Warren Buffett is the world’s top investor and with a net worth of more than $74 billion, he is the one of the richest men in the world. His investing genius is renowned around the world and people have spent millions of dollars just for the chance to sit down for lunch with him. So, understandably, people all over the world are looking to Warren Buffett’s advice when it comes to money matters.
While Buffett doesn’t talk specifically about personal finance very often–in fact, his tidbits of wisdom are almost always centered around business, stocks, or just life in general–much of his advice can be applied to helping with personal finance situations. Here five tips we’ve learned from reading and following Warren Buffett:
1. Have an emergency fund
Buffett is a huge fan of having emergency funds not only for rainy weather but also to be able to take advantage of good deals. In fact, Buffett keeps at least $20 billion cash in Berkshire Hathaway’s bank just in case.
While most of us won’t have that amount of emergency funds, the same concept is true in your personal finances. Having money set aside can help when sudden problems pop up. Always make sure you have an emergency fund.
2. Plan ahead
Buffett is a long term investor. That means that he always looks at the larger picture when making a stock purchase, and he never buys a stock without looking at where he’ll think it will be in the next five to ten years. If the prospect is good, then he buys with the intention of holding for a long time.
In personal finance, a similar idea is true. Planning ahead will allow for more room in your budget and less stress as you’ll be sure to have enough cash to cover unexpected expenses. Planning ahead also counts towards the future—don’t wait until you’re 50 to start saving for retirement!
3. Understand price vs value
Most people have trouble looking at something and deciding if it is a good price or not. The reason is because of a confusion between price versus value. Buffett, however, put it best when he said, “Price is what you pay; value is what you get.”
Although Buffett usually uses price versus value in reference to purchasing and picking stocks, understanding how to tell if something is worth the money can be used in personal finance and purchasing decisions as well.
4. Make informed decisions
“Risk comes from not knowing what you’re doing,” Buffett says. Although he meant it in the sense of diversifying your stocks, the same is true of your own personal finances. Knowing exactly what the risks are when you make decisions can help improve your financial security. Always read and research and think things through before making any kind of decision.
5. Take advantage of compounding
If there’s one thing Warren Buffett loves, it’s compounding interest. In fact, you could say that’s where a majority of his wealth comes from—compounding. This might not seem relevant for your personal finances, but when it comes to planning for your future, compounding interest is one of the best tools.