Warren Buffett says these are the 6 most important things you should do with your money
Do you want to be smarter with your money and better at building wealth next year than you were this year? There's no one better to turn to for advice than Warren Buffett. The Oracle of Omaha has built his own personal fortune to more than $72 billion, making him the third richest person in the world. Not only that, he's offered a lot of common-sense advice on building wealth that absolutely anyone can follow, whether they know anything about investing or not.
The personal finance site GOBankingRates recently compiled the best pieces of finance advice Buffett has ever given. Here are some of the best. You can see the full list here.
1. Never lose money.
"Rule No. 1: Never lose money. Rule No. 2: Never forget rule No. 1," Buffett has said. Of course, this is kind of a no-brainer--I don't know anyone who thinks losing money is agood idea.
But get beyond that obviousness, and this is practical advice that is very wise: avoid risk whenever you can. In particular, he says, to be happy and successful, never risk something you need to get something you just want--even if the odds are a thousand to one in your favor.
With this rule in mind, Buffett himself has refrained from making many risky investments over the years, and passed up what could have been big gains, for instance in technology. Over time, though, this risk-averse strategy has paid off spectacularly well.
2. Get high value at a low price.
"Price is what you pay, value is what you get," Buffett has written to Berkshire Hathaway shareholders. So you can lose money (and violate Rule No. 1) if you wind up paying more for something than its value is worth. This can happen, for example, when you use a credit card and wind up adding a lot of interest to the price of what you've bought. Or when you buy anything--from a share of stock to a piece of real estate--when everyone else is buying and the market is overpriced.
"Whether we're talking about socks or stocks, I like buying quality merchandise when it is marked down," Buffett wrote. It's a wise approach.
3. Get into healthy financial habits.
"Most behavior is habitual," Buffett said in a speech to college students, "and they say that the chains of habit are too light to be felt until they are too heavy to be broken."
We all have habits we'd like to break, and others we'd like to form. Among the latter, Buffett says, the most important is saving money. "The biggest mistake is not learning the habit of saving properly," he says. Consider using automatic deductions from your paycheck or automatic transfers from your checking account into a savings or investment account to make forming this good habit as painless as possible.
Related: Best money-saving tips we carried over into the new year.
4. Have lots of cash available.
Buffett says that Berkshire Hathaway always has at least $20 billion--and usually a lot more--in cash equivalents, ready to be drawn on in case of need. Once again, this is a very risk-averse strategy that means sacrificing the larger gains he could have gotten by investing that money. But, he says, it kept the company out of trouble during the 2008 financial downturn when so many others struggled or failed.
Don't have $20 billion to hide in your mattress? Having a decent portion of your money in cash or money
market accounts, or such items as U.S. Treasury bills or short-term CDs, is still a very good idea. This is especially important if you're an entrepreneur and may have an uncertain income. As Buffett says, Cash is to a business as oxygen is to a body: "Never thought about it when it is present, the only thing in mind when it is absent."
5. Invest in yourself.
Buffett has often said that you should invest in yourself as much as you can, and in every way you can, from taking care of your body, to finding work you love, to education. "Anything you do to improve your own talents and make yourself more valuable will get paid off in terms of appropriate real purchasing power," he said in one interview. Those returns will come back 10-fold, he notes, and unlike other assets, your abilities and skills can't be taken away from you.
That may mean going to school, or it could mean taking a training position, starting your own business, or even taking a volunteer position if it will teach you some skills you didn't have before. Whatever makes you smarter makes you richer.
6. Set long-term goals.
The mistake most people make is they try to catch whatever wave of rising prices and rapid returns they think they see in the short term, Buffett says. That kind of thinking almost always gets people in trouble. Instead, he advises, "invest with a multi-decade horizon." Instead of trying to make a quick buck, he says, you should be focused on increasing your purchasing power over your entire lifetime. That sounds like a very sane approach to me.
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