7 Cures For a Lean Purse, or What Can We Learn from a Century-Old Book
"The Richest Man in Babylon" is invariably popular among financial educators. That’s why we decided to check whether the teachings of the book completed almost a century ago are still relevant.
Klaudia Sibielak | Personal finance | 4. February 2022
The book "The Richest Man in Babylon" is a series of pamphlets that was first published in 1926. It sought to teach people how they could build wealth. And while one might think the amount of time that has passed since then has made its message less relevant, nothing could be further from the truth. For it turns out that certain realities have remained the same for millennia. George S. Clason moved the plot of his parables back several centuries and set them in ancient Babylonia.
For those who feel that the principles of that time’s finance cannot reflect those of today, and for those who wish to brush up on the basics of personal finance management, we bring a brief summary of our favorite parable from the collection. The third story in the book, known as "Seven Cures For a Lean Purse," presents the advice that Arkad, the richest of the wealthy inhabitants of Babylon, gives to the assembled disciples who want to improve their financial situation. What is this advice?
1. Start thy purse to fattening
In other words, save. No matter how much you earn – spending your entire paycheck (and even more than you earn) is always possible. The rich sage in the parable, therefore, suggests putting away every tenth of your income. This portion is significant enough to make a real difference in the long run but sufficiently small not to make you feel it in your everyday life. We advise a similar strategy. No matter how much you earn, save at least 10% of this amount. It would be best to set up a separate savings account for this purpose and transfer a certain part of your salary to it. Admittedly, it will not bring you gold mountains by itself, but it will enable separating your savings from the current spending budget and leaving the amount set aside intact.
At Finax, we understand the philosophy of the sage of Babylonia well. This is perfectly illustrated by the chart above, which we often use when explaining the basics of sound finance.
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2. Control thy expenditures
The sad truth is that we will never be able to satisfy all our cravings. As our income grows, more and more cravings will arise. So, it's worth learning to distinguish between these cravings and truly necessary expenses. That doesn’t mean we should give up on all the things that provide us with pleasure, although they do not satisfy any urgent need. However, it is important to do it consciously, skillfully weighing the potential benefits that money can grant us by spending it now against ones generated by putting it aside for later. It is also worth taking a closer look at your daily expenses in a broader scope - even those that seem necessary. You may find out they can easily be reduced. For inspiration, check out our article on 10 tips for reducing expenses.
3. Make thy gold multiply
If you've followed Arkad’s previous advice, you've probably already managed to put away a certain amount of money. However, without further steps, only very few can accumulate capital allowing them to live a prosperous life. To achieve this, investing is almost a prerequisite. Every euro should work for itself and earn you returns. As the inflation rate of all CEE countries exceeded 5% in December 2021, this point becomes especially important – otherwise, you will watch the value of your saved cash decline day by day.
How does inflation eat into the real value of our money? Let's see how the theoretical (based on historical, modeled results) value of the most popular Finax portfolio (70% stocks) changes with the level of inflation:
4. Guard thy treasures from loss
The sage Arcadian warns, however, that while it is necessary to invest, it should be done with caution. He points out that it is worth "trusting in the wisdom of those who can invest profitably". The chance for astronomical profits always comes at a price: a high probability of loss. Hence, don’t let yourself get fooled by tempting prospects of quick profits. Instead, you should consciously minimize the risk and take care of the safety of your funds. Look at our website and see how we do it at Finax.
5. Make of thy dwelling a profitable investment
The fifth piece of rich sage’s advice is to buy and own the roof over your head – even if it involves financing the purchase with borrowed funds. Arkad points out that a loan can be as much as the rent you pay to a landlord on a rental property, but the difference is that at the end of the repayment period, you will eventually own your house or apartment. The difference is that at the end of the repayment period, you will own your house or apartment and your cost of living will drop significantly, allowing you to spend more of your earnings on investments and leisure activities. Do we consider Arkad to be right in asserting that buying is more profitable than renting? Read the article on our blog and check it yourself.
6. Ensure a future income
As much as we like to think that old age is still a long way off, it's inevitable for all of us. The earlier we take care of our financial future, the better. At Finax, we are constantly trying to raise awareness of the importance of this issue and how small efforts, if made early enough, can be enough to secure your old age. This is how the magic of compound interest works, as it generously rewards investors for their patience, as in each successive period, not only the original amount invested but also the interest earned so far generates a profit.
Let's face the truth. The state pension system can’t be relied upon. Therefore, we've prepared a dedicated Retirement investment goal for you. And this is what Arkad points out in his sixth point, advising you to take care of your and your family's future in advance.
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7. Increase thy ability to earn
Arkad's final "cure for a lean purse" is to simply earn more. How can this be achieved? Contrary to what you might first think, the rich man does not suggest taking on more responsibilities and working sixteen hours a day. Instead, he points to "nurturing one's potential, learning and acquiring wisdom and acting in a way that preserves self-respect" as the key to success. It's important to continually develop yourself - both in terms of your professional qualifications and your financial knowledge and skills. If you don't know how to get started, check out our blog or YouTube channel. There you can find a lot of interesting materials, which have something to teach both beginners and experienced.
It seems that if the sage from Babylonia lived a few thousand years later, he could become our client ;) We hope that this short entry managed to encourage you to read the whole collection and get to know the wisdom contained in it.