Feb. 24, 2021

The Best Personal Finance Advice From the Greatest Investor of All Time Warren Buffett

The Best Personal Finance Advice From the Greatest Investor of All Time Warren Buffett

Episode 42: The Best Personal Finance Advice From the Greatest Investor of All Time Warren Buffett

  1. How Warren Buffett advises the average person to Invest
  2. Why Index Funds are King 
  3. How to break the paycheck to paycheck cycle 
  4. Why Money isn't everything 
  5. How to save more money 

Want to read more?  Here is an article on how to buy an index fund. 

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On this episode of the personal finance podcast, we're going to talk about Warren Buffett's best Money Advice. What's up everybody, and welcome to personal finance podcast. I'm your host, Andrew, founder of dollar after dollar.com. And today on the personal finance podcast, we are going to be talking about my favorite investor of all time, Warren Buffett and his best Money Advice, because one of the coolest things about Warren Buffett is that he gives out fantastic personal finance advice. He's not some hedge fund guy who's sitting in a tower in the middle of New York City, looking down upon us, and just throwing money left and right, buying Ferraris and things like that. Now, Warren Buffett is one of the richest people in the world. And he made the majority of his money by being patient and being frugal. So early on in his career, he started investing and making money, but 95% of his money, 95% of his net worth came after the age of 65. And that's a testament to how compound interest works. And you always hear us talk about compound interest. But he is a living testimony of how it works. And he's worth billions and billions and billions of dollars. And he is by far the best investor of all time, if you look at his investment returns, and at the same time, he is a single individual who is extremely, extremely wise, claiming he reads over 500 pages a day of books. And as you'll see, he gives simplistic advice that you can use every single day in your life. And before we get started, if you want to learn more about Warren Buffett to my favorite books on Warren Buffett, or the Warren Buffett way, and I've had some listeners email in and say they've actually already read the Warren Buffett way and loved it. And another one is the snowball. That's a biography about Warren Buffett as well. Both of these are fantastic books, if you want to learn more about him, because learning about Warren Buffett, you're going to see things on how you can use it in your investments on how you can use it in business and your day to day activities. With your personal finances. It's truly impactful. So let's get into my favorite Money Advice from Warren Buffett. So the first one is to borrow money wisely. And Warren Buffett has always warned about excessive borrowing. We've talked about this on this podcast, that getting into deep debt is a major problem for your personal finances is gonna wreck you in the long run. And here's what Warren Buffett says, 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. So what he's talking about here is that a lot of people will use leverage to invest, a lot of people will use leverage to borrow money to invest in property or into the stock market, or you'll see it a lot when people trade options, which is becoming a big thing as of late or use it as a business debt. And you have to be extremely weary about how you borrow money, because debt is a flaming emergency. We talked about that all the time, you have to be extremely careful when making decisions about debt, specifically, when making decisions about business debt. But at the same time, I believe there's good debt, and there's bad debt. Good debt can be things like taking advantage of low interest rates right now, and getting a mortgage instead of paying for a house cash, that would be taking advantage of good debt because interest rates right now I just got a mortgage for 2.7%. Well, if I bought the house cash, I'll be leaving a ton of money on the table because I could put that money into an index fund that makes on average, historically 7.8% in the market, and there's a massive gap right there, I collect a massive profit. Because I put that money into the market. Instead of putting it all into a house, there are situations where you can have good debt, another situation of good debt would be borrowing money for a company, let's say you have a company and you can see that it's going to become really profitable. Well borrowing money to grow that company can be an example of good debt. Now borrowing a significant sum of money to grow that company outside of your means where you're trying to grow too fast, is not a good example of debt. So you have to make these decisions wisely. The next one is pay yourself first. Now, you've heard me talk about this all the time, especially when I talk about the reverse budget. And the reverse budget is truly inspired by Warren Buffett and his pay yourself first. Here's what he says. Don't save what is left after spending. Spend what is left after saving. This is the most powerful thing that you can do in your personal finance. Let me say that again. Don't save what is left after spending. Spend what is left after saving. Think about that for a second. Because if you save your money on the back end, a lot of times, you're not going to hit your savings goals. If you go ahead and save your money at the end of each month, you pay your bills