Warren Buffett's Best Money Advice

Warren Buffett's Best Money Advice

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 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 prioritise 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 have 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 Pay-To-Pay Cycle

It's easier said than done, but Buffett illustrates just how important it is to break the pay-to-pay 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 pay-to-pay cycle would be payday loans or withdrawals from your emergency fund or long-term savings. 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 versus 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.

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.

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.


Comments

    One rule of thumb I use is 'buy it once'. This applies to durables like furniture, some clothing, shoes (sometimes), white goods. Be prepared to pay more highly for a product that you will not have to buy again. Its a version of the 'price-value' thinking. It means that I'm prepared to pay a higher price for an item that will deliver superior value. So I'd be happy to pay for a high quality fridge, and pay 50% more than a 'cheap' one, rather than have to buy two cheap fridges over the period that a high quality fridge would last.
    A furniture example might be to buy your lounge from Moran and keep it for life, rather than buy 5 Ikea lounges that will last five years each.

      That rule has its limitations. Say you buy the high quality fridge at $1000, vs the $500 cheap fridge. If you know that the $1000 fridge will last twice as long, with everything being equal it makes little difference.

      But everything is not equal. The $500 you save can be used to invest in something else. You could use it in your mortgage offset account to save on interest payments (a tax free benefit) - one fridge may not make a difference, but imagine if you save 30% of your yearly spending buy buying something cheaper? Or you could buy something else, that can either give you an additional benefit or make money. In the future, maybe the cheap fridge isn't $500, it's $300. Also, your $1000 fridge might be good, but in the future it's not as energy efficient as one in the future. Cars are a good example.

      Plus, opting for the $500 fridge is a risk with a potential reward - perhaps it will last just as long as the $1000 fridge. If it did, that's an extra $500 that could have been used elsewhere.

      It's probably down to preferences, but my style and needs change over time - if I applied the buy once rule, my house would look like a throwback to the 1980's.

        Your example assumes the fridges are a commodity. The more expensive fridge could have much lower running costs, free delivery and larger capacity to facilitate bulk freezing.

        But yeah, a fridge isn't a good example. Anything that gets worn out is a good example (car/shoes/jeans).

      At what point do you think "good enough" then? Samsung top of the line fridges don't even hold a candle to Gaggenau, but they're under half the price.

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