Learn what the 5 Laws of Gold say about your own finances. We also discuss the lean purse, and 7 cures to fix it (with real life examples).
About a year ago, I devoured the 5 laws of gold after picking up a used copy of The Richest Man in Babylon at our local community center's book sale.
Talk about a great example of purchase cost not equaling value — I only paid $0.50 for a book that will continue to guide my financial decisions for the rest of my life.
One of the most striking things about this book is its timeless advice on finances.
Even though the author wrote this book in 1926 and placed the story and characters in the ancient civilization of Babylon, it turns out that 6,000 years ago, people still grappled with the same financial issues as people do people today.
This book will be around forever, and will be passed out over and over again because it has taken what appears to be an extremely complex subject (money and the creation of wealth) and opens up a dialogue any of us could be a part of between a rich man and his willing pupils: a chariot builder and a musician.
We may not all comprehend the complex and integrated global financial system, the reason behind the Lehman Brothers meltdown, or the housing crisis, but we can all comprehend the rudimentary principles of finances that are the core to this book and really the core to any financial discussion. Who doesn’t feel dissatisfaction with living paycheck-to-paycheck? What economy does not have a small percentage of rich people versus a much larger percentage of those with meager means? And who wouldn’t gripe about working their lives away without ever being able to get ahead?
The solution to these issues are just as simple and clear as they were all along, though we all have a habit of muddying up the waters. Earn money, spend less money than you earn, save the rest of your income and make it grow.
There are many great chapters in this book, but the one I want to focus on first details the five laws of gold, or the “save the rest of your income and make it grow” financial principle.
The Five Laws of Gold and Those Who have Disobeyed
There are people out there who make millions and billions of dollars each year. I don’t know about you, but whenever I stumble across their earnings in the press or in an article I am reading and then read about financial devastations they go through just years later, I am always baffled. I always think, give me just one million dollars and I’ll make it last the rest of my life plus leave an inheritance behind. How on earth could it matter if they made a few bad investments or made a few lavish purchases when they are bringing in so much money? As my husband once said in an article here, you cannot outearn your stupidity; that goes for even the billionaires among us. The only difference between the millionaires and the rest of us when it comes to the five laws of gold is the wealthier individuals tend to have thriving businesses and other non-financial assets that they can continue to use for financial gain which allows them to make a quicker financial rebound than the average Joe. But their financial pain will still be great.
Below are the five laws of Gold according to George S. Clason. I am going to cite instances where these laws were not followed by ‘rich’ people and the financial devastation that followed to show you that no one is immune to these laws—not those with meager means, nor those who are rich.
1. Gold Loves those Who Save 10%
“Gold cometh gladly and in increasing quantity to any man who will put by not less than one-tenth of his earnings to create an estate for his future and that of his family.”
One of the best things about making a large sum of money every year is that 10% of this is much more than 10% of what you and I make. Also, the more income you earn, the easier it is to put away savings as everyone needs to spend a certain amount of money on necessities and survival and above that is up to you. Yet many athletes who make unfathomably large amounts of money each year fail to put away 10% of their money for the future. Instead of their large incomes resulting in a financially secure future for when their bodies can no longer perform, athletes often declare bankruptcy after their contracts are up. Sports Illustrated reports that 78% of NFL players go bankrupt just two years after they retire and within 5 years of retirement, 60% of NBA players are broke. As an example, shortly after three-time NBA Championship winner Randy Brown was fired as the assistant coach of the Sacramento Kings he filed for Chapter 7 bankruptcy. One of the lots that were auctioned off was his three championship rings. Compared to his former glory days where he brought in an estimated $15 million in income during his career, the rings brought in just a measly $58,833. This is not even 1% of his previous income. Had he saved just 10% of his gross income over the years he would have had $1.5 million to fall back on. (Paul wanted me to include more well-known examples, but I think those are too easy).
2. Gold Likes to Multiply
“Gold laboreth diligently and contentedly for the wise owner who finds for it profitable employment, multiplying even as the flocks of field.”