first, and then you save your money, you go out with your friends, and then you save your money after whatever you have leftover, then you save it, you're not going to hit your savings goals. But if you spend what is left after saving, you're always going to hit your savings goals. Barring that you're also saving money within your emergency fund, which is part of hitting your savings goals. So this may be money one on one to some of you, but it's a lesson a lot of people need to learn. And most people don't consider doing this, you have to save money first. And the best way to do this is automated, take the money, make sure it's automated into your savings account. And that will ensure that you don't even have to think about it, it just goes right into your accounts right into your brokerage account right into your savings account. All those accounts need to be automated, to ensure that you can do this without even having to think about it twice. That is the best way to do this. Because if you can learn to pay yourself first, it will absolutely change your life forever. Because the only way to build wealth is to pay yourself first you have to understand it, it's it sounds so simple. It sounds silly at times. But the only way to build true wealth is to actually pay yourself first because that's what you're doing. Now what I would do is I would also prioritize giving in that so paying yourself first and giving. And I would prioritize giving over paying yourself first. Because that is one of the biggest priorities I want with my money is be able to give money to others. So prioritizing giving and saving is going to be a massive benefit for you and your personal finances. And we'll have an episode coming up on giving and why it's so important to me. So make sure you're subscribed. So you can hear that episode because I think it is the most important thing that you can do with your money. And we'll talk about why the next one. Don't underestimate your habits. So a lot of people have bad money habits, they have bad habits with their personal finances, but they underestimate these habits they can they can turn them around in the long run. But here's what Warren Buffett says about money habits. The chains of habit are too light to be felt until they are too heavy to be broken. Now most of money is about your mindset. And the people who are the best with their money, take the emotions out of it. And they are mentally strong within their finances. And understanding that money is all about mindset, it's going to help you nip bad habits in the bud right away before they get out of hand. If you're overspending on items that don't bring you value understanding if you're overspending on items that don't bring you value is the first step in doing this. Maybe you spend way too much money on eating out you go eat out with your co workers every single day. But you don't even really like your co workers. You don't really even like hanging out with your co workers but you're spending 20 bucks a day on eating out well that's 100 bucks a week, that's $400 a month, guess what $400 a month amounts to you within 30 years $1 million. So is it really worth it for you to go out to eat every single day with your co workers for $1 million? I think most people are going to say no to that. But if you're going out with your co workers and it's like your best friends and you're making memories and things like that, hey, more power to you, if that's what you want to do, if that's your priority, more power to you. But the majority of people are not going to want to give up a million dollars over the course of their lifetime to go eat out with coworkers that day don't even really like so understanding these habits. that's a that's a great example of a habit. And understanding these habits will make you think through these options and break the routine. break up the routine break up the monotony of what you're doing with your personal finances. If you can't find money, places, look at your habits, look where you're spending your money. And that will allow you to build true wealth. The next one, break the paycheck to paycheck cycle. So this is easier said than done. But breaking your paycheck to paycheck cycle is one of my biggest goals for people with the personal finance podcast. That's why I'm educating you guys, I want you to break out of the paycheck to paycheck cycle. Because outside of the paycheck to paycheck cycle is where wealth is built. It's simple as that. And inside the paycheck to paycheck cycle is where poverty stays you will never get ahead if you're in the paycheck to paycheck cycle. Sometimes this is situational. Sometimes you were born in a situation that you cannot control that is way outside of your control. But guess what your future is within your control, you may have a harder time getting through the ups and downs than some people who are privileged because privilege is real. Let's all get real about this privilege is real. And you may have a harder time getting to the same point as someone else, but you're still in control of your future. And you changing your future will change your family's future for generations to come. Look how many people came out of situations in paycheck to paycheck cycle. Maybe their parents, their grandparents, their great grandparents all lived paycheck to paycheck their entire life. That is no way to live this life and so breaking that paycheck to paycheck cycle will significantly change your family's life for the future. This