Two major books were published in 1926 that rocked our world: Winnie-the-Pooh and The Richest Man in Babylon.
Although "stuffed with fluff," Pooh Bear might have had a larger impact on American pop culture, but it’s The Richest Man in Babylon that has made a massive financial impact on untold millions of readers, myself included, over the past 89 years.
Written by George Samuel Clason as a collection of parables, The Richest Man in Babylon is a unique book that lacks a central storyline and a reccurring cast of characters. Instead, the book is a collection of stories about one thing: building wealth. The book seeks to answer the question: If wealthy people have the same 24 hours in a day, and work just as hard as others, how do they acquire such incredible wealth?
Can wealth creation be taught? According to Clason, yes!
In one of his parables, Clason tells the tale of Arkad, a merchant and the richest man in the city of Babylon. The king of Babylon asks Arkad to share his wisdom with 100 students in an effort to increase the collective wealth of the population.
You see, the same problem existed in ancient Babylon that existed in 1926 and still exists today: most people are broke. Clason refers to this "broke" condition as having a "lean purse." To cure the problem of having a lean purse, Clason, through the story of Arkad, offers the following seven lessons:
1. Start thy purse to fattening.
Arkad, the richest man in Babylon, asks a very simple math question to his students: What would happen if, every day, you added 10 coins to your purse but only spent nine? The obvious answer, of course, is that wealth would increase by one coin each day.
Therefore, the first step in building great wealth is to simply set aside one coin each day. Specifically, Arkad instructs his students to set aside 10 percent of their earned income, which I think is a great place for anyone to start.
2. Control thy expenditures.
Of course, many people read cure number one above and say, “but I don’t make enough money to cover all my bills!” Clason, through his character Arkad, covers this next.
The second step in building great wealth is learning to spend less than you make. Have you ever heard a friend or colleague use the phrase “there is more month than money"? Or, have you yourself ever needed to put gas, groceries or something else on a credit card because you ran out of cash? It happens more often than most would like to admit.
Americans, especially, have trouble with this concept, which has given rise to a huge debt problem. According to the Federal Reserve’s G.19 report on consumer credit from 2013, the total U.S. outstanding revolving debt was $856.5 billion dollars in 2013. That's a lot of consumer debt for a nation of 300 million people.
If you want to start building wealth, get on a budget, start spending less than you make and set aside that one coin each day. As Clason writes, "That what each of us calls our 'necessary expenses' will always grow to equal our incomes unless we protest to the contrary."
3. Make thy gold multiply.
Now we get to the fun stuff! The third lesson from Clason for building wealth is putting your savings to work to earn more money. This can be done in a variety of investments, from stocks to real estate investing to gold.
Or, perhaps more fitting for this audience today, reinvesting your profits back into your business.
4. Guard thy treasures from loss.
You can build up a lot of wealth through the careful investment of your money, but it’s far easier to lose money than to gain it.
Therefore, the fourth cure for a lean purse is to guard your treasure from loss through careful vetting of any investment. In other words: don't be stupid! If you are lending money, make sure there is significant collateral for your loan. Lending money to your brother-in-law to start his new restaurant is a recipe for financial failure.
As Arkad says, "Guard thy treasure from loss by investing only where thy principal is safe, where it may be reclaimed if desirable, and where thou will not fail to collect a fair rental. Consult with wise men. Secure the advice of those experienced in the profitable handling of gold. Let their wisdom protect thy treasure from unsafe investments."
5. Make of thy dwelling a profitable investment.
Quit throwing money away on rent! At least that’s the lesson Clason, through Arkad, shares with us in the fifth cure for a lean purse.
As a real estate guy myself, I couldn’t agree more. However, as I discussed in a recent column, "Is Real Estate a Good Investment," real estate is only a good investment if you are smart about what you are doing with it. Simply buying property, with no regard to strategy, is a quick way to lose your investment.
Of course, the real estate market does go up and down. People do lose money in real estate. But historically, real estate has always climbed higher and higher with inflation. In fact, while most people fear inflation, as a real estate owner I look forward to it. Let inflation drive the cost of living, because my mortgage payments are fixed for the next 30 years. Try asking your landlord for that!
6. Insure a future income.
As you age, your ability to earn income will drop. You won’t be as ambitious, your health will begin to fail and there is a very real possibility that you’ll someday die. (Sorry to be the one to break it to you.)
Therefore, the sixth cure for a lean purse is to plan ahead for the day that you will no longer be able to work. Part of your investments should be long term in nature, designed to carry you all the way to death so you will not be a burden on your family. Futhermore, in the sad event that you pass away prematurely, be sure to have good life insurance, so your family will not need to bear the sadness of your passing alongside the realization that they are broke.
7. Increase thy ability to earn.
No matter what business you are in, you have the ability to increase your ability to earn. This is the final lesson Arkad, the richest man in Babylon, shared with his students. It is also one of the most important lessons for entrepreneurs today.
If you are employed at a day job, why do other employees make more money than you? If you are a full-time entrepreneur, why do other business owner’s make more money? Is it because they were born with some special skill? Or is it because they increased their own skills so they are worth more? I would argue the latter.
If you want to increase your income, you must increase your ability to earn. If you want to increase your ability to earn, you must increase your value to society. Learn a new skill, do the work no one else is willing to do and say yes to more of the right things and no to more of the wrong things. Focus on the few tasks that bring the most value to the world and outsource the rest. (For more on this, read "Want to Make $1,000 or More Per Hour?")
The seven “cures for a lean purse” may be nearly 90 years old, but the principles are just as important today as they were back then.
Wealth creation is not a mystery. It is not luck and it is not a secret. It is a repeatable process, something anyone can -- and should -- learn. The seven cures above will help you greatly on your journey to create long-lasting, mind-blowing wealth.
So are you ready to cure your lean purse?
Related: 3 Must-Have Views Toward Money