Buzz
Warren Buffett is an incredibly successful investor, and his investment advice is surprisingly easy to follow. Most of his strategies are clear, straightforward, and timeless. Here are some of Buffett's most valuable financial tips.
Be Cautious with Borrowing
Buffett advises against excessive borrowing. Credit card debt or unnecessary loans can quickly lead to financial difficulties:
I've seen more people fail because of liquor and leverage—leverage being borrowed money. You really don't need leverage in this world much. If you're smart, you're going to make a lot of money without borrowing.
While borrowing isn't something you should rule out entirely, it's important to understand the difference. Some experts distinguish between "good debt" and "bad debt." According to The Money Advice Service, good debt is a thoughtful way to invest in your future. It sets you up for long-term success without harming your finances. Examples of good debt include a mortgage or student loan—although, ideally, it should not negatively impact your finances.
On the flip side, bad debt is easy to recognize. It’s not an investment and only drains your finances, offering no opportunity for future growth. For example, borrowing money to buy a big-screen TV would typically be considered bad debt. If you're going to borrow, make sure it’s for something that can help you grow financially.
Prioritize Your Savings
To make saving a priority, take a close look at your budgeting habits.
Don't save what is left after spending; spend what is left after saving.
This may seem like basic financial advice, but it's a principle many overlook. Imagine you have enough monthly income to cover your essentials, and now you're ready to start saving. First, budget for your necessities and bills, then decide how much you'd like to save. Whatever is left can be used for discretionary spending.
Paying yourself first is essentially a way to automatically prioritize your savings. This can be done by setting up automatic monthly deposits into your savings account. Consider your savings and investments as a monthly bill, if that helps with the process.
Don't Underestimate the Influence of Your Habits
Many individuals fail to recognize the negative financial habits that can slowly take over their lives. Often, we don’t realize these habits are controlling us until they become overwhelming.
Chains of habit are too light to be felt until they are too heavy to be broken.
A significant part of personal finance is all about mindset. Recognizing this will help you nip those bad habits in the bud before they become unmanageable.
To change a habit, start by breaking it down. Identify the cue, reward, and routine. With this understanding, you can begin working towards breaking the cycle of your habit.
Break Free from the Paycheck-to-Paycheck Cycle
While it's easier said than done, Buffett emphasizes just how critical it is to break the paycheck-to-paycheck cycle:
Should you find yourself in a chronically leaking boat, energy devoted to changing vessels is likely to be more productive than energy devoted to patching leaks.
When you're caught in this cycle, it can be challenging to find the time or resources to step back and address the root of your financial problems. However, attempting to "patch up" the aftermath of your issues instead of tackling their cause can prolong the cycle.
Here are some examples of "patches" in the paycheck-to-paycheck cycle:
Payday loans
"Hardship withdrawals" from your retirement account
In fact, Trent Hamm of The Simple Dollar refers to the latter example as a "huge financial mistake." While a financial "patch" might provide short-term relief, over time it often sets you up for failure.
On the flip side, what does "changing vessels" look like? Here are the strategies we've discussed:
Identify recurring expenses that can be reduced
Reevaluate what you truly need versus what you want
Consider downgrading your lifestyle
Learn basic skills to handle emergencies on your own
Some of you might already be implementing these strategies and still feel stuck in the cycle. "Changing vessels" is much easier said than done, and it likely requires a larger solution that goes beyond the scope of this post. However, if you can find a way to change boats rather than just patch up a sinking one, it may take more time and effort, but it's definitely worth it.
Price and Value are Not the Same Thing
Buffett is known for his frugality, which is all about getting value. In this quote, he explains that price and value are not the same:
Long ago, Ben Graham taught me that 'Price is what you pay; value is what you get.' Whether we're talking about socks or stocks, I prefer buying quality items when they are on sale.
Frugality isn’t just about buying things at the lowest price. It’s not about overpaying for something just because it's valuable either. It’s about finding value at a reasonable price. In other words:
It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price.
If you consider yourself frugal, remember this: making a smart purchasing decision is not only about the price; it’s about the value as well. So when you think you're getting a "deal," make sure to factor value into the equation.
Investing is Easier Than You Think
We've discussed Buffett's rules for investing before, but here’s a quick summary of how to get started:
If you invest in a very low-cost index fund, where you don’t put all your money in at once but average it over a 10-year period, you'll outperform 90% of people who start investing at the same time.
Index funds—yes, it’s really that simple, according to Buffett. In his latest annual shareholder letter, he even suggests one to help you get started:
To add, I practice what I preach: My advice here closely mirrors what I’ve outlined in my will... Invest 10% of your money in short-term government bonds and the remaining 90% in a very low-cost S&P 500 index fund. (I recommend Vanguard’s VFINX).
If you have money you want to invest outside of retirement accounts, it boils down to a few straightforward steps:
Learn some basic investing terminology.
Open a brokerage account (Vanguard, E*Trade, etc.).
Select an index fund (Buffett recommends VFINX).
Purchase the fund through your brokerage account.
Invest for the long haul.
Buffett always emphasizes focusing on the bigger picture. He cautions against getting caught up in daily price fluctuations. Instead, adopt a long-term perspective.
... If you're not prepared to hold a stock for ten years, don’t even consider owning it for ten minutes. Build a portfolio with companies whose collective earnings grow steadily over time, and the market value of the portfolio will follow suit.
Once you've chosen your index fund, it may be wise not to check it daily. Buffett’s approach to index fund investing is often referred to as 'set it and forget it.' Constantly checking your valuations might lead to discouragement and the temptation to sell at an inopportune moment.
Of course, you should check your investments periodically to ensure you’re still on track. Time recommends a semi-annual review. However, for the most part, Buffett advocates for a long-term view when choosing investments. This way, your portfolio will require minimal adjustments over time.
Money is not the ultimate goal.
Even the wealthiest investor acknowledges that money isn't everything.
While some material things add to my life’s enjoyment, many others would only complicate it. I enjoy having a private plane, but owning multiple homes would be a hassle. Too often, a person’s possessions end up controlling them. The asset I value most, aside from health, is having a circle of interesting, diverse, and long-lasting friends.
Money can offer many opportunities, but it's essential to keep in mind what truly matters in life.
