The Babylon System for Financial Success (Part 2)

Highlights

  • The Richest Man in Babylon is a compilation of parables about a camel dealer in ancient Babylon, and the principles that enabled him to become the city’s richest man.
  • In this post, we continue our discussion on the insights the book provides to create, grow, and protect wealth.

“Wealth, like a tree, grows from a tiny seed.  The first copper you save is the seed from which your tree of wealth shall grow.  The sooner you plant that seed the sooner shall the tree grow.  And the more faithfully you nourish and water that tree with consistent savings, the sooner may you bask in contentment beneath its shade.”

Arkad, in The Richest Man in Babylon, by George S. Clason

A couple of weeks ago, I posted part 1 of my summary of what I regard as the six most valuable lessons to be learned from “The Richest Man in Babylon.  In this post I complete that review.  I’ve chosen to refer to these six lessons as The Babylon System for Financial Success.

As I mentioned in my earlier post, “The Richest Man in Babylon” is a compilation of short fictional stories.  The lead character is a poor scribe named Arkad, who lived in ancient Babylon.  The stories share common sense advice on how to build and manage wealth.  This advice remains as relevant today as they were when the stories were first published in 1926 as a series of pamphlets distributed by banks and other financial institutions.

The first three components of The Babylon System for Financial Success, which are discussed here, are:

  • “A part of all you make is yours to keep.” Have no less than 10% of each paycheck deposited into an employer sponsored retirement plan or a self-directed IRA.
  • “Learn to make your earnings work for you”. Learn how to invest wisely, and to recognize bad investment advice when it comes your way.  In addition, learn about the power of compound interest, which Einstein supposedly referred to as the 8th wonder of the world.
  • “Gold slippeth away from the man who invests it in businesses or purposes with which he is not familiar”. Stay away from investment advisors that advocate vague “proprietary” investment strategies or secret “black-box” models. 

In this post I will cover three additional components of The Babylon System for Financial Success.

Lesson 4.  Seek the Counsel of Wise Men

“Advice is one thing that is freely given away, but watch that you take only that which is worth having.”

There is no shortage of investment gurus who freely dispense investment advice on the internet and over the airwaves on networks such as CNBC, Fox Business, and others.  Unfortunately, much of the time the advice given is misguided at best, and often intended to fatten their wallets rather than yours.

Motivations aside, history has demonstrated time and again that trying to outsmart the market is a fool’s game.  According to a recent Morningstar report you can find here, “only 23% of all active funds surpassed the average of their passive rivals over the 10-year period ended June 2019”.

Here is a partial list of what I recommend you look for when selecting a portfolio manager.

  1. Are they a fiduciary? Non-fiduciary advisors, such as some brokers and insurance agents, are only required to recommend “suitable investments,” which affords them the ability to make recommendations that put the advisor’s financial interests ahead of yours.  By comparison, a fiduciary advisor is legally obligated to make recommendations that put your interests first.
  1. How are they compensated? Advisors who are paid solely by fees that are tied to the value of your investments have far fewer conflicts of interest than advisors who receive commissions and other hidden forms of compensation.
  1. How much do they charge? High fees are a killer for a couple of reasons.  First, of course, there is the immediate out of pocket expense.  Second, every dollar taken out of the portfolio for fees is one less dollar left to compound and grow.  The positive impact of compounding on investment returns cannot be overstated.
  1. Are they independent? Independent investment advisors are not paid to peddle any one family of funds or the investment products of their employers.  In addition, independent advisors use independent custodians.  This means your investments are held by (and importantly, you receive monthly statements from) a financial institution that is independent of the advisor.
  1. What is the advisor’s investment philosophy? The key to successful investment success is not making good decisions, it is avoiding really bad ones.  The extensive research and market data that underlies sensible, rules-based investment strategies can provide the discipline and confidence needed to stay calm when others panic, and to act judiciously when others are driven by greed.  “Gold flees the man who would force it to impossible earnings or who followeth the alluring advice of tricksters and schemers ….

Lesson 5.  Increase Your Ability to Earn

“As a man perfecteth himself in his calling even so doth his ability to earn increase.” 

For most of us, our capacity to earn is our most valuable financial asset.  The best way to maximize that asset is to continually improve our ability to perform our job.  Ankar put it this way:

Always does the affairs of man change and improve because keen-minded men seek greater skill so they may better serve those upon whose patronage they depend.  Therefore, all men should be in the front rank of progress and not to stand still, lest they be left behind.”

For many professions, the best way to improve job skills is continued education.  Continued education can positively affect earning potential in two ways.  First, continuing education can lead to the qualifications and specialized knowledge needed to perform higher paying jobs.  Second, academic achievement is regarded by many employers and clients as an indication of a person’s abilities, diligence, self-motivation and, therefore, can create a pathway to higher pay. 

When Warren Buffet was asked what is the best investment a person can make, his response was, “Ultimately, there’s one investment that supersedes all others: Invest in yourself.  Nobody can take away what you’ve got in yourself, and everybody has potential they haven’t used yet.” 

Lesson 6.  Spend Your Earnings Carefully

“Confuse not thy necessary expenditures with thy desires.  Each of you together with your good families, have more desires than your earnings can gratify…. Budget thy expenses that thou mayest have coins to pay for necessities (and) to pay for thy enjoyments.”

Human nature being what it is, most of us will spend more money if we have more money to spend.  Behavioral economists refer to this tendency as “lifestyle inflation,” which arises from the mistaken idea that more “stuff” equals greater happiness. In Arkad’s words: “What each of us calls our ‘necessary expenses’ will always grow to equal our incomes unless we protest to the contrary.”

Steps you can take to avoid the financially devastating effects of lifestyle inflation include:

  • Prepare a budget and stick to it, even as your income grows.
  • Pay down debt. Rather than spending your increased income, use it to pay for what you have already bought.
  • Avoid expenditures that are a persistent drain on your finances, such as a bigger house, a more expensive car, etc. Instead, favor experiences that are typically one-time expenses that can create lasting memories.

In a recent blog post, Nick Maggiulli demonstrates that frugality will not, in and of itself, result in financial success.  Controlling expenses is essential.  That said, Arkad also recommends you enjoy the product of your success – within reason: “Build for yourself a mountain of gold first, then you can enjoy as many banquets as you wish without worry.”

One important aspect of financial success not considered in The Richest Man in Babylon is charity.  I will be discuss that subject in an upcoming blog post.

Thank you for reading,

Mr. Market Commentator

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