is where wealth is built is getting out of paycheck to paycheck cycle. And Warren Buffett talks about it all the time because his family was in the same situation, 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. So what most people do in the paycheck to paycheck cycle, his patch leaks. So they get things like payday loans or hardship withdrawals, or they rely on the government to bail them out all the time. This is fine. If you're in great need, and you're in dire need of a bailout. Great, but this is not fine. If it's a consistent habit. And if you want to break the paycheck to paycheck cycle, you're gonna have to take self responsibility. Yes, you may be in a situation that you can't control. But getting yourself out of that situation is something that you can control. And sometimes when you're living in the paycheck to paycheck cycle, it can be hard to even think of the resources on how you can get out of it. But trying to patch up your issues on the back end is never going to get you ahead financially, you got to think about that. Because financial patches in the short run may get you out of a pinch. But in the long run, it's going to hurt you more that's going to help you so how can we change vessels. Instead of patching the leaky boat? Well, changing the vessels is happens in a couple of different ways. Maybe you can trim down expenses. If you're a spender, try to trim down your expenses a little bit in areas that don't bring you value. So that you have a little more money to start to get ahead, reevaluate your needs and wants, see what really your true needs are and what your wants are, and reevaluate that every single month downgrades. You can downgrade things like your cable, if you have a real fancy car, downgrade your car, downgrade your house, if you have way too big of a house, and you really can't get ahead financially, these are all things that you can do. Where you can jump vessels instead of patching up the leaky boat. And then learning some basic skills, maybe getting a side hustle or getting some basic skills to increase your income because that is the biggest catapult to building wealth, and we talked about all the time is increasing your income. So doing that will change everything for you. And figuring out ways to increase your income is the single biggest way to get yourself out of the paycheck to paycheck cycle. It truly is. income is where you should be devoting all your time. Now I understand this if you're the middle of it and changing vessels in quotations, I'm saying changing vessels is much harder to do. It's easier said than done. But if you could do one of these things, focus on increasing your income. Maybe you're a waitress, and you just can't get ahead and you have multiple kids, you're a single mom, see if there's a way that you can increase your income in some way, shape, or form, focus on increasing your income. Because that's the single fastest way to get you out of a situation. The next one. Price and value are not the same thing. So Warren Buffett is very frugal. He's notorious for being frugal. And frugality is truly all about finding true values and things. Here's a quote that he has that explains why price and value 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's marked down. What does he mean by that? So let's say for example, that you want to invest in something like Tesla, this is a great example for the current events that are happening right now. Well, Tesla is pumped up extremely in value right now. Tesla is way overvalued if it looks if you look at it as a stock price. And at the same time, you can look at a company that is extremely undervalued that may be getting beat down because of current news or economic considerations. And that may have great financials but just caught a bad rap in the news. Well, that would be a better situation to buy than the extremely overvalued price pumped stock. And along those same lines, he says the same thing, it's far better to buy a wonderful company at a fair price than a fair company at a wonderful price. And that's the same thing. I've used this exact scenario. I've used these exact quotes, to buy things like rental properties to buy things like investments. There's a reason why I buy index funds this way, because it's far better to buy a wonderful company at a fair price than a fair company at a wonderful price. So the key to this, the key to being free was to make smart dispensing decisions. It's not just about price, but it's the value that you're getting out of the thing. It's the value that you're truly getting out of it. So if you think you're buying something and you're getting a deal, don't forget to calculate value into that equation. Don't just buy things because you think you're getting a deal but get something that is quality at all times whether it's your investments, whether it's your purchases in everyday life, any of those pieces, the next one and this is one of my favorite ones. But talking about investing is much easier than you think. And most people think Warren Buffett tries to tell people that they need to be investing in the stock market individual stocks or things like that. What is your boy always tell you about investing, you want to invest in low cost index funds for the money majority of people unless you truly know what you're doing, and you want to spend hours and hours and hours a day, looking at 10 Ks and different company reports and their financials and pieces like that, then you need to be investing in index