Warren Buffett’s Financial Wisdom

1) Start with a meat and potatoes small business – and be your own boss.

Buffett made his fortune by doing things his way, not by following the crowd. In high school, Buffett and a pal bought a pinball machine to put inside a barbershop. With the money they earned, they bought more machines until they had eight different shops running their machines. When they sold the venture, Buffett used the proceeds to buy stock and start another small business. By age 26, he’d become his own boss and amassed $174,000 – or $1.4 million in today’s money.

LESSON: Don’t fall for the temptations of a huge, immediate windfall business. Cut your teeth on the side, with something basic, reliable and small.

2) Mind the foxes who steal from the vineyard: small expenses.
In the famous book, The Millionaire Next Door, authors Stanley and Danko report that millionaires live well below their means. They budget, plan investments, and allocate their time, energy, and money into building wealth instead of displaying high social status.

Warren Buffett’s companies are known for watching out for small expenses. Exercising vigilance over every expense can make your profits and your paycheck go much further.

LESSON: The next time you spot a sale or online deal, check in with yourself to see if that $50 is better saved or invested than spent. It might seem like you’re spending a relatively small amount of money, but it all adds up.

3) Debt kills.
Warren Buffett advises his people to limit what they borrow. Living on credit cards and loans won’t make you rich. Buffett never borrowed a significant amount of money, not even for investments or mortgages.

The Millionaire Next Door reports that millionaires’ parents did not provide “economic outpatient care”, and their own adult children are economically self-sufficient as well.

LESSON: If you do give your teenager a credit card, make sure to set firm limits and specify use ahead of time. If they abuse the privilege, they lose the card. Do the same for yourself.

4) Leap forward.
Very often those who supply the affluent become wealthy themselves. In fact, one of the best ways to make money is to sell products or services to those who already have money. Many people don’t see these opportunities because they’re far too busy seeking money and security in the short term only.

Well, when Buffett began managing money in 1956 with $100,000 cobbled together from a handful of investors, he was dubbed an oddball. But he didn’t allow others’ opinions to keep him from leaping into a profitable venture. Over and above, I might add, others with greater private means.

Lastly, I will suggest this: Get professional advice on new ventures and ideas. We are here for far more than “just” tax planning. I would love the opportunity to sit with you, and help you evaluate the direction of your financial life … and point you in a new direction, should it be necessary.

Posted on July 1, 2011 Read More

Money Lessons for Young Children

But the best news is that helping them to develop these habits can be fairly simple! I’ve put together some basic steps – many of these may not seem like rocket science, but my job is to be a coach and a goad for you to do the things which you already may “know” to do!

1.     Give them an allowance-with strings. Don’t just give them an allowance for doing nothing – this actually defeats the purpose! You can buy your young children whatever they ask for, so they don’t need “spending money”. Instead, see an allowance as a training tool: your children should learn that money is earned by working. Believe it or not, this isn’t an obvious connection for a young child! Because a kindergartner truly is able to help with small chores around the house, you can put them to work and let them earn their allowance this way. Rather than seeing it as a “bribe”, or some sort of indentured servitude, this is a critical knowledge base for a young child.

2.     The old lemonade stand. Encourage this! And do it with adult supervision. Your child will learn how to make a product, market it and sell it. While the idea is to teach good money habits, they are also learning valuable life lessons – nothing sells itself, after all. (Though with cute kids, that’s sometimes the case!)

3.     Saving and investing. Rather than showering your young child with gift after gift, encourage them to go through the process of working towards a savings goal. You can always “supplement” this process, but having your child save up for an item will teach them that nothing comes for free. In return, children also learn that the items you buy them have real value and should be treated as such.

This might, even, cut down on those “negotiations” so familiar to parents who bring their children into stores!

4.     Cold, hard cash. A lot of children nowadays are so used to seeing parents pay with debit and credit cards that they may not know what actual money looks like! This is a new-generational issue, and it’s important that your children learn that money is more than a mouse click, or a card swipe. Show your kids the different types of money – coins, bills, etc. and tell them the monetary amount for each.

When you go shopping, let your child have a try at paying for certain items. This will help them feel quite grown up, and again – they see that transactions don’t just “happen”, they cost.

Posted on June 2, 2011 Read More

How To Prepare Your Finances For Emergencies

1) Put $1,000 aside. It doesn’t amount to a real emergency fund, but it will do until you get your finances in order. You can accumulate the $1,000 by allocating $10 a day for just over three months. Most people go into debt because they live hand to mouth, spending 100% of their take-home pay. Then life happens. Having a mini-emergency fund can help you get out of debt and stay out of debt.

2) Remove yourself from credit card debt-forever. I suggest paying off your credit card by starting with the smallest balance in order to achieve small successes and then working to snowball your payments as you tackle the larger balances. These first two steps, having $1,000 and paying off debt, simply prevent you from facing a financial emergency by starting out wounded and bleeding.

3) Improve your ability to handle fluctuating monthly expenses. If you can, set up a monthly budget so your day-to-day expenses are less than 65% of your take-home pay. The difference between those growing rich and those remaining poor is not the salary they make. It is the salary they keep. Relative to their income, the rich are frugal. They save and invest. They spend less than 65% of their take-home pay on day-to-day expenses. They save at least 10% in their retirement accounts and another 5% in taxable savings. They direct another 10% toward unknown big purchases. And they even live frugally enough to give another generous 10% to charities.

4) Automate your cash flow to promote saving and investing. Every month, have 10% transferred into your retirement account before you receive your paycheck. Then automate the transfer of 25% of your take-home pay into an investment account a day or two after your paycheck is deposited. Automating your savings makes savings a high priority and ensures that you pay yourself first. This investment account will grow over time, and you can use it to pay for big emergencies and charitable gifts.

5) Set up an asset allocation for your investments that’s diversified for safety while being invested for growth. If you make it to this step, you’re well ahead of the game…but the game ain’t over yet! Diversification works, and it’s never more obvious than in times of market turmoil. Without diversification, portfolios can have a zero return over a decade. After being well diversified, the likelihood of no return over a decade drops significantly.

6) (If necessary) Mobilizing during an actual emergency. Having the discipline to budget for small financial emergencies will help you be prepared when you encounter larger financial crises. When some unknown spending need strikes, take the money to cover the expense from your growing emergency fund. Then, determine if you have been budgeting for this level of unknown expenses adequately.

Usually emergencies don’t happen. So the money you have socked away makes more money. Keep an emergency fund for several years and it should double in value, giving you an additional emergency fund. Whether you need it or not, being prepared for a financial emergency means peace of mind, knowing that your lifestyle is frugal, so you won’t be in trouble.

Posted on May 1, 2011 Read More

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