10 Brilliant Financial Strategies Recommended by Warren Buffett
1. Never Lose Money
One of the most well-known pieces of advice from Buffett is: “Rule No. 1: Never lose money. Rule No. 2: Never forget rule No. 1.” This advice emphasizes the importance of avoiding losses as they can make it challenging to recover to your starting point, let alone generate profits.
2. Get High Value at a Low Price
Buffett emphasized a critical principle in the 2008 Berkshire Hathaway shareholder letter, stating that “Price is what you pay; value is what you get.” When you pay more than the value you receive, you risk losing money. For example, if you pay exorbitant interest rates on credit card debt or buy things you seldom use, you might lose money. To avoid such scenarios, it is advisable to emulate Buffett’s modest lifestyle by seeking opportunities to purchase items of superior quality at a lower cost. As he put it, “Whether we’re talking about socks or stocks, I like buying quality merchandise when it is marked down.”
3. Form Healthy Money Habits
During a 2007 speech at the University of Florida, Buffett stated, “Habits are hard to break because most behavior is habitual, and the chains of habit are too light to be felt until they become too heavy to be broken.” It is essential to cultivate good financial habits while simultaneously eliminating those that harm your finances. Therefore, focus on establishing positive money habits while breaking free from detrimental ones.
4. Avoid Debt, Especially Credit Card Debt
Buffett’s wealth was primarily built by putting interest to work for him rather than working to pay interest, which is a common approach for many Americans. According to Buffett, “I’ve seen more people fail because of liquor and leverage – leverage being borrowed money.” He shared this insight during a speech at the University of Notre Dame in 1991, stating that “If you’re smart, you’re going to make a lot of money without borrowing, and you really don’t need leverage in this world much.” Buffett is highly cautious about credit cards and even recommends avoiding them altogether. He warns that credit card interest rates can be quite high, sometimes reaching 18% or even 20%, and he claims that if he borrowed money at such rates, he would be broke.
5. Keep Cash On Hand
Maintaining cash reserves is crucial for ensuring financial security, according to Buffett. As he stated in the 2014 Berkshire Hathaway annual report, “We always hold at least $20 billion – and often more – in cash equivalents.” While it’s natural to be tempted to invest liquid cash, both businesses and individuals should prioritize having cash reserves on hand. Buffett likens cash to oxygen for an individual and emphasizes its importance, stating, “Cash is never thought about when it is present, but the only thing in mind when it is absent.” He stresses that cash is the only legal tender when bills are due and urges everyone to keep it handy at all times, advising, “Don’t leave home without it.”
6. Invest In Yourself
Buffett believes that investing in oneself is the most significant investment anyone can make, as reported by Inc.com. In his words, “Invest in as much of yourself as you can. You are your own biggest asset by far.” He reiterated this point in a CNBC interview, saying, “Anything you do to improve your own talents and make yourself more valuable will pay off in terms of appropriate real purchasing power.” The returns from self-investment can be substantial, and according to Buffett, “Anything you invest in yourself, you get back tenfold.” Unlike other assets or investments, no one can take away the returns from self-investment, as “nobody can tax it away; they can’t steal it from you.”
7. Learn About Money
Investing in oneself involves gaining knowledge about managing money, according to Buffett. As an investor, his primary responsibility is to reduce exposure and minimize risk, and as he once stated, “risk comes from not knowing what you’re doing,” as reported by Forbes. Therefore, learning more about personal finance is an essential part of investing in oneself, providing increased financial security as one minimizes risks. The key takeaway from this Buffett quote is that individuals should take an active role in educating themselves about personal finance. Charlie Munger, Buffett’s partner, emphasized the importance of continuous learning by stating, “Go to bed smarter than when you woke up.”
8. Trust a Low-Cost Index Fund for Your Portfolio
Buffett’s advice often carries philosophical weight, but he has also provided practical tips that almost anyone can apply, such as investing in index funds. In his 2013 letter to Berkshire Hathaway shareholders, he suggested, “Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund.” Buffett has advocated for index funds for years, stating at the 2004 Berkshire Hathaway annual meeting that “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 ten years—you’ll do better than 90% of people who start investing at the same time.”
9. Give Back
Buffett has acknowledged that as a member of the luckiest 1% of humanity, it is his responsibility to think about the other 99%. As a part of this effort, he has taken concrete action by co-founding The Giving Pledge with Microsoft co-founder Bill Gates. The initiative is a commitment by over 100 billionaires to give away their wealth. Even if you are not a billionaire, you can still enhance your life by contributing to your community.
10. View Money as a Long-Term Game
Buffett’s quote “Someone’s sitting in the shade today because someone planted a tree a long time ago” underscores the importance of taking a long-term view when it comes to money. By planting the seeds of financial success today and nurturing them over time, you can create a solid foundation for the future. This foundation can provide shade in the form of financial freedom, a secure retirement, or the ability to cover the costs of your children’s education.
Buffett’s investing decisions reflect this long-term view. In his 2014 letter to shareholders, he urged people to “invest with a multi-decade horizon” and to focus on attaining significant gains in purchasing power over their investing lifetime. Rather than being swayed by short-term stock market fluctuations or economic crises, investors should stay the course.
Building true wealth and financial security takes time and effort, and there will likely be challenges along the way. But by viewing your finances as a lifelong endeavor, you can stay committed to your goals and build a solid financial foundation that will provide benefits for years to come.