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What is The Richest Man in Babylon about? What are the key financial principles for becoming wealthy, according to its author George Clason?
The Richest Man in Babylon by George S. Clason is a financial advice classic written in the 1920s. The financial principles in the book are delivered by the fictional character of Arkad, the richest man in Babylon, who imparts the secrets of wealth to a group of local citizens who want to learn how to stop struggling financially and become rich.
Below is a brief overview of Clason’s advice.
The Richest Man in Babylon by George S. Clason
In his book The Richest Man in Babylon, George Clason presents timeless principles for managing your money in the form of “Seven Cures for a Lean Purse” (how to acquire wealth) and “Five Laws of Gold” (how to preserve and grow wealth). The principles are illustrated by parables set thousands of years ago in the wealthy city of Babylon, where the basic ideas of finance were born.
Here is a quick summary of the key points of his advice.
Arkad: The Richest Man in Babylon
Arkad, who started his working life as a lowly scribe in Babylon’s hall of records, noticed that the scribes who produced more work received more pay. He worked to increase his speed and received more money himself.
Upon the advice of a money lender, Arkad began saving 10% of everything he earned. To his surprise, he didn’t miss having it available for spending. He created a budget and lived within his means. At first, he spent the interest earned on his savings—however, he later learned to put his money to work by earning more interest on his interest. He also looked for ways to invest. Except for the mistake of investing in the jewels that turned out to be fake, he increased his wealth gradually through wise investments.
Arkad became wealthy because he learned to:
- Pay himself
- Live below his means
- Put his money to work
- Get competent financial advice
The money lender put Arkad in charge of managing his land and other wealth. Arkad increased their value and eventually inherited a share of the estate. Thus, he became “the richest man in Babylon.”
Seven Principles for Acquiring Wealth
Arkad explains to the group of Babylon citizens who questioned him that he became wealthy by implementing “Seven Cures for a Lean Purse.” The cures or principles for acquiring wealth are:
1) Pay yourself first. Save 10 percent of everything you earn, even if you’re in debt, to start building wealth. You’ll find that you get along just fine on 90% of what you earn and in 10 years, you’ll have saved a year’s earnings. Although you’ll be tempted to spend your savings at times, remember that spending brings only temporary gratification, while saving builds long-term wealth and security. And the person who saves part of his earnings will find it easier to acquire more money.
2) Control your spending. After you save a tenth of your earnings, determine your necessities and create a budget to cover them, plus a few worthwhile things you enjoy, not exceeding the remaining 90% of your income. Live within your means or, better yet, live below your means. Should your earnings increase, beware of lifestyle inflation, which is the tendency to increase your spending as your income increases. What you define as necessary will always expand to keep pace with your income unless you resist.
3) Put your money to work. The money you accumulate from your earnings is just a starting point. You need to put it to work by investing it or multiplying it by taking advantage of compounding interest over time. By investing your money, you create a continuing income stream—your money keeps working for you whether you are working, traveling, or retired.
4) Protect your principal from loss. The first thing to do with money you’ve saved is to protect it. Invest it only where your principal is safe and you can get it back if you want to and where you’ll get a fair interest rate. Beware of these ways of losing money you’ve saved:
- Spending it on wants rather than needs.
- Loaning it to family and friends who don’t repay you.
- Making an investment that you haven’t researched and that fails to pay off.
- Succumbing to a bogus get-rich-quick scheme.
5) Own your home. Make your home a profitable investment. By investing your money in buying a home and paying it off over time, you’re turning an expense into an asset. Once you own it, you’ll reduce your cost of living and you can sell it at a profit if you choose. (Shortform note: This principle is debatable today. Depending on factors such as home prices, interest rates, appreciation, and your income/job stability, owning your home may not make sense for you.)
6) Plan for retirement. Invest for the future for two reasons: 1) if you die prematurely, your family will be provided for and 2) when you’re no longer able to work, you’ll have an income.
Ways to do this include buying real estate and land that will increase in value and can be sold later, or making other investments. (Shortform note: Further options today include investment in stocks and bonds, pension/social security, and various forms of insurance.)
7) Increase your earning ability. Increasing your income doesn’t mean asking for a raise. That makes you dependent on a boss. Instead, take control by investing in yourself. Improve your skills or learn new skills through classes and training. The more you learn, the more valuable you are and the more you might earn. Also, set goals and work to improve your performance—people who do more and better quality work get paid more.
Five Laws of Gold
Arkad presented “Five Laws of Gold” to his son Nomasir, along with a bag of gold and instructions to return in ten years to report on his accomplishments. (Shortform note: The Laws of Gold, which focus on building wealth, overlap or repeat the seven principles for acquiring wealth.)
The Laws of Gold or of growing your wealth are:
1) You acquire gold by saving regularly (at least a tenth of your earnings) to build wealth for a secure future.
2) Gold grows when you invest it wisely, along with the interest you receive on it.
3) Your gold will stick around and grow if you follow competent advice from financial experts.
4) You’ll lose your gold if you follow bad advice or rely solely on your own judgment when you lack experience.
5) You’ll also lose your gold if you succumb to the allure of get-rich-quick schemes or risky investments that promise huge payoffs.
Nomasir lost the gold his father had given him by betting on horses and investing in a foolish business venture. When he hit rock bottom, he read the laws of gold and determined to do better. He went to work managing a slave crew, saved 10% of his earnings, and eventually invested in several successful business opportunities, based on competent advice. After ten years, Nomasir was able not only to recoup his father’s money, but also to triple it.
Three parables in the book further illustrate how to manage your money:
Invest wisely: A spear maker’s sister urged him to loan her husband money to start a store. But despite wanting to help his sister, the spear maker concluded it would be a poor investment because his brother-in-law had no experience in running a store or any other business.
Protect yourself against the unexpected: The city of Babylon protected itself with massive walls and a moat that, in one instance, withstood a siege of more than three weeks. You can ensure your personal security by saving, investing, and buying insurance.
Find a way: When you have problems, you need need to fix them rather than letting them define your life. When Dabasir was a young man, he fell into debt, became a robber, and ended up a slave. However, through determination he overcame his problems.
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Here's what you'll find in our full The Richest Man in Babylon summary :
- A compilation of financial advice pamphlets distributed by banks and insurance companies in the 1920s
- Timeless principles for managing your money
- An entertaining story written in the form of three parables