funds, which is exactly what I do. And here's what Warren Buffett's advice is for the majority of people, 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, that's dollar cost averaging, you'll do better than 90% of people who start investing at the same time index funds, the simplest way to invest. And that's what he's talking about here. Then he goes on further, 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, this is what he gives to his wife put 10% of cash and short term government bonds, and 90% and very low cost s&p 500 index funds, and he suggests Vanguard index funds here. So if the greatest investor of all time is suggesting that the majority of people should put their money in index funds, because they're going to do better than 90% of people, what do you think you should do as the average working person who's going to work everyday, they don't have time to look at 10 Ks, they don't have time to go through company's financials. It's simple. It's extremely simple. And some of the best investing minds in the world are advising you to do the same. So if you want to buy an index fund, it comes down to some pretty simple steps, you open a Vanguard account or you open a fidelity account, or you open a Schwab account. It doesn't matter who you use, except for Robin Hood, they don't let the people trade. You open a brokerage account at any of those, then you pick an index fund, I like s&p 500 index funds. Warren Buffett likes s&p 500 index funds, you probably should too. But I also like VTS AX, which is a total stock market index fund, the total stock market index fund just means you're buying the total stock market, it's as diversified as you can get. And it's one of the best investments you can use. I have it in my 401k. And then you buy the fund through your brokerage account. Now you may be asking is an ETF an index fund, they trade the exact same way. So if you want to buy an ETF, you can do that as well, the exact same thing, the next one, invest for the long term. Here's what he says, If you aren't willing to own a stock for 10 years, don't even think about owning it for 10 minutes put together a portfolio of companies who at whose aggregate earnings March upward over the years. And so also will the portfolio's market value. Investing is a long term game, this isn't a get rich, quick trading Game Stop shooting up type of situation, investing is for the long term, if you think day traders are making more money than the people investing in index funds in the long term, then you are absolutely wrong. Because the majority of day traders end up losing money. Listen, I used the day trade, you make money, then you lose, then you make money little more than you lose it and you're really barely getting on top. Whereas if you're an index fund, the index fund the last couple of years is done 20%. And you don't have to think about it, you just automatically transfer your money over. And when you're investing in the long term that reduces your stress as well, because you're not checking it every day. Because for example, go to your your stock market app that's in your phone, go to the s&p 500 it should be one of the top ones in there and turn your phone sideways guess what's going to come up the historical timeframe of the stock market. Now put it on the maximum amount of years that you can put it on usually it's like 10 years or 20 years, I can't remember what it is right now. And what you're going to see is that historically, you're going to see the stock market go up and down, up and down. But historically, over the long run, the stock market goes up. And that's what you need to look at. Because investing is a long game, you're buying companies that you're going to own for 10 years or longer and holding them you're not going to think about it, you're just going to continuously keep investing, because that's going to catapult the snowball, and your snowball is going to grow, grow. And as it rolls downhill, cough cough compound interest is going to grow and make that snowball massive and all of a sudden you're wealthy and that's how this works. But you have to continuously stick to your plan and make sure you're investing for the long term. And then the last one we're going to go over money isn't everything. Even the world's most successful investor knows that money isn't everything. So here's what he says 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 the owner. Too often, a vast collection of possessions ends up possessing the owner. The asset, most value, aside from health is interesting, diverse and long standing friends, this just shows you he's wise he's in his 90s now, but money isn't everything. He has all the money in the world and still shows that money isn't everything. This is something we need to be thinking about constantly. And understanding doing the right things and taking the right steps toward building wealth is extremely important. But understanding this that money isn't everything and the people around you are what matters most. Thank you guys so much for listening and if it's your first time listening, consider subscribing. So you never miss an episode and share this episode with a friend. And don't forget to leave a rating and review on iTunes as well because our goal is to bring as much value to you as possible and we're trying to spread this message that money can buy freedom, that's what money is there to do is to buy more freedom. So thank you again so much for listening and I hope you have a great day.