Five personal finance tips from Warren Buffett

Thought I would post the following article as I found many of the points resonated with me, others not so much, eg 'You really don't need leverage in this world much'. My thoughts are that if you're smart, you'll know when and how to leverage to optimise the results (but I wouldn't be surprised if in my quick read, I'm looking at this too narrowly...).

Many will have heard this many times before, but worth revisiting.

By Olugboyinwa Ajomale, an intern at Pulse.
This article first appeared at www.pulse.ng

"There are a whole lot of things that can be learnt from one of the richest men in the world, Warren Buffett, who is also a force to reckon with in the investment world.

The business mogul has some personal finance tips which he follows that can also adapt to your daily life.Here are five personal finance tips you can learn from Warren Buffet.

1. "Only buy something that you'd be perfectly happy to hold if the market shut down for 10 years"

It does not matter what you are buying, anything you buy must still be useful after a very long time. Which means you should not buy something that would not have value in the future.So before buying anything, even if it is investing in stocks, make sure what you are about to buy would still have value in the future.

You are your own asset - Before buying anything look out for the long-term benefits of such thing.

2. "Someone's sitting in the shade today because someone planted a tree a long time ago"

This is telling us to start investing and saving early and spending wisely.

Investing, saving early and spending money wisely would help you grow your finances.

This would make it easy for you to gain financial independence and having no worries about financial problems.

So you need to start making good financial decisions to achieve your long-term financial goals.

3. "Price is what you pay; value is what you get"

Before buying anything have it in mind that there is a difference between price and value.

Improving your skills - Just because you buy or invest in something expensive or cheap does not mean it would have value.

Buy or invest in things that you feel and believe you would get value for your money, whether it is expensive or not.But try to get something with high value at a lower price.

4. "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."

To gain financial freedom and independence, you should avoid accumulating debt and one way you can keep doing this is by borrowing.

I've seen more people fail because of liquor and leverage — leverage being borrowed money," Warren Buffett in a speech given at the University of Notre Dame.

So you need to avoid borrowing and having unpaid debt.

5. "Invest in as much of yourself as you can. You are your own biggest asset by far."

You are your own asset.You need to invest in yourself by improving and expanding your financial knowledge.

Read books that will teach you more about financial and money management. You can also invest in yourself by improving your skills and making yourself more valuable.

 

Good points except number 4. I find Buffett inconsistent when talking about borrowing and leverage. I think he is referring to unnecessary leverage and unnecessary risks.

However, to make millions the Buffett way, avoid unnecessary credit card debt and loans.

In a 1991 speech at Notre Dame, Buffett said he had seen a lot of people fail “because of liquor and leverage.” And, he said Donald Trump failed because of leverage.

“He simply got infatuated with how much money he could borrow, and he did not give enough thought to how much money he could pay back,” said Buffett.

But investors generally don’t need leverage. “If you’re smart, you’re going to make a lot of money without borrowing,” said Buffett. “I’ve never borrowed a significant amount of money in my life.”​

How to make your first million the Warren Buffett way

I guess it depends on how he defines "significant"

It would seem like common sense that if you had enough money to pay cash for a home that you would, right? Not so fast. Take a look at a recent interview with Warren Buffett on CNBC where he explains why he took out a mortgage in 1971 on a second home, even though he could have easily paid cash for the property. Buffet's mortgage borrowing strategy can teach the average homebuyer a valuable lesson in the financial benefits of owning a home. Sometimes borrowing money, and thus incurring a debt, is a sound financial decision in the long run. In this case, Buffett used the money that he would have paid to own the house outright to buy more Berkshire Hathaway stock. With the cash, he saved taking out a mortgage on the house he put into the stock which he says would now be valued at an astounding $750,000,000!​

Even The Rich Get Mortgages: Warren Buffett Explains His Mortgage Borrowing Strategy to CNBC

In another interview, Buffett is reported to have claimed:

…We never…borrow money…I never borrowed money…​

https://alphaarchitect.com/2015/09/...lind-spots-leverage-taking-unnecessary-risks/

That's patently untrue, which is why I find his messages on leverage confusing and inconsistent.

The bottom line is that he does borrow when it makes sense to do so.

I really think that message is about risk, not leverage.

If you’ve got $100 million at the start of the year, and…you’re going to make 10% if you’re unleveraged, and 20% if you’re leveraged, 99 times out of 100. What difference does it make at the end of the year whether you’ve got $110 million or $120 million? It makes no difference at all…It makes absolutely no difference. It makes no difference to your family. It makes no difference to anything.​

https://alphaarchitect.com/2015/09/...lind-spots-leverage-taking-unnecessary-risks/

But to make money they didn’t have and didn’t need, they risked what they did have and did need, and that’s foolish. That is just plain foolish. Doesn’t make any difference what your IQ is. If you risk something that is important to you for something that is unimportant to you, it just does not make any sense.​

https://alphaarchitect.com/2015/09/...lind-spots-leverage-taking-unnecessary-risks/

I really think that is referring to taking unnecessary risks.

It comes down to this:

It’s comforting to know that I can wear the same clothes, eat the same food, and watch the same TV as a billionaire like Buffett. And so, in the end, why swing for the fences by using leverage? Even if you’re successful, what would change?​

Ummm... for me, everything. I have been able to buy, renovate and hold a development site in Melbourne which I sold for a significant profit because of leverage. Without borrowing, I would not have been able to buy the property of make the money that I made. I used the funds from the sale, in conjunction with leveraged funds to complete two projects: a renovation/conversion of a 3x1 to a 4x2 and a build of a new 4x2 house. At completion, the combined LVR of these properties will be under 50% and the rent will be around double the interest payments, which will improve over time as the loans are P&I.

Put simply, without leverage there is no way I would be where I am now. So I don't accept the message not to use leverage and not to borrow. But I do take the message to avoid unnecessary leverage and unnecessary risks, which I think is more in line with what Buffett is saying.

 

Great, thanks @Perthguy. brilliant post. I certainly agree about using leverage. I don't leverage to the hilt (am rather conservative) but I also don't try to compete against others (at all), but in particular where I know I can't keep up with them. I would not have achieved half of what I have if it wasn't for OPM (other people's/bank's money). Now it's consolidation mode.