Saving, Investing. Lessons to learn from the wealthiest man in Babylon

The Richest Man in Babylon was the title of a book on investing and personal finance written in 1926 by George S. Clason. Mr. Clason penned down what he believed to be timeless lessons on personal finance, saving and investing in the form of parables depicting ancient Babylon.

Mr. Clason, who served in the military during the Spanish-American war and later started an atlas firm which went bankrupt during the great depression, is a testament to the book’s message that anyone could become wealthy through a series of carefully calculated decisions.

Over a century later, we find his lessons, though seemingly antediluvian, continue to ring true as a prudent way to become wealthy.

The main principles from the countless lessons cited in the book critical to the modern investor lie in increasing one’s income streams, forestalling excessive spending, and the wisdom to multiply wealth through prudent investing.

Set of rules

According to Mr. Clason, a small set of rules would propel an individual to financial freedom if followed. Saving is the first step to building wealth. One can only become wealthy by storing some of what they earn. As an extension to this lesson, he states it is vital an individual ventures to save at least 1/10th of income. However, today, in a world marked by arguably lesser uncertainty and cheaper cost of goods, it is safe to say an individual can comfortably save much more than this amount.

As an extension of the first rule, Mr. Clason states controlling expenditure is essential. It is important to note he takes a nuanced stance by suggesting you should also not overstretch to save as this could lead to mental and physical strain. It is important to pay yourself, shifting the narrative from one that proposes saving is taking away that money from oneself (by denying oneself the commensurate consumption).

Most middle-class families notice today “necessary expenses” grow along with income. However, it is essential to avoid this trap of rise in consumption and income. He then says you must make your gold or, in our case, rupees multiply. It is crucial to raise active income streams and, equally, if not more important, to set up passive income streams.

To this end, he warns against investing in things you do not understand. He states if an investment sounds too good to be true, it probably is. He mirrors the sentiments of value investor Benjamin Graham, saying it is imperative to have modest expectations for returns on investment.

Risk, losses

By seeking exceptional performance, the investor opens themselves to risk and losses. By passively indexing in the Nifty50 or its foreign counterparts, the investor avoids making risky choices and restricts himself to reasonable returns, often outperforming most other modes of investment. Mr. Clason states one should refrain from consulting a bricklayer (one unfamiliar with the subject) on the investment to buy. This lesson remains extremely important to adhere to in a world dominated by social media and financial misinformation.

Furthermore, we see he argues for the importance of life insurance. Along with his advice on life insurance, we see contemporary investors can also buy health insurance. Therefore, it makes sense for individuals also to ensure they and their families are covered by health cover.

Finally, he rounds out his lessons for investors by saying “no man respects himself if he does not repay his debts”. Thus, an individual must work towards becoming debt-free before becoming financially independent. He advises those in debt to save 10% of income, spend 20% of income on repayment and live from the rest of it.

The parables emphasise the wisdom of raising income, controlling expenses, and investing wisely. Saving a tenth of income is foundational, adapting to contemporary times where individuals might save more. Expense control, without self-deprivation, is crucial to avoid the common pitfall of expenses rising with income.

He champions creating and multiplying wealth by cultivating active and passive income streams.

Red lines

He cautions against obscure investments, advocating informed, moderate expectations and avoiding advice from non-experts. As a safeguard, insurance and the moral imperative of debt repayment outline a path to financial independence. These enduring principles guide modern financial behaviour, proving their timeless relevance.

(Anand Srinivasan is a consultant and Sashwath Swaminathan a research assistant at Aionion Investment Services)

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