5 Laws of Gold: Money should work hard for you
The author is not a financial advisor or formally qualified in financial matters.
This article is the second in a series of articles on the ‘5 Laws of Gold’ based on George S Clasons’ The Richest Man in Babylon. If you would like to learn more, please consider picking up copies of any of the books mentioned in this article from your local library or independent bookstore.
A river cuts through rock not because of its power, but because of its persistence.
James N Watkins
5 Laws of Gold: Money should work hard for you
Gold laboreth diligently and contentedly for the wise owner who finds for it profitable employment, multiplying even as the flocks of the field.
In my previous article on the 5 Laws of Gold, I introduced you to the simple yet fundamental idea of paying yourself 10% of all you earn, before you pay for any other expenses. Now, I’ll talk you through the second Law of Gold as laid out in George S Clason’s The Richest Man in Babylon: your money should work hard for you.
“This is the process by which wealth is accumulated:” states Arkad, the titular ‘Richest man in Babylon’, “first in small sums, then in larger ones as a [person] learns and becomes more capable.”
To think of it differently: if you have 10% of your total wages put away every week, then in 10 weeks you would have a full week’s wages saved. In a way, you will have earned 11 weeks wages in 10.
Dolla dolla bill ya’ll
Trigger warning: there’s numbers and math coming up. Don’t panic.
The median weekly income for a working Australian is $805, according to the 2021 census data.
To put the 10% rule into context: by putting $80.05 away every week the average Aussie will have $805 to invest after 10 weeks. With this extra week’s wages, you now have a tidy sum which can start to earn for you, rather than you needing to earn for it.
While it is tempting to leave this money in the bank, for a rainy day perhaps, Clason has this to say:
Gold in a purse is gratifying to own and satesfieth a miserly soul but it earns nothing. The gold we may retain from our earnings is but a start. The earnings it will make shall build our fortune.
It is immensely satisfying to have a full weeks’ wages sitting in a bank account or under the mattress, but what the ‘miserly soul’ fails to see is the opportunity cost of keeping this money rather than putting the money to work.
Opportunity Cost
The Reserve Bank of Australia has publicly available data on the retail deposit interest rates and rates of return: between June 2012 and June 2022 the average high-interest rate cash management account with a bank was 0.72% per year. This means, that if you were to put $80.05 per week into a high interest account and leave it for a decade, you would have made $1,548 interest (total sum $43,535) in total.
The ASX 200, however, has made an average of 9.29% annualised per year; which means that over the same time period if you took that $80.05 per week and every month bought stock (check out my piece on dollar-cost averaging for more), you would net yourself $27,150 interest (total sum $69,137).
By keeping your money in the bank — and leaving it, you kept your principal (money saved per week) and took home $1,548 in interest payments after a decade. By putting your money in the ASX 200 you kept your principal (money saved per week) and took home $27,150 in interest payments after a decade. Per year, if you kept your money in the bank you would have made an extra $154.80 per year passive income. If you had kept your money in the ASX 200 you would have made an average $2,715 per year in passive income.
So, the opportunity cost of keeping your money in the bank and leaving it is a net loss of $2,560.20 per year. Ouch. Never mind the mattress people; their money cost them the full $2,715 per year. Brutal stuff.
Bonds: For those wondering, the Australian Government Bond market had an average return of 2.498% on 10 year bonds which means you would net yourself $5,710 interest (total sum $47,697). Not nearly as profitable as the ASX 200, but a far preferable return than sitting in the bank.
Wealth, like a tree, grows from a tiny seed. The first copper you save is the seed from which your tree of wealth shall grow. The sooner you plant that seed the sooner shall the tree grow. And the more faithfully you nourish and water that tree with consistent savings, the sooner may you bask in contentment beneath its shade.
Think with your head, not your heart
A core tenet of Benjamin Graham’s The Intelligent Investor Is that the ‘intelligent investor’ thinks with their head, not with their emotions. Graham literally wrote the book on Security Analysis, the practice of using data analysis to determine the intrinsic value of a stock as a means of determining if the current asking price is above or below the value of the stock. This practice made him and, moreover, made Warren Buffet exceedingly effective at investing their money into value, which in return made them exceedingly wealthy.
What Clason’s second Law of Gold tells us is that our money must work for us, and what Graham teaches us is what to look for in identifying the most effective occupation for our money.
Money, by its very nature, wants to multiply — much like any living organism. “Even under torture” writes John M Barry, “nature will not lie, will not yield a consistent, reproducible result unless it is true.” Barry was talking about the scientific method in The Great Influenza, namely on how scientists at the Johns Hopkins University were working to discover the pathogen that was ravaging the world in the early 20th century. That said, the nature of money is that it wants to multiply itself: short of keeping your money under your mattress, anywhere you keep your money, it wants to grow. It wants to work for you. Kind of like a virus.
If you pay yourself 10% of your wages, and you find for your money gainful employment you will see your money grow. So how do you know the most fertile soil to plant these seeds? This is where Clason’s Third Law of Gold comes into play.