Tuesday, March 17, 2009

Finance through Parable

I just finished The Richest Man in Babylon and am feeling pretty motivated! The book, recommended by J Money, is a series of parables dealing with ex-slaves, money lenders, merchants and the assorted citizens of Babylon.

The book's recurring message is "save a tenth of all you earn" and invest it in a manner that would lead to further, passive wealth.

One of the stories was about a merchant so in debt his wife returned to her family and he fled Babylon. He was sold as a slave, barely eluded eunuchdom and was eventually allowed to escape by his owner's wife who taught him that some free men are born with the minds of slave and vice versa. There was a neat anecdote in there about water always levelling off to its resting point.

Anyway the man returned to Babylon with a plan often repeated in the book:

He would save 1/10th of all his earnings.
2/10ths would go towards paying all his debtors equally.
7/10s would be used to live on.

The first month he finds work and makes 19 coins. This is dandy until the following month when he only makes 11 coins. That month he and the wife eat nothing but herbs and broth but still pay creditors 20% and save 10% of the 11 coins. The following month he makes 40something coins and all is well. He and the Missus buy new clothes and shoes and feast like kings. Within two years all his debts are paid off and he is lending others money.

While I appreciate the fluctuation involved in varying monthly earnings I don't think this is the right plan. Instead of going from literal famine to feast the following month this couple should have used the 10% they'd already saved in order to better feed themselves. An ounce of prevention through proper sustenance is worth a pound of medicine tomorrow. If they'd created a real budget with allotments for clothing and food they would have paid their debtors off much faster and sustained an even lifestyle unhindered by the market's folly.

I guess that is the problem with parables - they make the reader feel warm and inspired but don't hold up well under criticism.


J. Money said...

wow, someone actually picked it up and read it - awesome! it def. makes you feel warm and fuzzy inside for sure...it would be cool to talk w/ the author and have him answer critiques & criticisms! unfort. i'm sure he's long gone by now..

glad you got something out of it though :)

Anny said...

The author was on to something - according to my edition's cover its the top selling finance book. Think of the passive income from writing one book and getting enough royalties to continue benefitting your grandchildren!

MoneyMateKate said...

My first thought was: if you suddenly had 50% less to live on for the month, it's not like you can move somewhere cheaper for a few weeks. And given my drastically reduced circumstances in this economy, my rent is now 60% of my income - and this week is so bad I'll be lucky if I break even with just my rent. Blech. I look forward to things getting back to normal, where my rent is more like 35%. I hate feeling like I'm a slave to my landlord.

Sun Ivey said...

Speaking about technologies these days. All of the paperwork is left behind and now it is time to go virtual. Read about ideals and it will make sense to you.