We should all have mentors in life, and they don’t always have to be people you have direct access to. For life advice, I follow Oprah; for relationship advice, apparently I follow a crazy cat lady because I’m still single… but for money advice, I turn to the most successful investor of the 20th century, Warren Buffett. His money advice is surprisingly straightforward, accessible and worth a read:
Beware of Borrowing
“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.”
Obviously we all have credit cards that we use to build up credit, but it’s important to know the difference between good and bad debt. Good debt is investing in things that will have a return in the future like a mortgage or student loan. Bad debt is that fur vest or new TV that will in no way positively affect your future finances. Buffett himself has said that he has never borrowed a significant amount of money for anything. You should be charging things only that you know you can pay off in full by the end of the month – paying interest on things you don’t need is just throwing away money.
Pay Yourself First
“Don’t save what is left after spending; spend what is left after saving.”
Take a few minutes to write out your monthly expenses – your rent, utilities, transportation costs etc. Now figure out a goal for how much per month you would like to save. Whatever is left over is your spending money – it’s that simple. Set up automatic monthly deposits from your checking account into an online savings account like Ally to make sure saving is always the priority.
Watch Small Expenses
“If you buy things you don’t need, you will soon sell things you do need”
Many people underestimate the small bad money habits that can eventually ruin their finances. It’s important to remember that much of personal finance is all about mindset – being hyper aware of where your money is going on a daily basis and simplifying your life. Warren Buffett invests in businesses run by managers who obsess over the tiniest costs, and although I’m not saying you should become obsessive, it’s important to become more conscious. Open an account on Mint.com and track your spending for two weeks, taking notice of all the small expenses you can cut out of your daily routine.
Think of it this way: Every penny that you don’t spend unnecessarily leaves more money to invest for the future or allocate to something you might enjoy more–like your next sunny vacation (good investment).
Know the Difference Between Price and Value
“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.”
Buffett notoriously still lives in a modest home and drives a cadillac. Remember, frugality isn’t about buying anything just because it’s got a low price tag OR paying a lot for something just because it’s valuable…it’s about buying value at a low price. There is always a way to find things for a better price. Shop for your favorite designer clothes on Ebay, use online price comparison tools like Amazon and always check for promo codes before you buy something. You can still get high quality things for a great price if you take the time to look for a better deal.
Investing is Easier Than You Think
“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.”
I’m guilty of finding investing intimidating. I only opened my own retirement fund a couple years ago (waaaay too late). It’s important to first have your debt paid down, and then have money in an emergency fund with your excess cash flow. If you’re interested in investing some extra money, for beginners like me, Buffett recommends investing in index funds. In a recent annual shareholder letter he said this:
“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.
Remember that the stock market is constantly hitting highs and lows, so it’s important that once your money is in there you can be patient and forget about it. Looking at your valuations too often could get you discouraged and tempted to sell at the worst time.
Money Isn’t 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.”
I would say that this is the most valuable advice from one of the richest men in the world. Take note.