"Divide your portion to seven, or even eight, for you do not know what misfortune may occur on the earth." – Ecclesiastes 11:2
One of the biggest challenges I’ve faced with tax clients over the years, is that so many just live beyond their means. These are bright, well educated people with successful professions or businesses that make very good livings. The problem is, they always seem to have inadequate savings, and no cushion for a rainy day. And certainly, as Ecclesiastes teaches us, no diversification. Most would tell me they will start putting something more away for retirement “one of these days”. It’s one of the reasons I added investment advisory services to my practice. I knew I could help them with some basic rules and near painless financial discipline.
The Richest Man in Babylon is a classic tale, and the principles of the story are not unlike the more contemporary book “The Millionaire Next Door.” The wisdom is simple. The value is priceless.
The parable told in this very old book is not only timeless, but perhaps even more relevant today. The story takes place in the ancient city of Babylon. Babylon was a city of wealth and splendor with treasures of gold and jewels. It was located beside the Euphrates River in a flat and arid valley. It had no forests, no mines, and no stones for building. It was not located on a natural trade route. The rainfall was insufficient to raise crops. Babylon was a prime example of man’s ability to achieve greatness by using whatever means was at his disposal. All of the resources supporting this large city were man made, as were all of its riches. Babylon possessed only two natural resources consisting of fertile soil and water in the river. With one of the greatest engineering accomplishments of the day, Babylonian engineers diverted the waters from the river by means of dams and irrigation canals to provide water to the land allowing the growth of abundant crops. The Babylonians were also artists, inventors, philosophers, manufacturers, financiers and traders, well ahead of their time. It was a civilization to behold.
The story begins with friends Bansir, a chariot builder, and Kobbi, a musician, discussing their poverty despite being in lucrative professions. They come upon childhood friend Arkad, who has since become one of the richest men in Babylon. They ask him how he came to acquire such riches while they have worked so hard, yet are penniless. Arkad explains that he himself was once a hard working but penniless scribe, who made a deal with a very rich man named Algamish. Arkad would complete a job for Algamish and in return, Algamish would teach him the secret of acquiring wealth.
The agreement was honored and when Arkad completed the job the wealthy man shared his secret. “I found the road to wealth, when I decided that a part of all I earned was mine to keep.” Bansir and Kobbi then ask, "Isn't all that I make mine to keep?" Arkad then said no, that a man had to pay for his clothes, for his food, his shelter, etc., but that if he regularly saved at least a tenth of his income (and as much more as he could afford to save) and put that money to work earning interest, he would become wealthy. Arkad then began to share his wisdom with his friends, explaining his basic principles he called “Seven Cures for a Lean Purse”.
Start Thy Purse to Fattening
Arkad instructs the men to begin by continuing to work hard at their current occupations, but for every ten coins placed in their purse to take out for use but nine. "Deride not what I say because of its simplicity," Arkad says, "Truth is always simple."
Control Thy Expenditures
"How can a man keep one-tenth of all he earns in his purse when all the coins he earns are not enough for his necessary expenditures?" "How many of you have lean purses," Arkad asks. All of the men say that they have lean purses, that they have no money. "Yet," Arkad responds, "Thou do not all earn the same. Some earn much more than others. Some have much larger families to support. Yet, all purses are equally lean.” Now, I will tell thee an unusual truth about men and the sons of men. It is this: “That what each of us calls our necessary expenses will always grow to equal our incomes unless we protest to the contrary." Arkad tells the men not to confuse necessary expenses with their desires, that all men are burdened with more desires than they can gratify. "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."
Make Thy Gold Multiply
Once you've started saving at least one-tenth of what you earn, you must put that money to work earning interest. "Put each coin to laboring that it may reproduce its kind even as the flocks of the field and help bring to thee income, a stream of wealth that shall flow constantly into thy purse."
Guard Thy Treasures from Loss
Arkad explains “Everyone is tempted by opportunities, whereby it would seem that a man could make large sums by investing his money in most plausible projects. Often friends and relatives are eagerly entering such investment and urge him to follow." The first sound principle of investment is security—what is a person who wants a loan from you offering as collateral? "Guard thy treasure from loss by investing only where thy principle is safe, where it may be reclaimed if desirable, and where thou will not fail to collect a fair rental. Consult with wise men. Secure the advice of those experienced in the profitable handling of gold. Let their wisdom protect thy treasure from unsafe investments."
Make of Thy Dwelling a Profitable Investment
If you pay rent to a landlord all your life, at the end of your life you'll have nothing to show for it. If you can instead pay a mortgage on a house, at the end of your life you'll have a house to show for it. "Own thy own home."
Insure a Future Income
It behooves a man to make preparation for a suitable income in the days to come, when he is no longer young, and to make preparations for his family should he be no longer with them to comfort and support them. "The man, who, because of his understanding of the laws of wealth, acquireth a growing surplus, should give thought to those future days. He should plan certain investments or provision that may endure safely for many years, yet will be available when the time arrives which he has so wisely anticipated.
Increase Thy Ability to Earn
A man must set goals and work to achieve them. These goals should not only be to advance in one's career or one's position, but also to become wiser and more knowledgeable. Further, if a man respects himself, he must do the following:
- Pay his debts with all promptness in his power not purchasing that for which he is unable to pay.
- He must take care of his family that they may think and speak well of him.
- He must make a will in case God calls him, so a proper and honorable division of his property is accomplished.
- He must have compassion upon those who are injured and smitten by misfortune and aid them within reasonable limits; do deeds of thoughtfulness to those dear to him.
"Cultivate thy own powers, to study and become wiser, to become more skillful, to so act as to respect thyself. Thereby shalt thou acquire confidence in thyself to achieve thy carefully considered desires."
And there you have it. Isn’t this really what modern day financial planning is all about? A little common sense, a little wisdom, and a little more discipline – that’s the hard part for most, and it really does not need to be. Having a good plan and a good advisor to show you the way is most of the battle. The rest, as true of most things in life, is up to you.
Anthony Caruso, CPA has practiced as a certified public accountant and investment advisor for over 30 years. Caruso and Company, P.A. is a Registered Investment Advisor offering fee based money management, tax and financial planning. Information contained above is not intended to be a recommendation to buy or sell any specific investments, or take specific tax actions and individuals should consult with their advisors for appropriate advice relating to their individual circumstances.