Warren Buffett is a hugely successful investor, and his tips for investing are surprisingly accessible. Most of his methods are simple, straightforward and timeless. Here’s some of Buffett’s best money advice.
Borrow Wisely
Buffett warns against excessive borrowing. Credit card debt or unnecessary loans can quickly get you into lots of financial trouble:
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.
At the same time, you don’t have to rule out borrowing completely. Some experts classify borrowing money as "good debt" and "bad debt." According to The Money Advice Service, good debt is a sensible way to invest in your future. It leaves you in a better place, long-term, and should, ideally, not have a negative impact on your finances. This includes things like a mortgage or student loan. Keep in mind—I said ideally.
Bad debt, on the other hand, is pretty obviously and inherently not meant to be an investment. Bad debt drains your finances and has no prospect for future growth. A loan to buy a big screen TV is probably bad debt. If you’re going to borrow money, make sure it’s for an investment.
Pay Yourself First
If you want to make saving a priority, take a look at how you budget.
Don’t save what is left after spending; spend what is left after saving.
This might be Money 101, but it’s a lesson a lot of people don’t consider. Let’s say you have enough monthly income to cover your basic needs, and you want to start saving. Budget for your needs and bills, then figure out how much you want to save. Whatever is left is spending money.
Paying yourself first is basically an automatic way to prioritize your savings. To do this, you can set up automatic monthly deposits into your savings account. And think of your savings and investments as a monthly bill, if that helps.
Don’t Underestimate Your Habits
Many people underestimate the bad money habits that can eventually take over their finances. We often don’t wise up to our habits until they’ve become hard to manage.
Chains of habit are too light to be felt until they are too heavy to be broken.
Much of personal finance is about mindset. Accepting this will help you nip those bad habits in the bud, before they get out of hand.
If you want to change your habit, first break it down. Understand your cue, reward and routine. With those in mind, you can work toward breaking the cycle of your habit.
Break the Paycheck to Paycheck Cycle
It’s easier said than done, but Buffett illustrates just how important 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 living in this cycle, it can be hard to find the time and resources to take a step back and address your financial issues at their core. But trying to "patch up" the aftermath of your issues rather than the cause of them can keep the cycle going.
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 calls the latter example a "huge financial mistake." While a financial "patch" might get you out of a pinch, in the long run, it almost sets you up for failure.
On the other hand, what would be considered "changing vessels"? Here’s what we’ve talked about:
- Look for regular expenses you can trim
- Reevaluate your needs vs. wants
- Downgrade
- Learn some basic skills to deal with emergencies yourself
Some of you may already be doing all of this and still feel you’re stuck in the cycle. "Changing vessels" is a hell of a lot easier said than done. And there’s probably need for a larger solution that goes beyond the realm of this post. But if you can find a way to change boats rather than patch a sinking one—it might take a little more time and effort, but it’s worth it.
Price and Value are Not the Same Thing
Buffett is notoriously frugal. And frugality is all about value. In this quote, Buffett explains that value and price are not the same thing:
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 like buying quality merchandise when it is marked down.
Frugality isn’t about buying anything at a low price. It’s not about paying a lot for something just because it’s valuable, either. it’s about buying value at a low price. Another way of putting it:
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, consider this: the key to making a smart spending decision isn’t just price; it’s value, too. So when you’re getting a "deal," don’t forget to calculate value into the equation.
Investing is Easier Than You Think
We’ve talked about Buffett’s rules for investing before, but here’s the gist of how to get started:
If you invested in a very low cost index fund—where you don’t put the money in at one time, but average in over 10 years—you’ll do better than 90% of people who start investing at the same time.
Index funds—yep, it’s that simple, according to Buffett. And in his most recent annual shareholder letter, he even offers one for getting started:
My money, I should add, is where my mouth is: What I advise here is essentially identical to certain instructions I’ve laid out in my will… Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund. (I suggest Vanguard’s. (VFINX)).
If you have some money that you want to invest outside of your retirement accounts, it basically comes down to a few simple steps:
- Learn some basic investing terminology.
- Open a brokerage account (Vanguard, E*Trade, etc.).
- Pick an index fund (Buffett suggests VFINX).
- Buy the fund through your brokerage account.
Invest Long-Term
Buffett always promotes big picture. He warns to not get caught up in daily valuations. Instead, think long-term.
… If you aren’t willing to own a stock for ten years, don’t even think about owning it for ten minutes. Put together a portfolio of companies whose aggregate earnings march upward over the years, and so also will the portfolio’s market value.
If you’ve picked your index fund, it might even be best to not check on it every day. A lot of people refer to Buffett’s index fund investing strategy as "set it and forget it." If you look at your daily valuations, you might get discouraged and be tempted to sell your stock at the worst time.
Sure, you should look in on your investments every now and then to make sure you’re still investing properly. Time suggests a semi-annual check-up. But for the most part, Buffett suggests looking at the big picture when it comes to picking your investments. This way, your investing won’t require much maintenance.
Money Isn’t Everything
Yep—even the world’s most successful investor knows money doesn’t buy everything.
Some material things make my life more enjoyable; many, however, would not. I like having an expensive private plane, but owning a half-dozen homes would be a burden. Too often, a vast collection of possessions ends up possessing its owner. The asset I most value, aside from health, is interesting, diverse, and long-standing friends.
Money offers a lot of options. But, of course, it’s important to remember the things in life that truly matter most.
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