Profitable employment for your money does not mean tying it up in ridiculously lavish purchases; it means spending money to earn money. The classic case of someone who spent money in their business without even breaking even is famed photographer and hard, passion-driven worker Annie Leibovitz who found herself $24 million in debt in 2009. She won a Lifetime Achievement Award, and is rumored to earn a day rate of around $250,000. Where did her money go? Unfortunately, it appears that her expenses for her craft and passion exceeded her pay. Instead of spending money in order to produce more money (through her art), she spent money for perfection and ended up in the red after many of her jobs. This type of business model will not multiply ones flocks, but rather throw someone into financial ruin.
Psst: you'll want to check out the other best financial books of all time.
3. Gold Loves a Cautious Owner
“Gold clingeth to the protection of the cautious owner who invests under the advice of men wise in its handling.”
Celebrities and athletes are in the habit of handing over their finances and trust to financial advisors. They probably don’t want to deal with excel sheets and accounts, and think that they are in more capable hands with someone who is an expert. In many cases, they are completely right. However, some have no hands in their own finances and get themselves into trouble by not participating. Kenneth Starr, financial advisor of many celebrities, reportedly stole $30 million during his reign. Uma Thurman lost $1 million to Starr, whom she had hired to pay her bills and do her taxes. Fortunately she realized what had happened and demanded her money back (which she was given). Sylvestor Stallone sued Kenneth Starr because he advised him to keep his money in the Planet Hollywood restaurant chain while telling others that this investment was going bankrupt. Stallone was said to have lost $10 million (though he later sued and settled out of court with Starr).
4. Gold Favors those Who Study Investments
“Gold slippeth away from the man who invests it in businesses or purposes with which he is not familiar or which are not approved by those skilled in its keep.”
Tori Spelling and Dean McDermott decided that they wanted to open up a bed and breakfast in Fallbrook, California. Tori decided to use part of her inheritance and sell off lots of her old belongings that were sitting in a storage facility in order to lease and renovate this inn (just how much money she invested is hotly debated). Tori and Dean made a reality television show out of this, and viewers watched as the two were given good advice over and over again from people who know the Bed and Breakfast business. Yet Tori and Dean trekked their own path, plowing lots of money into the renovations, as well as time and energy. Their interest waivered as they became new parents, and realized they were not making any money (of course we don’t know how much they made from the reality television show deal). After a couple of seasons they decided to call it quits and headed back out to Hollywood.
5. Gold and Get-Rich-Quick Schemes Don't Mix
“Gold flees the man who would force it to impossible earnings or who followeth the alluring advice of tricksters and schemers or who trusts it to his own inexperience and romantic desires in investment.”
There are people out there who offer investment returns that are way too good to be true. It works for awhile because of the ponzi-scheme setup, but then when the system blows up most of the people who invested with them collapse. This is the case with Met Pitcher Mike Pelfrey who had invested 99% of his assets with ponzi-schemer Robert Allen Stanford (he reported to the New York Post that 99% of his money was frozen by the Securities and Exchange Commission during the investigation of Stanford, which shows that he must have invested 99% of his money with this schemer).
As the book says, “Wealth that comes quickly goeth the same way. Wealth that stayeth to give enjoyment and satisfaction to its owner comes gradually, because it is a child born of knowledge and persistent purpose.” Unfortunately, there are innumerable cases of people who have no knowledge and purpose with their hard-earned (and sometimes not so hard-earned) money, and it disappears.
For those of you who are not at the point in life where you are worrying about gold; the chapter on Seven Cures for a Lean Purse is a great read as well. Who hasn’t suffered from a ‘lean purse’ from time to time?
Let’s take a look at George Clason’s seven cures to a lean purse and how to put them into action.
Start Thy Purse to Fattening
“For every ten coins thou placest within thy purse take out for use but nine. Thy purse will start to fatten at once and its increasing weight will feel good in thy hand and bring satisfaction to thy soul.”
If you remember from the previous article, Arkad from Babylon is our teacher in this book. He allays everyone’s doubts about being able to get by without spending all of your income by detailing his own experience with a lean purse and how when he began to only take nine coins out of it for every ten placed into it he did not suffer. In the same way, you may think that only spending 9 out of every 10 dollars will lead to deprivation, but that does not have to be the case.
Arkad distinguishes between short term gains and long term gains, and asks if you desire jewels, finery, and more food (short term gains) or if you desire more substantial belongings, gold, lands, and income-bringing investment? “The coins thou takest from they purse bring the first. The coins thou leavest within it will bring the latter.”
Action: Save at least 10% of your income.
