The Richest Man in Babylon

I recently borrowed an audio book from the library titled "The Richest Man in Babylon". I am currently expanding my research from investment to include financial planning as well. I am looking into financial planning skills as I believe that investment and financial planning (allocation of one's capital to increase productivity and security) go hand in hand. As such, I will seek to provide more research on these two areas of both investment as well as financial planning in my future posts.

In this audio book, I managed to pick up some important financial planning skills. This book presents an interesting look into old financial planning skills from ancient past of Babylon. Of course, the characters and story being told are fictitious. However, the lessons to be learnt are applicable to modern times. It told of a richest man in Babylon who gave a tablet containing important rules on money management to his son. The man also gave some gold to his son and sent him off to the outside world to test his ability to manage and grow the gold.

In two misadventures, the son nearly lost the entire gold given him by his father. The first misadventure spoke of the son believing in some travellers who told him to put a portion of his gold into a sure win gamble of a horse race. The son lost the gold put into the bet and only in the end found out the travellers were con men who were in cahoots with the few other competitors who bet against this son in the horse race. The son found out this from other travellers only when the travellers who swindled his money had left him.

In another second misadventure, the son heard from a travelling merchant that his merchant friend had a business selling pots and wares which is worth investing in. This travelling merchant managed to convince the son to buy over the business which he persuaded the son that it is a good investment on his gold and he would make many times returns over his invested gold. After the son bought over the business did he realise that pots and wares were difficult to sell and he ended up with lots of junk pots and wares that were of little value and use.

After losing almost his entire gold did the son began to look at the tablet that his rich father had gave him. He began to study carefully the words of wisdom carved on the tablet by his father. It contained five important money management rules.

Rule number one said that "one should seek to invest wisely not less than one-tenth of his regular income consistently for compound interest to work".
Rule number two said that "one should always seek profitable employment (investment) for his money in order to grow it".
Rule number three said that "one should seek the advice of wise man who manages and invests money prudently in order to learn from them, and one should also be cautious to never place his money in risky wager or gamble ".
Rule number four said that "one should never make investments that he does not understand or is unfamiliar with so as to protect his principal capital." 
Rule number five said that "one should never be caught by greed to make investments that promise returns that are far beyond any logical thought and should beware of tricksters who promise returns on investments that are unbelievable."

After the son has read the rules carefully and given much thought to them, he realised that only a person that has the right attitude towards money management will be able to grow his money prudently. It does not matter whether how much money he began with. To a prudent person, even a small sum of money can compound into a large amount given the right money management attitudes. To a non-prudent person, even a large sum can be lost through his hands resulting in nothing in the end. As such, the son regretted that he should have read the money management rules his rich father gave him first before even venturing his given money into any investments. He realised that it is the right attitudes in money mangement that really matters and not how much money he begans with.

With regards to the above five rules, it can be summarised into simple take home messages. We are not talking about being greedy in terms of accumulating and hoarding wealth. We are taking about managing our finances prudently so as to make meaningful growth in our savings and in turn using our money or money management skills to help others. Of course, helping others may not be restricted to only monetary means. As in one of my earlier post, one needs to look beyond just wealth as it is a perishable item that one cannot bring to the grave anyway.

Simple take home messages:-
(1) Invest as much dispensable income (portion of income one does not need in short-term) and returns from existing investments regularly to make meaningful growth of one's investments by compounding.
(2) Never gamble one's money. There is no basis for a sound foundation of returns by gambling.
(3) Be humble to learn from wise prudent people who manage their investments and finances well. 
(4) To protect one's capital, one should never invest in any investment that one does not understand the workings of the investment.
(5) One should be realistic about the returns one is getting from an investment. If an investment promises a return too good to be true, think carefully for it may really be "fleeting sweet promise". Invest therefore on a sound foundation of investment knowledge and not seek short-cuts.

To listen is always easy, but it is the discipline and perserverance that will allow only the doer instead of listener to reach his financial goals.