

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.

This is going too far – you would be restricted to government bonds and bank deposits if you took this recommendation literally.

It’s certainly wise to be aware of the risks associated with any individual investment and to make sure that the risk level across your entire portfolio is appropriate.

• And don’t put money into any investment that you don’t understand.

Cure 5 – Make of thy dwelling a profitable investment

Clason favours buying your home over renting it.

• Rent money is often as much as a mortgage payment, and will never result in you owning your home.

I broadly agree.

• Primary residences are tax-advantaged in the UK (no capital gains tax) and owning your own home protects against sequencing risk as you approach retirement.

Cure 6 – Insure a future income

This cure is about a pension for old age, and a legacy for your family when you are gone.

Arkad suggests property or land as a long-term investment or money on deposit with the moneylender.

• Arkad is also a fan of life insurance, even though it was yet to be invented in his time.

The interest rate in Babylon was around 6% pa, so cash made a bit more sense in those days.

• My instant access savings account pays around 0.8% pa at the time of writing.

I prefer pensions and ISAs for both retirement and legacies.

Cure 7 – Increase thy ability to earn

Cultivate thy own powers, study and become wiser, become more skilful, act as to respect thyself. Thereby shalt thou acquire confidence in thy self to achieve thy carefully considered desires.

This cure is often overlooked in modern times.

• For the young, or those on below-average incomes, working to increase their salary is likely to have more impact on their future financial prospects than is learning about investments.

It’s very difficult for those on low incomes to become financially independent and it would require a significant level of frugality.

The Goddess of Good Luck

I think we can all agree that it would be a good thing to be lucky.

• Unfortunately, we have no way to work towards this state.

Or do we?

• The teasing structure of the next chapter seems to suggest that Clason thinks we might.

But in fact, it’s a shaggy dog story.

• In reality, it’s a warning to stay away from the gaming tables and the races – and more importantly, to avoid procrastination.

Good luck waits to come to that man who accepts the opportunity.

By which Clason means once more those who wisely invest 10% of their earnings, and do not put off doing so.

• To those who take the opportunity to make a wise investment as soon as it is presented.

The spirit of procrastination is within all men. We desire riches; yet, how often when opportunity doth appear, that spirit doth urge various delays in our acceptance. In listening to it we do become our own worst enemies.

Good luck can be enticed by accepting the opportunity. Action will lead thee forward to the successes thou dost desire. Men of action are favoured by the goddess of good luck.

The Five Laws of Gold

Arkad sent his som Nomasir into the world to make his fortune (and to gain respect) with two things:

1. a bag of gold
2. a tablet inscribed with the five laws of gold.

He was to return in ten years and give an account of himself.

• If he had prospered, he would inherit his father’s estate.

Nomasir lost most of his gold in a bet on a horse race and the rest on a failing shop.

• But he was saved by the five laws written on the tablet that his father had given him.

---

That’s it for today – we’ll find out what the five laws of gold are next time.

• We’re halfway through the book now, so I expect to complete it in another couple of articles (plus a summary).

Until next time.