Musing 9: The Richest man in Babylon- II

THE RICHEST MAN IN BABYLON- II

Good morning and cheery Sunday greetings to all the readers. We will today move ahead with our exploration of the wonderful classic, “The Richest Man in Babylon” by George S. Clason. I had covered the first five tenets of the book in last week's musing leaving the balance five for today. Let's begin by first recapitulating the last week's tenets.

1.      Pay Yourself First.

2.      Put the saved money to work.

3.   Go for prudent financial advice which includes your own financial education.

4.      Protection of, your capital and your life, family and assets.

5.      Balance your wants and needs.

          I will not labor on to discuss these five tenets again today but will request you to refer back to last week’s post to refresh your memory. We begin today with the sixth tenet.

6.      Build Assets; Eschew Liabilities.

“Put each coin to laboring that it may reproduce its kind even as the flocks of the field and help bring to thee income, a stream of wealth that shall flow constantly into thy purse.”

          It is extremely important to understand the difference between an asset and a liability. I will cover this issue in a forthcoming post but suffice to know here is that an asset is the one that puts money in your pocket while a liability takes money out of your pocket. So your swanky new Smartphone costing Rs 25,000 is a liability but if you invest the same amount in a Mutual fund, it’s an asset.

          We must endeavor to build up as many assets as possible while keeping liabilities to the minimum.

7.      Build your Home.

"Therefore, do I recommend that every man own the roof that sheltereth him and his. Nor is it beyond the ability of any well-intentioned man to own his home."

          Clason recommends that a person should endeavor to build his home, even if he has to take a loan for the same. However, I have reservations about the validity of this concept today and shall cover the reasons in detail as we move along on the blog.

Taking a large home loan for a house in which one may stay after two to three decades and keep paying for its upkeep and maintenance all these years may not be the most prudent financial decision. Yes, one may get rental income out of it but finding a good tenant is rather difficult nowadays.

However, if one is sure to stay in the same house, then the investment is well worth it. It saves rental income, gives tax benefits and provides psychological protection. There is, however, an upper limit of mortgage for the house as is with other loans keeping one's take-home income in mind. More about this contentious and nebulous issue later in the blog.

8.      Wealth is acquired slowly.

"Wealth that comes quickly goeth the same way."The wealth that stayeth to give enjoyment and satisfaction to its owner comes gradually because it is a child born of knowledge and persistent purpose."

          The quick fix of stocks which will ostensibly grow ten-fold in next few months, a plot of land where massive development is due to begin - all insider information are invariably wrong. Don't fall for these. Wealth building is a marathon and not a sprint. The magic of compounding discussed earlier in the blog takes time to work.

          Select your investments wisely and watch them grow. Don’t uproot them when they are mere saplings, allow them to grow to large trees for they will provide you with both fruits and shade. Be patient with your wealth growth. Remember the tenet of protection- invest in financial instruments where your capital is not jeopardized chasing higher returns.

9.      Incur Debts Wisely

“Youth, never having had experience, cannot realize that hopeless debt is like a deep pit into which one may descend quickly and where one may struggle vainly for many days. It is a pit of sorrow and regrets where the brightness of the sun is overcast and night is made unhappy by restless sleeping.”

          There are good debts and there are bad debts- wise is he who knows the difference between the two. I will cover the issue of debt management subsequently on the blog but suffice to say here is that any debt taken to acquire assets is a good debt while debt to buy liabilities is a bad debt.

          A home loan or a loan for a startup is a good debt while a personal loan or a credit card debt is bad. More about this important issue later.

10.    Develop Financial Wisdom.

“Cultivate thy own powers, to study and become wiser, to become more skillful, to so act as to respect thyself.”

          This nugget of wisdom is very close to my heart and the raison d’être for my blog. You must develop financial muscles along with physical ones. Like one devotes few minutes every day for physical fitness; devote few minutes towards financial fitness too.

          A few minutes of reading/listening about financial matters will incrementally build our financial muscle. Please don’t watch financial news channels though. They are there to entice you to trade in the stock market- the more you trade, the more profit you generate for others.

Clason says that if you offer gold and wisdom to a fool, he will ignore wisdom and take gold, which he will soon lose due to his foolishness.

“Without wisdom, gold is quickly lost by those who have it, but with wisdom, gold can be secured by those who have it not.”

          Start your reading and learning with good books- the current one is as good as any to begin. What this wisdom will do to you is to make you alive to the financial opportunities as they arise around you.

Next week we will explore another classic- Rich Dad Poor Dad by Robert Kiyosaki.

Have a lovely Sunday. As always, you have earned it.