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Wise ways to wealth

Reported by Nine News Finance, Margie Sheedy
Thursday, November 24, 2011
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Can history teach us anything about which wealth creation strategies work best?

Financial freedom is like a pot of gold at the end of the rainbow. Ask five wealth creation experts how to find it, and you'll undoubtedly get five different answers.

In good times, there's talk of property booms or investing in sure things on the sharemarket. In tough times, some say it's prudent to spread your risk, or to buy into government bonds, while others reckon it's better to focus your strategy on saving.

History tells us that the world of wealth creation is all about cycles. So what can we learn from history? Is it worth looking back so we can move forward with our personal finances?

Back to the future

References to financial strategies are peppered through historical texts, including the Bible, says Dr Ciorstan Smark, a senior lecturer in accounting and finance at the University of Wollongong.

"Biblical proverbs such as 'The rich rules over the poor and the borrower is slave to the lender' (Proverbs 22:7) and 'It's stupid to guarantee someone else's loan' (Proverbs 17:18) have been quoted by US commentator Dave Ramsey, radio presenter and the author of Total Money Makeover.

"And the late Larry Burkett, advocated getting out of debt and having a good solid savings account in case of difficult times.

"These commentators are very much about frugality and financial freedom and about not wasting resources or the planet."

"They may be conservative theories, some may say old fashioned. (However) quite a few Old Testament (thus present in religious traditions of Judaism, Christianity and Islam) are looking pretty good right now!"

Consider the downturn

In good times, she says that people see their neighbours who've adopted more risky strategies doing better than they are, "but they don't take into account the bad times, and the downturn in wealth cycles."

Cut back to history for some belt-tightening lessons. For example, when Shakespeare had Lord Polonius say to his son Laertes, in Hamlet, "neither a borrower nor a lender be…" it was a classic financial cautionary tale of living within your means.

In books such as George S Clason's The Richest Man in Babylon, which was first published in 1926, it was suggested that the richest ancient Babylonians lived by the concept of paying yourself first. They believed in putting aside 10 percent of your earnings, which you then invested in safe ways to make your money earn compound interest.

"The very conservative view of wealth creation will give less returns in good times but better than average results in difficult times," admits Dr Smark.

"The thing about the historically conservative and low-debt strategies, and setting aside a certain portion of your earnings for those rainy days, is that they work in difficult times of high unemployment and uncertainty.

"I don't think we've seen the worst of the global economic fallout yet so having 10 percent of your income set aside every year is a good look.

"People who do their financial planning often believing that everyone's going to stay employed, no-one's going to get sick and nothing's going to go wrong. They are playing a dangerous game."

28/11/2014 07:39Sydney, Australia. 28 November,2014
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