If I were a wealthy man

If we define wealth as ‘the ability to live independently from your own resources’, then everyone ought to be interested in developing a ‘wealth’ plan. The modern era, however, has created a rather different mindset, which is wreaking havoc with government finances across the western world.

The US example

The present American welfare system evolved during a time of unprecedented prosperity in the immediate aftermath of World War Two. Manufacturing and exports were buoyant, as many competitor economies had been destroyed and it was felt there would always be enough money to pay for all society’s welfare needs. 

The State will provide

Fifty years on from President Kennedy’s inaugural speech (“Ask not what your country can do for you”), many people today in the US and beyond have come to expect that the State will provide. A huge debate is raging currently across the Atlantic between right-wing politicians focusing on tax reductions and left-wing politicians focusing on welfare benefits, referred to as ‘entitlements’. The harsh reality is that an ‘entitlement’ mentality is likely to lead to unrealistic expectations. Sooner or later, both European and American governments need to inform their electorate that they must now work towards financial independence, as the State can no long afford to provide the financial safety nets they have become accustomed to.

The Richest Man in Babylon

The Richest Man in Babylon is a book that relates a series of short stories based on events from 5,000 years ago. The parables it contains show that the fundamental principles of personal wealth creation haven’t changed since ancient times. The book, written in 1926 by George Clason, summarises the seven steps for acquiring and retaining wealth:

1) Save regularly

2) Invest your savings

3) Live within your means

4) Insure your assets

5) Own your own home

6) Insure your income

7) Increase your earnings potential

There is a fascinating section in this book containing an exchange of letters between a university professor and an archaeologist during the 1930s.

The professor had been asked to translate 5,000-year-old clay tablet inscriptions. He describes his astonishment at discovering that the information contained within the tablets relates not to Arabian Nights-type stories but rather to the methods used by an ancient Babylonian to overcome his financial difficulties. The professor goes on to describe how he covertly followed these principles himself. Covertly, as he was very embarrassed that in an effort to keep up appearances, he had been living beyond his means for years and his financial situation had become increasingly desperate. 
The professor concludes the series of letters by stating that an important message “has risen out of the ruins of Babylon just as true and just as vital as the day it was buried”.
He also reveals that by following these ancient principles he had dramatically improved his finances. A key to this turnaround was a commitment to regular savings, even though he had serious debts to deal with at the time.

The pay yourself principle

Every month you make payments to all sorts of organisations but how much do you pay to yourself? A guiding principle of money management is to make the most efficient use of your income and capital, and if you don’t have sufficient capital, the most effective way to acquire it is through regular savings.
A main theme emanating from the Richest Man in Babylon is: ‘A tenth of all I earn is mine to keep.’ This principle is in contrast to the view ‘Why should I deprive myself of the things I can afford?’ However, developing a reserve of capital means funds are available when they are needed most.

The eighth wonder

The eighth wonder of the world has to be compound interest. Even relatively modest sums invested wisely are capable of generating significant sums over decades. Albert Einstein called it one of the greatest mathematical concepts of our time.