Control Thy Expenditures
Every one of Arkad’s pupils makes a different salary from one another…yet every person in the room has a lean purse. How could this be? Wouldn’t you think that the people who make more money should have fatter purses than the people with meager incomes? This is a clear example that people spend more than they need to, even if they believe their spending to be on necessities only.
Arkad speaks the truth here
“…[t]hat what each of us calls our ‘necessary expenses’ will always grow to equal our incomes unless we protest to the contrary.”
Think about promotions, raises, extra money, and those received by others. How often does this money just become absorbed into our monthly expenses and we begin to wonder how it is that we are making more money and still not saving any of it?
Instead of trying to satiate all of our desires — desires will never fade and even the wealthy cannot satiate all of their desires — we need to think about being 100% satisfied with each coin spent (nine out of every ten). By prioritizing our money, it enables us “to realize thy most cherished desires by defending them from casual wants.”
Action: Make a list of necessary expenses and desires; prioritize your spending so that you do not spend more than 90% of your earnings.
Make Thy Gold Multiply
Arkad does not want us to leave our extra gold from the two cures above in our purses or under a mattress at home.
“Gold in a purse is gratifying to own and satisfieth a miserly soul but earns nothing…wealth is not in the coins he carries in his purse; it is in the income he buildeth, the golden stream that continually floweth into his purse and keepeth it always bulging.”
Arkad wants us to put each of our coin (or dollar) to labor so that it can reproduce like rabbits.
Action: Find a way for your money to earn money. This can be through a savings account, CDs, stocks, bonds, etc.
Guard Thy Treasures from Loss
“The first sound principle of investment is security for thy principal…Be not misled by thine own romantic desires to make wealth rapidly.”
Action: Invest with a sound understanding of risk to your principal; stay away from investments that seem too good to be true.
Make of Thy Dwelling a Profitable Investment
By owning a home
“…thou canst pay the money lender with the same regularity as thou didst pay the landlord. Because each payment will reduce thy indebtedness to the money lender a few years will satisfy his loan. Then thy heart be glad because thou wilt own in thy own right a valuable property and thy only cost will be the king’s taxes.”
Some housing markets do not work this way, but when Paul and I were deciding whether or not to purchase a home in Houston from a financial perspective, I quickly determined that it made perfect sense. Houston’s real estate is so cheap that you can find a home where you will only be paying a few hundred dollars more per month than if you rent when you include insurance and taxes.
In fact, our actual mortgage payment each month is $100 less than what we were spending to rent from a landlord a property we would never own or build equity in. It was an easy decision for us. Of course, you also have to take into consideration home maintenance, closing costs, tax increases, etc.
Action: Do a cost analysis of renting versus owning a home in your house market; decide if it makes sense to own or rent after including all costs involved.
Insure a Future Income
Arkad states that
“…a lean purse to a man no longer able to earn or to a family without its head is a sore tragedy.”
Because his book takes place in Babylonian times when there is no insurance, he introduces this idea as a future possibility:
“In my mind rests a belief that some day wise-thinking men will devise a plan to insure against death whereby many men pay in but a trifling sum regularly, the aggregate making a handsome sum for the family of each member who passeth to the beyond.”
Action: How will you provide for your family’s future should you pass away? Clason suggests securing insurance of some type.
Increase Thy Ability to Earn
“Always do the affairs of man change and improve because keen-minded men seek greater skill that they may better serve those upon whose patronage they depend. Therefore, I urge all men to be in the front rank of progress and not to stand still, lest they be left behind.”
We should all be continually improving our skill set and becoming greater assets to our employers and in our businesses.
At the same time, we should start with small goals, achieve them, and the goals and results will gradually increase in size. By learning to attain small goals, you will train yourself to secure larger ones. Wealth is accumulated first in small sums and then in larger ones as you become more capable, so start small and go from there.
Action: Continue to invest in yourself in ways that will help your career and income-earning potential. Start small in saving and investing and celebrate your accomplishments. For example, if you set a goal of saving $2,500 this year, break it down into mini-goals of $208.33 per month. Next year shoot for $5,000.
These cures may seem a little overwhelming at first. Just remember to start from the beginning and work your way through. The first two cures go hand-in-hand: control your expenditures so that you can save 10% of your income, and really everything else flows from them.
Are you suffering from a lean purse?