The Daily Reckoning
Wednesday, May 18, 2006
The Daily Reckoning PRESENTS: Mark Skousen has honored Benjamin Franklin’s 300th birthday by compiling and editing The Completed Autobiography by Benjamin Franklin (Regnery 2006). Today, we offer advice on personal economics, business, investments, estate planning, and charitable giving, all based on the study of a man Skousen considers the most “versatile genius in all of history.” Enjoy.FRANKLIN’S GOLDEN RULESby Mark Skousen
SourceCompiler and editor of The Compleated Autobigraphy
by Benjamin Franklin (Regnery, 2006).
“Nothing but money is sweeter than honey.”-Ben Franklin
Benjamin Franklin made great contributions as an inventor, scientist, writer, and founding father, but he is also offered valuable advice on money matters. His is one of the greatest success stories in American history, and much of his success in philanthropy, community, and public office came from his experience and capabilities in the financial world.
Why pay attention to Ben Franklin? His is the first “rags to riches” story in America. Throughout all his experiences, failures and victories, he built a fortune that was never in jeopardy. By time he died in 1790 at the remarkable age of 84, he was a self-made man, one of the richest in American history. The Autobiography, published posthumously, tells largely how he created his wealth. It influenced millions of Americans, both young and old, who wanted to succeed in life, from Andrew Carnegie and Thomas Mellon in the 19th century, to Warren Buffett and in the 20th century.
In his “Advice to a Young Tradesman” in his famous pamphlet, “The Way to Wealth,” published in Poor Richard’s Almanac in 1758, Franklin wrote, “In short, the way to wealth, if you desire it, is as plain as the way to market. It depends chiefly on two words, industry and frugality; that is, waste neither time nor money, but make the best use of both. Without industry and frugality, nothing will do, and with them everything.”
His most famous pro-saving adage, “A penny saved is a penny earned,” is remarkably profound. How can a penny saved be a penny earned? Assume you earn $100 a day. If you have $100 in your pocket and you spend it, you have to go out and do a day’s work to get that $100 back. Another way of putting it: With $100 in savings, you could take off a whole day of work and still enjoy a day’s income by drawing upon your savings. In sum, saving is a source of earning power.
The more you save, the more earning power you build up. In addition, savings earns interest, which means more earning power, compounded returns.
Franklin preached throughout his life the virtues of “industry, thrift and prudence” as universal principles of success. He made a point of working smart and often working late hours to get ahead. Remember the refrain, “Laziness travels so slowly that poverty soon overtakes him.”
Undoubtedly Franklin would castigate today’s Americans for indulging in undersaving, overspending and excessive debt. “No revenue is sufficient without economy,” he warned. “A man’s industry and frugality will pay his debts and get him forward in the world…. Business not well managed ruins one faster than no business.”
We all know of millionaires who have gone bankrupt. Just because you have plenty of income and assets does not mean you can’t run into financial trouble. Parkinson’s Second Law, “Expenditure rise to meet (and sometimes exceed) income,” occurs all too often.
One of the most difficult things to do is to cut back when you have a setback in income. But retrenching is better than going into debt in order to maintain your lifestyle. When his printing partnership abruptly ended in 1767, Franklin made the difficult decision to cut back consumption (dining at home at only one “single dish”), and urged his wife Deborah to do the same. It kept them out of trouble.
Franklin was also a successful investor. In 1743, at the age of 42, he turned over his printing business to his partner David Hall, receiving an annual income for over twenty years afterwards. He never completely retired, however. He worked for the government as a postmaster and minister to France. Nevertheless, over the years he built up a substantial fortune, and relied on his savings and investment income to pursue a gentleman’s career in science, politics, and community service.
Franklin built his investment retirement portfolio by saving, avoiding debt, placing well-collateralized loans (bonds), and investing in rental properties.
So, how did he manage his money? First, Franklin ignored the doomsayers and profited from his prediction that America was destined to be a great prosperous nation. An incurable optimist, Franklin was always bullish on America, and life in general. At the end of the War for Independence, he predicted, “America will, with God’s blessing, become a great and happy country.” The United States, he said, is “an immense territory, favored by nature with all advantages of climate, soil, great navigable rivers and lakes….[and] destined to become a great country, populous and mighty.”
