Somewhere in your local bookstore’s personal finance section, hidden quietly between the glamorous Suze Orman and Dave Ramsey hardcover books, you will find a slim, unassuming little volume called The Richest Man in Babylon.
It is frequently cited by personal finance bloggers and individual investors as a “must-read” for beginners, so last week I decided to finally check it out for myself.
It really is a slim book — I read the whole thing in only a couple of hours. The book is composed of a series of loosely connected fictional parables involving various characters in the ancient wealthy city of Babylon — the birthplace of currency, promissory notes and formal business contracts, according to the book.
Although it was written in the 1920s, and presumably had some value for those weathering the Depression in the decade that followed, it’s still quite relevant. Sure, some parts are a bit cheesy (the letters from a fictional British archaeologist toward the end are absurd), but for the most part the stories are engaging and easy to digest.
Reading it certainly can’t hurt — and it may just turn you into a more disciplined investor. The book relates the wealth-building secrets of Arkad, a character known as “the richest man in Babylon.” From humble beginnings, Arkad eventually grasps the power of compound interest combined with taking on prudent investment risks. Over time, he accumulates much gold, eventually becoming the city-state’s wealthiest citizen — so wealthy, in fact, that the king summons him in hard times for advice on how to teach other citizens the same wealth-building strategies.
Arkad is a believer in putting away at least 10% of everything you earn. “A part of all I earn is mine to keep,” as Arkad puts it. Get a paycheck for $100, and $10 should immediately go into a 401(k) or high-yield savings account — the modern equivalents of Babylon’s interest-paying “gold lenders.”
The book refers to interest as “rental” which is an interesting way to look at it. When you make a loan to someone, you are essentially renting your money out to them. When you receive a loan, you are using another’s money on a rental basis, so it makes sense to pay a rental fee — interest — over time. In the current national frame of mind where we demonize bankers and credit card issuers, it is easy to forget that borrowing and lending are clearly defined relationships. You don’t go into a relationship without fully weighing the benefits and drawbacks, and, it should go without saying, you should be able to pay back the amount owed. When you rent a car, you pay a rental fee for the privilege of using the car, but you are also expected to return the car itself.
The Richest Man in Babylon is brilliant at boiling down complex concepts like lending and compound interest into easy-to-understand principles. It also emphasizes the importance of living below one’s means and making money work for you. If you don’t modify your spending habits, you may wind up a slave to your possessions.
Finally, the other thing I liked about this book was its argument that hard work is an important, even necessary, activity for those who wish to develop great wealth. Leisure is overrated. In an age where everyone wishes they were a Power Ball winner or a trust fund baby, it is a refreshing piece of advice.
Also, if you’re a female reader, try not to be put off by the fact that the book reads as though it was written exclusively for men. That’s the 1920s for you, I suppose. Or ancient Babylon. What it lacks in political correctness or general sensitivity, it makes up for in timeless, genderless advice.
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