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  • Writer's pictureJohn Gibson, CFA

5 Rules of Finance to Teach Your Children

(and perhaps a good reminder for ourselves)

I have been obsessed with the world of investing and economics since learning about the stock market in my 6th grade math class. But the book that inspired me to be a financial advisor is called The Richest Man In Babylon. I first read it when I graduated from college.

This book was written by George S. Clayton, who originally wrote it as a series of pamphlets for banks and insurance companies to hand out. The series was compiled and published as a book in 1926.

Among the many entertaining parables and wise aphorisms are the Five Laws of Gold, which lay out the basic principles of personal finance. Here are the Laws as written by Clason, with my translation from his King James style:


1.      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.

Translation: Save at least 10% of everything you earn. Pay yourself first! It might not be much at first, but it’s good to start exercising the savings muscle as soon as possible.

 

2.      Gold laboreth diligently and contentedly for the wise owner who finds for it profitable employment, multiplying even as the flocks of the field.

Translation: Learn how to invest your savings…and then invest wisely and prudently (more on this later).

 

3.      Gold clingeth to the protection of the cautious owner who invests it under the advice of men wise in its handling.

Translation: Read how the great investors like Warren Buffett, Peter Lynch, Jack Bogle, and William O’Neil did it. Seek advice from wealthy people in your community. The greats have different styles, but there are principles of caution and prudence throughout. Also, use a good financial advisor if you can.

 

4.      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.

Translation: Avoid investing in complicated financial products and investments that are difficult to understand. Be ok with potentially “missing out” in the returns being hyped on social media. You will do better in the long run.

 

5.      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.

Translation: If it sounds too good to be true, it usually is. Some very speculative investments have made a few people wealthy, but the people that chase these returns typically lose their money. It is best to invest for the long-term in high-quality businesses and watch the miracle of compound interest increase your money over time. Grow rich slowly.

 

If you follow these principles someone will ask you one day, “How did you get so wealthy?” And your answer will be, “Two ways. Gradually, then suddenly.”

 

Now then, go forth and force thy children to read this short book. They will thank thee later. Don't worry, the rest of his book in plain English!

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