He was critical of the doomsayers and complainers: “I saw in the public papers of different states frequent complaints of hard times, deadness of trade, scarcity of money, &c.,” he wrote in 1785. “It is always in the power of a small number to make a great glamour. But let us take a cool view of the general state of our affairs, and perhaps the prospect will appear less gloomy than has been imagined.”
In his Autobiography, he told the story of an elderly man who repeatedly predicted economic depression and a real estate collapse in Philadelphia, and warned Franklin to sell his printing house and his real estate holdings. Franklin ignored his advice and prospered. Eventually, he said, “I had the pleasure of seeing him give five times as much for one [piece of land].”
Second, Franklin continued to live frugally, even during his retirement, which meant occasionally he had to cut back (as noted earlier).
Third, limit your speculative opportunities, so as not to jeopardize your entire portfolio with so-called “guaranteed” investments. You are bound to make mistakes. Franklin made many.
Fourth, diversify your holdings and limit your risks. Franklin made it a point of having a wide variety of income sources, so that a loss in one would not destroy his entire portfolio. In addition to earning income from his role as minister and postmaster, he maintained 7 or 8 rental properties; earned interest-bearing bank accounts in Philadelphia, New York, London and Paris; investing in common stocks such as the Bank of North America, which paid a sizeable dividend; and occasionally loaned funds at interest to individuals and institutions.
His sizeable interest and rental income from bank accounts and real estate saved him from several severe financial setbacks during his years abroad.
In 1767, while colonial agent to England, his long partnership in the printing business ended. “A great source of my income was cut off,” Franklin wrote, forcing him and his wife to become more frugal in their spending habits. He limited himself to a “single dish” when dining at home.
In 1772, there was a banking crisis in England, but Franklin survived unscathed. “I only hazard a little using my credit with the bank….Being out of debt myself, my credit could not be shaken by any run upon me.”
In 1774, Franklin suffered the most serious blow to his finances. As a result of the Hutchinson Letters scandal (where he sent confidential letters among British officials to America, where they were published), Franklin was vilified in England and fired from his job as postmaster and colonial agent, which amounted to a loss of £1,800 a year in income! Frugal living and their sizeable savings and income properties saved them from certain disaster. Late that year, his devoted wife Deborah died, and he was forced to return home.
Franklin wrote and rewrote his last will and testament several times before passing away in 1790. His will is quite interesting, and I reproduced it in The Compleated Autobiography. Before he died, he engaged in some estate planning, such as arranging the transfer of his son William’s farmland in New Jersey to his grandson (William, who as a royalist opposed Franklin during the American Revolution, received nothing in his father’s will).
In his will, Franklin made a long list of his real-estate properties, bonds (loans), shares, cash, books, printing equipment, and other assets. His will describes Franklin’s “fine crab-tree walking stick, with a gold head curiously wrought in the form of the cap of liberty,” which he gave to George Washington, and the picture of King Louis XVI surrounded by 48 diamonds, a gift to Franklin when he left Paris. He gave the diamond-studded picture to his daughter Sally on condition that she not remove the diamonds. Within a few years, she and her husband removed all of them to pay for a long trip to Europe!
According to the Wealthy 100, a ranking of the 100 wealthiest Americans of all time, Franklin was worth at least $150,000, a considerable sum in those days.
One of the most interesting aspects of Franklin’s will is the creation of a fund in Boston to finance young artisans. During his lifetime, Franklin engaged in all kinds of fundraising activities for public causes, and gave liberally from his purse. But here he created a fund with 1,000 pounds, whose interest would be used to fund the education of young people. The fund continued until recently. Franklin was living proof of Poor Richard’s saying, “Great almsgiving lessens no man’s living.”
It is estimated at nearly 50% of Americans die without a will. Don’t let it happen to you. And when you do your estate planning, be creative like Franklin. The next time you update will, look for novel ways to give away money to your relatives, and favorite charities. Surprise some people!
Remember these final words from Poor Richards: “A long life may not be good enough, but a good life is long enough.”
Near the end of his life, Franklin told friends that he wanted to be remembered for “living a useful life,” rather than “dying rich.” It turns out that he was known for both!
Regards,
Mark “Be Free” Skousen
for The Daily Reckoning